As filed with the U.S. Securities and Exchange Commission on January 3, 2022

 

Registration No. 333-             

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form S-1

 

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

 

HEARTCORE ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   7374   87-0913420

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

HeartCore Enterprises, Inc.

1-2-33, Higashigotanda, Shinagawa-ku

Tokyo, Japan

Telephone: +81-3-6409-6966
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Corporate Creations Network Inc.

3411 Silverside Road Tatnall, Building #104

Wilmington, Delaware 19810

Telephone: (302) 351-3367

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Laura Anthony, Esq.

Craig D. Linder, Esq.

Anthony L.G., PLLC

625 N. Flagler Drive, Suite 600

West Palm Beach, Florida 33401

Telephone: (561) 514-0936

  Louis A. Bevilacqua, Esq.
Bevilacqua PLLC
1050 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
Telephone: (202) 869-0888

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

 

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 market 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 7(a)(2)(B) of the Securities Act. ☐

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered  

Proposed

Maximum

Aggregate

Offering Price(1)

   

Amount of

Registration Fee

 
Common stock, par value $0.0001 per share (2)(3)   $ 17,250,000     $ 1,599.08  
Representative’s Warrant to purchase common stock(4)   $     $  
Common stock issuable upon exercise of Representative’s Warrants to purchase common stock (5)   $ 1,509,375     $ 139.92  
TOTAL   $ 18,759,375     $ 1,739.00  

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended (the “Securities Act”).
   
(2) Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.
   
(3) Includes shares the underwriters have the option to purchase to cover over-allotments, if any.
   
(4) No fee required pursuant to Rule 457(g) under the Securities Act.
   
(5) The Representative’s Warrants are exercisable at a per share exercise price equal to 125% of the public offering price per share. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the Representative’s warrants is $1,509,375 which is equal to 125% of $1,207,500 (7% of $17,250,000 of shares of common stock sold in this offering). Pursuant to Rule 416, the registrant is also registering an indeterminate number of additional shares of common stock that are issuable by reason of the anti-dilution provisions of the Representative’s Warrants.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a) may determine.

 

 

 

 
 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS   SUBJECT TO COMPLETION   DATED JANUARY 3, 2022

 

2,500,000 Shares

 

 

HeartCore Enterprises, Inc.

 

Common Stock

 

We are offering 2,500,000 shares of our common stock. This is our initial public offering. Prior to the offering, there has been no public market for our common stock. We expect the initial public offering price to be between $5.00 and $7.00 per share. For purposes of this prospectus, the assumed initial public offering price per share is $6.00, the mid-point of the anticipated price range. The actual number of shares we will offer will be determined based on the actual public offering price.

 

We are also seeking to register the issuance of warrants to purchase 201,250 shares of common stock (the “Representative’s Warrant”) to the underwriters (assuming the exercise of the over-allotment option by the Underwriters in full) as well as the 201,250 shares of common stock issuable upon exercise by the underwriters of the Representative’s Warrant at an exercise price of $7.50 per share (125% of initial public offering price).

 

We intend to apply to list our common stock on The Nasdaq Capital Market (“Nasdaq”) under the symbol “HTCR”. We believe that upon the completion of the offering contemplated by this prospectus, we will meet the standards for listing on Nasdaq. We cannot guarantee that we will be successful in listing our common stock on Nasdaq; however, we will not complete this offering unless we are so listed.

 

Currently, Sumitaka Yamamoto, the Chief Executive Officer of the Company, beneficially owns 10,984,539 shares of our common stock, which represent approximately 69.43% of the voting power of our outstanding capital stock. Following this offering, Mr. Yamamoto will control approximately 59.96% of the voting power of our outstanding capital stock if all the common stock being offered are sold. As a result of his voting power, he will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets. If we obtain listing on Nasdaq, will be a “controlled company” as defined in Rule 5615(c)(1) of the Nasdaq listing standards because more than 50% of our voting power will be held by Mr. Yamamoto after the offering. As a “controlled company,” we are exempt by Rule 5615(c)(2) of the Nasdaq listing standards from the requirements of Rule 5605(b), (d) and (e) of the Nasdaq listing standards that would otherwise require us to have (i) a majority of the board of directors consist of “independent” directors under the listing standards of Nasdaq, (ii) a nominating/corporate governance committee composed entirely of independent directors and a written nominating/corporate governance committee charter meeting the requirements of Nasdaq, and (iii) a compensation committee composed entirely of independent directors and a written compensation committee charter meeting the requirements of Nasdaq. Consequently, we are exempt from independent director requirements of Rule 5605(b), (d) and (e) of the Nasdaq listing standards, except for the requirements under subsection (b)(2) thereof pertaining to executive sessions of independent directors and those under subsection (c) thereof pertaining to the Audit Committee. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq. See “Prospectus Summary—Implications of Being a Controlled Company.”

 

We are an “emerging growth company” under the federal securities laws and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”

 

We are a holding company and conduct our business through our operating subsidiary, HeartCore Co., Ltd., a Japanese corporation, in Japan.

 

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of the material risks of investing in our common stock under the heading “Risk Factors” beginning on page 27 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

    Per share     Total  
Public offering price   $ [●]     $ [●]  
Underwriting discounts and commissions (1)   $ [●]     $ [●]  
Proceeds, before expenses, to us   $ [●]     $ [●]  

 

(1) See “Underwriters” beginning on page 136 of this prospectus for additional information regarding the compensation payable to the underwriters.

 

We have granted a 45-day option to the underwriters to purchase up to 375,000 additional shares of common stock solely to cover over-allotments, if any. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $[●], and the total proceeds to us, before expenses, will be $[●].

 

Delivery of the shares of common stock is expected to be made on or about [●], 2022.

 

 

The date of this prospectus is                  , 2022

 

 
 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
RISK FACTORS 27
Cautionary Note Regarding Forward-Looking Statements 59
USE OF PROCEEDS 60
DIVIDEND POLICY 61
CAPITALIZATION 61
DILUTION 62
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 63
CORPORATE HISTORY AND STRUCTURE 82
DESCRIPTION OF BUSINESS 86
MANAGEMENT 111
EXECUTIVE COMPENSATION 117
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 128
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 129
DESCRIPTION OF SECURITIES 129
SHARES ELIGIBLE FOR FUTURE SALE 132
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK 133
UNDERWRITING 136
LEGAL MATTERS 143
EXPERTS 143
WHERE YOU CAN FIND ADDITIONAL INFORMATION 143
INDEX TO FINANCIAL STATEMENTS F-1

 

No dealer, salesperson or other individual has been authorized to give any information or to make any representation other than those contained in this prospectus in connection with the offer made by this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs or that information contained herein is correct as of any time subsequent to the date hereof.

 

For investors outside the United States: We have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside the United States.

 

i

 

 

INDUSTRY AND MARKET DATA

 

We are responsible for the disclosure in this prospectus. However, this prospectus includes industry data that we obtained from internal surveys, market research, publicly available information and industry publications. The market research, publicly available information and industry publications that we use generally state that the information contained therein has been obtained from sources believed to be reliable. The information therein represents the most recently available data from the relevant sources and publications and we believe remains reliable. We did not fund and are not otherwise affiliated with any of the sources cited in this prospectus. Forward-looking information obtained from these sources is subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus.

 

TRADEMARKS AND COPYRIGHTS

 

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. This prospectus may also contain trademarks, service marks and trade names of other companies, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this prospectus are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks are the property of their respective owners.

 

ii

 

 

PROSPECTUS SUMMARY

 

This summary highlights certain information about us, this offering, and selected information contained in this prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding whether to invest in our common stock. For a more complete understanding of the Company and this offering, we encourage you to read and consider the more detailed information in this prospectus, including “Risk Factors” and the financial statements and related notes.

 

Unless the context otherwise requires, “HeartCore,” “we,” “us,” “our,” or “the Company” refers to HeartCore Enterprises, Inc., a Delaware corporation, and its consolidated subsidiaries, including, but not limited to, HeartCore Co., Ltd., a Japanese corporation.

 

THE COMPANY

 

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 September 30, 2021, our sales and marketing organization was comprised of 14 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 September 30, 2021, our combined business units (customer experience management business unit and digital transformation business unit) had 819 total customers in Japan, of which 561, or 68.5%, were paying customers and 23 total customers outside Japan, of which one, or 4.3%, was a paying customer. Our 281 non-paying customers were originally paying customers that utilized our paid services but now use a free version of the CXM Platform. There is the potential for non-paying customers to become paying customers again if and when they start utilizing our paid services again.

 

We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our 97.5%-owned subsidiary, HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co”), which was established in Japan by Sumitaka Yamamoto, our Chief Executive Officer, in 2009 and acquired by us in July 2021. 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.

 

For the fiscal years ended December 31, 2020 and 2019, we generated revenues of $9,026,463 and $7,208,964, respectively, and reported net income of $155,064 and net loss of $1,261,027, respectively, and cash flow from operating activities of $745,748 and cash flows used in operating activities of $685,803, respectively. For the nine months ended September 30, 2021 and 2020, we generated revenues of $8,446,011 and $6,664,487, respectively, and reported net income of $414,826 and $398,315, respectively, and cash flow from operating activities of $1,239,250 and $691,626, respectively. As noted in our consolidated financial statements, as of September 30, 2021, we had an accumulated deficit of $3,610,332.

 

Industry Overview

 

Customer Experience Management Business

 

Companies must manage a huge amount of content, collaborate with other kinds of business processes, and build infrastructure to fulfill customers’ needs. To make it happen, companies need a content management system that allows easy implementation of a wide range of features including content creation, analysis, search capability and access controls into their websites, and enables them to deliver and receive content at the best time responding market changes. A customer experience management system is also becoming essential for companies to manage customers and deliver personalized content based on the users’ behavior, device, location and context. A customer experience management system is also required to analyze big data to deliver even the subconscious wants and needs of customers. Furthermore, these capabilities are not supposed to be limited to general websites but also to various kinds of services such as E-commerce, smartphone sites, smartphone apps, social networking services, blogs, and digital signage. Content management systems and customer experience management systems need to provide rich features to fill the new generation of customers’ needs.

 

1
 

 

Digital Transformation Business

 

Robotic process automation (“RPA”) is a technology that allows automation for a defined set of tasks. RPA robots can emulate most human-computer interactions to carry out error-free tasks at high volume and speed. Some common tasks RPA can do include: (i) invoice processing; (ii) process sales orders; (iii) account reconciliation; (iv) enterprise resource planning data entry for core processes such as finance, human resources, manufacturing, supply chain, services, and procurement; (v) employee onboarding; (vi) payroll; and (vii) data queries.

 

As companies have strived to automate, it has become more and more challenging to identify RPA opportunities. This has included uncovering processes that would be good candidates for automation and having fundamental metrics about those processes (via task mining and process mining technology) at their disposal – like utilization and the specific steps in the process if it is not already documented – to aid them in their decision.

 

Task mining is a technology that enables organizations to discover, understand, and analyze the tasks employees perform as they relate to completing larger processes. Task mining software works by monitoring the actions users take. A recorder is installed on an employee’s computer to capture their interactions in the different applications they use, recording data like keystrokes, clicks, data entry, etc., to uncover how tasks are completed within the organization. The purpose of using task mining software is to discover and understand the tasks employees are performing. The ultimate objective is to find ways to improve how those tasks are carried out or automate them to increase operational efficiency, reduce errors, and improve employee engagement.

 

Process mining is a technology that investigates the mountains of data in enterprise event logs to discover and present end-to-end processes that the organization is performing to complete work. Event logs are essentially banks of data that store different information. The benefit of process mining software is that it presents the process it successfully mined, along with the process’ variants and suggestions on how to optimize and improve that process. Like task mining, the most common use case for adopting process mining technology is to improve processes, with the ideal goal of automating them for all the benefits and returns that come with automation, like improved customer and employee experiences.

 

Industry Characteristics

 

Explosive Growth of Cloud-Based Applications Creating a New Era of IT Complexity. Businesses around the world are spending hundreds of billions of dollars to adopt applications that help advance digital transformation and drive competitive advantages. With the proliferation of cloud technologies and software-as-a-service (“SaaS”) traditional software suites have been disaggregated into point solutions. For example, human capital management software has been segregated across recruiting, payroll, benefits administration, and other key business functions. As a result, enterprises have transitioned from managing a handful of multi-purpose, largely on-premises applications to managing hundreds and even thousands of specialized point solutions deployed across on-premises, cloud, and hybrid environments. According to the Wall Street Journal, in 2019 the number of software applications deployed by large firms across all industries worldwide had increased by approximately 68% over the previous four years. These applications, which were generally not designed for interoperability, run in tandem with long-running, legacy technologies. The increasing volume of applications has a compounding effect on the complexity of business processes and the IT environments that support them.

 

The Benefits of Digital Transformation Have Yet to Make Their Way to the Workforce. Modern enterprise applications enable deep and nuanced functionalities, such as conducting personalized marketing campaigns, predictive service delivery, and real time visibility of goods movement across the supply chain. However, despite massive functional advancement, the true promise and potential of digital transformation—reallocating human capital towards cognitive, higher-value activities—remains elusive, which is limiting improvements in productivity. For example, in the United States, non-farm real output per hour grew 31% during the decade ended December 31, 2009, but only 13% in the subsequent decade ended December 31, 2019.

 

2
 

 

Individual Business Processes Rely on Multiple Business Applications, and Workers to Orchestrate Them. While specialized applications deliver extensive functionality, they do not account for the full spectrum of how work gets done. The proliferation of specialized applications has resulted in humans being the connective tissue in an enterprise, working across a wide range of applications that individually are not built to address the needs of the actual processes they are supporting. As a result, activities performed by many workers today are still manual, mundane, and administrative tasks, limiting workers from focusing on higher-value activities that can directly improve business performance.

 

Automation is the New Frontier of Competitive Differentiation. Enterprises are demanding a new approach to unify, tailor, and run applications without significant IT resources or changes to existing infrastructure. Automation enables organizations to design and optimize business processes to improve productivity and business performance. Additionally, automation solutions that can accurately and consistently emulate human behavior can work within existing business processes in a way that traditional applications cannot. This allows businesses to harness the power of specialized applications in a differentiated manner. With the ability to emulate human behavior, this new approach to automation is disrupting traditional automation and transforming data-processing work by allowing customers to find efficiencies without materially changing business processes and supporting infrastructure.

 

Empowering Workers to Automate their Personal Workflows is Leading to a Democratization of Automation. The emerging workforce is graduating with increasingly advanced technical skills and training in automation. Individuals are entering the workforce with higher expectations related to job impact, satisfaction, and efficiency, and view software as a driving force in realizing those expectations. As a result, organizations are looking to empower workers with tools to optimize the more tedious parts of their jobs. The combination of technology that can emulate human behavior and a workforce with the knowledge and tools to create their own automations has enabled enterprises to begin to automate a significant number of use cases, from individual tasks to enterprise-wide processes.

 

Cost of Skilled Human Capital is Accelerating the Evolution Towards the Fully Automated Enterprise. The cost of skilled human capital continues to rise due to growing demand. We believe it is increasingly imperative for enterprises to leverage automation to liberate workers from menial, repetitive, and less productive tasks and to better utilize the positive qualities that only humans have, such as abstract thinking, making connections, dealing with ambiguity, creativity, innovation, passion, and community engagement. We believe this will drive business value and greater employee engagement. According to a 2020 Gallup study, business units with highly engaged employees are more present and productive; more attuned to the needs of customers; and more observant of processes, standards, and systems. When taken together, the behaviors of highly engaged business units result in 21% greater profitability.

 

Addressable Market

 

Our software addresses the market for intelligent process automation, which, in February 2021, International Data Corporation estimates to grow at a five-year compound annual growth rate of approximately 18.4% to $37.9 billion by the end of 2024. However, we believe that this does not fully encompass the opportunity associated with our vision of the fully automated enterprise.

 

3
 

 

According to an estimate by Bain & Company in the report Beyond Cost Savings: Reinventing Business Through Automation, the expansion of automation software by incorporating broader capabilities and technologies has increased the size of the addressable market for automation software to approximately $65 billion.

 

The size of our addressable market opportunity is underpinned by the substantial amount of business processes that could be improved through automation but are not currently automated. According to Forbes, there are more than 1 billion knowledge workers globally as of December 10, 2020. We expect our estimated global market opportunity will continue to expand as customers increase the size of their business units and hire additional employees, resulting in a greater number of users and processes that can benefit from automation throughout these enterprises. Additionally, we believe that we are unlocking a myriad of still unexplored automation possibilities as we continue to contribute to this market. We believe those possibilities represent a significant greenfield opportunity for us.

 

Organizations across the world are only beginning to understand the power of automation and we believe we are at the forefront of a revolution in the way that people do work. We believe that the opportunity that lies ahead of us is largely untapped and has the potential to be one of the largest ever in enterprise software.

 

Our CXM Platform

 

Our CXM Platform includes marketing, sales, service and content management systems, as well as other tools and integrations, that enable companies to attract and engage customers throughout the customer experience. We also provide education, services and support to help customers be successful with our CXM Platform.

 

We focus on selling our CXM Platform to mid-market business-to-business companies, which we define as companies that have between 100 and 5,000 employees. We sell our CXM Platform on a subscription basis. As of September 30, 2021, our combined business units (customer experience management business unit and digital transformation business unit) had 819 total customers in Japan.

 

Advantages of our CXM Platform

 

Our CXM Platform features a central database of lead and customer interactions and integrated applications designed to help businesses attract visitors to their websites, convert visitors into leads, close leads into customers, and fulfill the needs of customers so they become promoters of those businesses.

 

Designed to Help Companies Grow Better. Our CXM Platform was architected from the ground up to enable businesses to transform their marketing, sales, services, and content management playbook to meet the demands of customers today. Our CXM Platform includes both a system of record for maintaining a unified view of the customer experience and a system of engagement for efficiently engaging customers through search engine optimization, web content, social, blogging, email, marketing automation, messaging, support ticketing, knowledge base and more. And it is also easy to integrate with customer data platforms.

 

Ease of Use of a Single, Extensible Platform. We provide a set of integrated applications on a common platform, which offers businesses ease of use and simplicity. Our CXM Platform has one login, one user interface, one database, and one team for support. Our CXM Platform starts free and grows with our customers. It is designed to scale its power and technical sophistication without losing its ease-of-use. In addition to being a comprehensive suite itself, our CXM Platform seamlessly integrates with external applications, making it easy to extend the functionality of our CXM Platform and customize it for any business.

 

Power of a Unified Customer View. At the core of our CXM Platform is a single customer experience management database for each business that captures its lead and customer activity throughout the customer lifecycle. Our CXM Platform creates a unified timeline incorporating all the interactions with a particular customer. In contrast to many customer experience management system suites which are cobbled together, we have a set of core functionalities, including reporting, content, messaging, data, and automation, which runs across our product lines, which we refer to as functions.

 

Scalability. Our CXM Platform was designed and built to serve a large number of customers with demanding use cases. Our CXM Platform currently processes billions of data points each week, and we use leading global cloud infrastructure providers and our own automation technology to dynamically allocate capacity to handle processing workloads of all sizes. We have built our CXM Platform on modern, scalable distributed technologies. We built the infrastructure to support hundreds of microservices and can easily add new features and capabilities to the CXM Platform. We utilize a variety of open-source distributed systems including customer data platform and consent management platform to scale our data collection and processing. Our scalability gives us flexibility for future growth and enables us to service a large variety of businesses of different sizes across different industries.

 

4
 

 

Extensible and Open Architecture. Our CXM Platform features a variety of open application programming interfaces (“APIs”) that allow easy integration of our platform with other applications. We enable our customers to connect our platform to their other applications, such as ecommerce, event management and videoconferencing applications. By connecting third-party applications, our customers can leverage our centralized inbound database to perform additional functions and analysis.

 

CXM Platform Functions

 

Our CXM Platform features integrated applications and tools that enable companies to create a cohesive and adaptable customer experience. Each function can be used standalone or in conjunction with the other functions. Our functions are available in both free and paid tiers (i.e., Starter, Professional and Enterprise) with gradually increasing levels of functionality that support the needs of our customers as they see success with our tools and their businesses grow.

 

Customer Experience Management. The core of our CXM Platform is a single database of lead and customer information that allows businesses to track their interactions with contacts and customers, manage their sales activities, and report on their pipeline and sales. This allows a complete view of lead and customer interactions across all of our integrated functions, giving our CXM Platform substantial power. This integration makes it possible to personalize every aspect of the customer interaction across web content, social media engagement, and email messages across devices, including mobile. The integrated functions on our CXM Platform have a common user interface and are accessed through a single login. There is a free version of our CXM Platform that can be used standalone, or with any combination of content management systems function, marketing function, sales function, and/or service function.

 

Marketing Function. The marketing function is an all-in-one toolset for marketers to attract, engage, and nurture new leads towards sales readiness over the entire customer lifecycle. The marketing function is available in both free and paid tiers, and can be used standalone, with our customer experience management system, a third party customer experience management system, and/or any version of content management systems function, sales function or service function. Features include marketing automation and email, social media, search engine optimization, and reporting and analytics.

 

Sales Function. We designed the sales function to enhance the productivity and effectiveness of sales teams. Businesses can empower their teams with tools that deliver a personalized experience for prospects with less work for sales representatives. The sales function is available in both free and paid tiers, and can be used with our customer experience management system, a third party customer experience management system, and/or any version of marketing function, content management system function or service function. Features include email templates and tracking, conversations and live chat, meeting and call scheduling, lead and website visit alerts, sales automation, and lead scoring.

 

Service Function. The service function is our customer service software that is designed to help businesses manage and connect with customers. The service function is available in free and paid tiers, and can be used standalone, with our customer experience management system, a third party customer experience management system, and/or any version of marketing function, content management system function or sales function. Features include tickets and help desk, automation and routing, knowledge base, team emails, feedback and reporting tools, and set customer goals.

 

Content Management System Function. Our content management system function combines the power of customer experience management and a content management system into one integrated platform. Our content tools enable businesses to create new and edit existing web content while also personalizing their websites for different visitors and optimizing their websites to convert more visitors into leads and customers. Our content management system function can be purchased as a standalone product, with our customer experience management system, a third party customer experience management system, and/or with any version of marketing function, sales function, or service function. Features include manage website pages, business blogging, smart content, landing pages and forms, search engine optimization tools, forms and lead flow, web analytics reporting, calls-to-action, and digital asset management and product information management file manager.

 

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Platform Application (“App”) Partners. Businesses that use software outside of our software can leverage our ecosystem of third-party integrations. We make it easy to find and install new or existing software solutions that complement our CXM Platform. Over 20 integrations and applications are available for our users, across a wide range of categories, including integrations with leading social media, email, sales, video, analytics, content and webinar tools.

 

CXM Platform Services

 

We complement our product offerings with professional services, customer success and support, which we view as critical elements of ensuring the long-term retention of our customers. The majority of our services and support is offered over email, phone, chat applications and via web meeting technology rather than in-person, which is a more efficient business model for us and our customers.

 

Professional Services. We offer professional services to educate and train customers on how to leverage our CXM Platform to transform how their business attracts, engages and delights customers. Depending on which functions and services a customer purchases, they receive one-on-one training and guidance from one of our onboarding or technical specialists by web meeting and can purchase additional group training and education in online or in-person classes. Our professional services are also available to customers who need additional assistance on a one-time or ongoing basis for an additional fee.

 

Customer Success. Our customers have access to a customer success manager or customer success team which are responsible for our customers’ long term success, retention and growth on the CXM Platform. Our customer success managers and customer success teams address the unique needs and goals of our customers through a series of ongoing interactions and strategy calls on how to best engage and use our CXM Platform.

 

Support. In addition to assistance provided by our online articles and customer discussion forums, we offer phone and/or email and chat-based support, which is included in the cost of a subscription for our Hubs. Phone support is available starting at the Professional product level for all functions while email and chat-based support is available for Starter functions. We strive to maintain an exceptional quality of customer service. We continuously monitor key customer service metrics such as phone hold time, ticket response time and ticket resolution rates, and we monitor the customer satisfaction of our customer support interactions. We believe our customer support is an important reason why businesses choose our CXM Platform and recommend it to their colleagues.

 

CXM Platform Technology

 

Our customers have chosen us as their CXM Platform, which we architected and built to be secure, highly distributed and highly scalable. Since our founding, we have embraced rapid, iterative product development lifecycles, cloud automation and open-source technologies, including big data platforms, to power marketing, sales, service, and content management programs and provide insights not previously possible or available.

 

Our CXM Platform is a multi-tenant, single code-based, globally available software-as-a-service delivered through APIs, web browsers or mobile applications. Our commitment to a highly available, reliable, and scalable platform for businesses of all sizes is accomplished through the use of these technologies.

 

Platform Approach. We built our customer experience management system on a single platform with reusable and composable libraries, allowing us to rapidly address new feature areas and bring new products to market that have a consistent user experience and data model. We have built this platform with scale in mind, supporting thousands of components including hundreds of microservices.

 

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Modern Database Architecture. We process billions of data points weekly across various channels, including social media, email, search engine optimization and website visits, and continue to drive nearly real-time analytics across these channels. This is possible because we built our database from the ground up using distributed big data technologies such as content delivery network, Edge computing and customer data platform to both process and analyze the large amounts of data we collect. We also utilize cloud environment to operate customer data at scale, allowing our engineers to choose the best datastore for each task.

 

Agility. Our infrastructure and development and software release processes allow us to update our platform for specific groups of customers or our entire customer base at any time. This means we can rapidly innovate and deliver new functionality frequently, without waiting for quarterly or annual release cycles. We typically make a significant number of customer data updates to our software platform in a single day, enabling us to gather immediate customer feedback and improve our product quickly and continuously.

 

Cost Leverage. Because our CXM Platform was built on an almost exclusive footprint of open-source software, own developed source code and designed to operate in cloud-based data centers, we have benefited from large-scale price reductions by these cloud computing service providers as they continue to innovate and compete for market share. As our processing volume continues to grow, we continue to receive larger volume discounts on a per-unit basis for costs such as storage, bandwidth and computing capacity. We also believe that our extensive use of open-source software will provide additional leverage as we scale our CXM Platform and infrastructure.

 

Scalability. By leveraging leading cloud infrastructure providers along with our automated technology stack, we are able to scale workloads of varying sizes at any time. This allows us to handle customers of all sizes and demands without traditional operational limitations such as network bandwidth, computing cycles, or storage capacity as we can scale our platform on-demand.

 

Reliability. Customer data is distributed and processed across multiple data centers within a region to provide redundancy. We built our CXM Platform on a distributed computing architecture with reduced single points of failure and we operate across data center boundaries daily. In addition to datacenter level redundancy, this architecture supports multiple live copies of each data set along with snapshot capabilities for faster, point-in-time data recovery instead of traditional backup and restore methodologies.

 

Security. We leverage industry standard network and perimeter defense technologies, distributed denial-of-service, protection systems (including web application firewalls) and enterprise grade domain name system services across multiple vendors. Our data-center providers operate and certify to high industry compliance levels. Due to the broad footprint of our customer base, we regularly test and evaluate our platform with trusted third-party vendors to ensure the security and integrity of our services.

 

Digital Transformation Solutions

 

Our mission is to unlock human creativity and ingenuity by enabling the fully automated enterprise and empowering workers through automation.

 

The modern enterprise is complex as employees must navigate an ever-increasing number of systems and applications to perform their day-to-day work. This dynamic forces workers to constantly execute manual, time-consuming, and repetitive tasks to get their work done. The friction faced by workers often results in lost productivity that can have a direct impact on a company’s bottom line. Traditional automation solutions intended to reduce this friction have generally been designed to be used by developers and engineers, rather than the employees directly involved in executing the actual work being automated. As a result, employees are limited by the lack of flexibility of these traditional automation technologies causing employee productivity, innovation, and satisfaction to suffer.

 

Our software is designed to transform the way humans work. We provide our customers with a robust set of capabilities to discover automation opportunities and build, manage, run, engage, measure, and govern automations across departments within an organization. Our software leverages the power of AI based computer vision to enable our software robots to perform a vast array of actions as a human would when executing business processes. These actions include, but are not limited to, logging into applications, extracting information from documents, moving folders, filling in forms, and updating information fields and databases. Our robots’ ability to learn from and replicate workers’ steps in executing business processes drives continuous improvements in operational efficiencies and enables companies to deliver on key digital initiatives with greater speed, agility, and accuracy.

 

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Our software is designed to interact with and automate processes across a company’s existing enterprise stack. As a result, our customers can leverage the power of our software with lower overall IT infrastructure cost. Our software enables employees to quickly build automations for both existing and new processes. Employees can seamlessly maintain and scale automations across multiple deployment options, constantly improve and evolve automations, and continuously track and measure the performance of automations, all without substantial technical experience.

 

At the core of our automation software is a set of capabilities that emulates human behavior, which provides our customers with the ability to automate both simple and complex use cases. Automations on our software can be built, consumed, managed, and governed by any employee who interacts with computers, resulting in the potential for broad applicability of our software across departments within an organization. Society is at a turning point in how organizations execute work, and we believe the ability to leverage software to enrich the employee experience will unlock tremendous value and efficiency opportunities. While we are still in the early days of a multi-year journey to the fully automated enterprise, momentum is growing as organizations across the world are only now beginning to understand the power of automation.

 

Many of our customers expand the scope and size of use cases of our software across their organizations as they quickly realize the power of our software. We believe that the success of our land-and-expand business model is centered on our ability to deliver significant value in a very short time. We grow with our customers as they identify and expand the number of business processes to automate, which increases the number of robots deployed and the number of users interacting with our robots. Our ability to expand within our customer base is demonstrated by our net retention rate, which represents the rate of net expansion of annualized renewal run-rate from existing customers over the last 12 months. Our net retention rate was 52% and 75% as of December 31, 2020 and 2019, respectively.

 

Solutions

 

Our mission is to be at the forefront of innovation and thought leadership in enterprise business automation, analyzing enterprise users’ desktops and mission-critical systems, and creating end-to-end software that provides business automation based on the results of that analysis and further simulating the numbers. We create end-to-end software that provides business automation. Our software uses a combination of RPA, task mining, and process mining to remove pain points in business operations, allowing software robots to emulate human behavior and perform specific business processes, thereby eliminating the need for employees to perform specific manual or routine tasks. This allows employees to focus on higher value-added tasks, and also allows them to seamlessly automate business processes, from legacy IT systems and on-premise applications to new cloud-native infrastructure and applications, without making significant changes to the organization’s underlying technology infrastructure. It can seamlessly automate business processes. Our software enables you to automate legacy mission-critical systems as well as work without desktops, and automate across multiple applications where no APIs exist. It is also intended to be used by employees within an enterprise, and supports a variety of use cases, from simple tasks to complex business processes over time.

 

Key Benefits to Organizations

 

Our software is built to help companies run their operations in a fully automated manner. Our solutions are designed to remove the friction that exists between employees and departments by increasing operational transparency, fostering collaboration between departments, and allowing people to focus on the work that matters. In addition, companies can deploy highly customized robots to support agile and fast automation creation, while reducing the overall cost of their IT infrastructure. Our goal is to shorten the time to value creation, increase efficiency, and drive innovation. Our software delivers the following key benefits to enterprises:

 

Empower Customers to Achieve Digital Transformation. Our software makes it fast and easy to drive digital transformation, which is typically time-consuming. Companies use our solutions to continuously discover and automate both simple tasks and complex business processes to increase operational efficiency and digital transformation. Our software reduces the time it takes for people to complete tasks from days and hours to minutes and seconds, allowing employees to focus on more creative, mission-critical, and innovative work. As a result, our software helps companies accelerate innovation, improve productivity, create competitive differentiation, and enrich the employee and customer experience. We help companies achieve true digital transformation.

 

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Build Business Resiliency and Agility into Digital Business Operations. Our software provides our customers with the flexibility they need to operate under ever-changing conditions. A company’s operations change over time. If companies have to modify their robots each time a change occurs, true efficiency will not be achieved. Our software robots are not only capable of performing tasks just like humans, but they can also keep changing as the business changes. Our robots can be deployed manned, unmanned, desktop, server-side, or hybrid, and can adjust seamlessly as conditions change. If necessary, they can also utilize spare resources in the enterprise (such as desktops at midnight) to perform time-consuming tasks and processes. Our software provides our customers with the ability to have a virtually unlimited digital workforce that operates 24/7, resulting in a more efficient and less error-prone digital workflow.

 

Fast Time-to-Value. We believe that our solutions provide companies with an immediate return on investment. Our software can be easily installed on any operating system, or company. It is also designed to be intuitive, minimizing the need for time-consuming and costly implementation and training. With automatic recording and playback capabilities, workers can create robots by simply performing routine tasks. Our simulation feature also allows us to verify the efficiency of the automation before it goes live and measure its effectiveness. By using our software, customers can reap significant benefits such as improved costs and increased worker productivity.

 

Organization-Wide Automation. Powerful, easy-to-use software allows workers across an enterprise organization to automate their work. Our software is designed to automate any business process or task, from individual desktop tasks to complex mission-critical business processes for departments across the enterprise. It also provides development software that does not require technical skills, allowing any employee in the organization to spread the automation. This will help spread automation throughout the organization as employees across departments and job functions use our technology to improve their performance.

 

Inspect, improve, and analyze business execution. Our solutions provide visibility into how work is actually being done in the enterprise, enabling our customers to understand, identify, and execute automation opportunities on an ongoing basis. For example, if there is duplication of work between multiple departments, you can choose to automate one of them but not the other. This allows us to optimize the automation. Our solution leverages advanced process discovery techniques and ML models from actual log data to understand individual patterns for executing work and address bottlenecks and inefficiencies. It is a very powerful solution that can optimize the entire company.

 

Improve Employee Productivity, Experience, and Satisfaction. By using our solutions, companies can achieve true digital transformation and establish a better work environment for their workers. With our software, enterprise workers will be able to automate tasks that can be used and operated efficiently and automate time-consuming manual tasks. We believe that this will improve the overall experience of our customers’ employees and allow them to focus on developing higher value-added skill sets. As a result, our clients will be able to retain a high-value, engaged workforce that is capable of delivering optimal business results.

 

Improve Accuracy and Compliance with Speed. Operations automated by our software are designed to be performed consistently as designed, allowing companies to achieve greater accuracy. For example, a sudden change in the user interface of a website will not affect the execution of the robot. It is very highly adaptive and is designed to eliminate human errors and inconsistencies that are common to workers who do their work manually. The work performed by the robot generates a log that can be reviewed and monitored at any time, allowing administrators to better control and comply with the work.

 

Enhance Customer Experiences. Companies can use our robots to solve known problems faster and more efficiently. We can also identify potential problems and help solve them. Business is always changing, and our software allows employees to focus on addressing critical customer issues and concerns, rather than performing repetitive, routine, and low-value tasks. Our robots improve the overall speed, accuracy, and effectiveness of a company’s customer service, increasing customer retention and loyalty.

 

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Key Benefits to Employees

 

Our software is designed to eliminate the need for employees to execute low-value, manual tasks, freeing up time to focus on more meaningful, strategic work. We believe that this, in turn, causes employees to feel empowered and be more valuable in contributing to broader organizational goals. “Robotics Engineer” is one of the fastest emerging job roles globally, with LinkedIn reporting a 40% compound annual growth rate in job postings from 2015 to 2019. According to a survey conducted by International Data Corporation, 53% of respondents indicated that AI and robotics would have a positive impact on jobs in their companies. Additionally, according to a survey published in UiPath, Inc.’s 2020 “State of the RPA Developer Report,” 84% of respondents believe that having RPA skills would positively impact their future career moves.

 

We believe the democratization of automation leads to the following benefits tied to an improved employee experience:

 

  greater professional fulfillment and job satisfaction;

 

  increased creativity and innovation;

 

  improved performance and accuracy;

 

  enhanced skillsets;

 

  increased autonomy and job opportunities; and

 

  more collaboration and better human interactions.

 

Our Digital Transformation Software

 

Our software is purpose-built to advance the next generation of automation. By addressing the complete lifecycle of automation, including identifying specific tasks and processes to automate, building and managing automation software robots, deploying them to execute processes, and measuring their business impact, our software is intended to address a wide and diverse array of automation opportunities, including complex, long-running workflows. We believe our software delivers compelling ease-of-use and intuitive user experiences through our low-code development environment and seamlessly integrates with an ever-expanding ecosystem of third-party technologies and enterprise applications without changing the existing infrastructure of an organization. In doing all of this, we enable businesses to redefine the relationship between enterprise applications and business processes.

 

Our software encapsulates seven modular product pillars that together address the automation lifecycle within an enterprise:

 

  Robot Automation Portal. Our RPA and Robot Automation Portal products combine AI with desktop recording, back-end mining of both human activity and system logs, and intuitive visualization tools, enabling users to discover, analyze, and identify unique processes to automate in a centralized portal.

 

  Recorder. Our RPA products are low-code or no-code development environments with easy-to-use, drag-and-drop functionality that users in an organization can learn to use to create attended and unattended automations without any prior knowledge of coding.

 

  Object-Oriented. The products in our automation category offer centralized tools designed to securely and resiliently manage, test, and deploy automations and ML models across the entire enterprise, with seamless access, enterprise-grade security, and endless scalability of data.

 

  Orchestration. With our RPA products, an enterprise can deploy our robots in highly immersive attended experiences or in standalone, unattended modes behind the scenes, and can leverage hundreds of native connectors built for commonly used line-of-business applications.

 

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  Graphical User Interface and Character User Interface. With our RPA products, there are multiple ways for users to remain connected and interact with robots, whether they are running in a data center, in the cloud, or right on their desktop. This capability allows our customers to manage long running processes that orchestrate work between robots and humans.

 

  Monitoring. Our RPA products enable users to track, measure, and forecast the performance of automation in their enterprise.

 

  Governance. We offer powerful, centralized governance capabilities designed to help businesses ensure compliance with business standards.

 

Our software is powered by the following key differentiating elements that are necessary for end-to-end automation within today’s enterprise:

 

  AI Computer Vision. Our robots are powered by a multi-pronged approach, combining proprietary computer vision technology that uses highly-trained AI with technical introspection of visual hierarchy to dynamically recognize and interact with constantly changing elements of on-screen documents, images, and applications.

 

  Document Understanding. We combine our proprietary computer vision technology with optical character recognition, natural language processing, and a variety of ML technologies to classify and extract data from unstructured, semi-structured, and structured documents and images, handwriting, and scans.

 

  Low-Code Development Experiences. Our software is built to be intuitive and easy to use with low-code, drag-and-drop development tools, and interfaces that knowledge workers can understand.

 

  Widespread and Rich Human and Robot Interaction. Our software facilitates a broad array of interactions between humans and robots, allowing users to easily engage with robots when, where, and how they want.

 

  Enterprise-Grade Governance and Security. We deliver centralized governance and data security capabilities built for businesses to securely and resiliently deploy and manage automations at enterprise scale.

 

  Open and Extensible Software Architecture. Our software delivers both user interface automation and API integration on a single software. We offer hundreds of out-of-the-box, native integrations with a wide range of enterprise applications and productivity tools from our technology partners.

 

  Flexible Deployment. We have built our software to be multi-tenant and deployable across on-premises, private and public cloud, and hybrid environments to meet any level of scaling, availability, and infrastructure requirements.

 

Our Digital Transformation Products

 

Our software is built so that automation processes can be used throughout the enterprise. Customers can either adopt our products as a unified solution or use a subset of our products for each.

 

Discover

 

Process Mining. Process mining visualizes the event logs generated through various systems and applications by connecting them in chronological order and by pattern, by using process mining tools. This enables us to identify problems and their causes, such as exception processing that creates a burden for corrective actions, insufficient segregation of duties and rule deviations, inefficient business processing, bottlenecks, etc., so that we can improve our business effectively and speedily. In addition, if using the function to evaluate whether or not there is a problem by using the best practices of business processes as benchmarks, it becomes easier to examine the image of appropriate business processes. Furthermore, by updating the data to be captured and monitoring it continuously, it is possible to recognize the performance of business quality, changes, and anomalies in a timely manner, which can lead to improvements.

 

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Currently, business process reforms are rapidly advancing, as exemplified by the automation of routine tasks through the introduction of RPA. In business process reform efforts, business processes have traditionally been visualized and evaluated in order to identify inefficient operations that need to be improved. However, these methods require a great deal of time and effort, such as interviewing the person in charge of the business, manually transcribing the contents of the business manual, which lacks accuracy and completeness, into a business flow, and repeatedly checking and revising the transcribed contents with various parties involved in the business. Furthermore, depending on the level of understanding and risk sensitivity of the interviewees, infrequent exceptions and so-called local rules were sometimes overlooked.

 

One of the concepts that will drive and enhance digital transformation is digital twin technology. Digital twin technology reproduces what is happening in a factory in a computer, for example, by outputting logs of information on machine tools, manufacturing equipment, and products in production, and putting the logs into process mining. It is also called a digital twin organization, which is an organization model that makes it easier to understand and manage business processes in real time, and to plan for the future. Using a model that behaves like a twin of a real factory system, it is possible to test the effects of production conditions that are not possible in reality, to test processes for efficiency, and to predict fatigue when manufacturing equipment is kept running. This factory simulation environment can reproduce the same environment as in reality.

 

In the 5G era, local 5G will be able to collect even more detailed logs of the factory. This will increase the accuracy of the simulations and enable even more advanced operational efficiency. By recreating not only factories but also white-collar workplaces in a digital twin, it will be possible to identify problems, eliminate bottlenecks, change workflows, and reform work styles.

 

Task Mining. Task mining is a method of analyzing individual PC operations of staff engaged in various tasks, i.e., detailed PC operation log data such as “application launch,” “screen launch,” “file open,” “mouse click,” “text input,” “copy and paste,” etc., to discover issues and problems. Task mining can highlight task-level issues such as, for example, whether a series of tasks to convert paper documents into digital data by reading them with OCR is taking longer than expected (inefficient tasks), or copying and pasting from email body to Excel is repeated with high frequency (repetitive tasks).

 

The merit of task mining is that it can point out issues and problems related to tasks, i.e., the various tasks that individual staff members perform on their PCs, based on facts such as the actual time required and the number of tasks processed. Conventional business analysis based on interviews can only provide information based on the subjective and sensory perceptions of the workers themselves, and the accuracy and reliability of the analysis results are not always high. In addition, the on-site measurement work by a researcher with a stopwatch was not only time-consuming and costly, but also had the possibility of adversely affecting the work itself of the workers to be measured. On the other hand, in the case of task mining, since the analysis targets the PC operation logs automatically collected through the sensors (agents) installed on each PC, the flow of work based on the facts as they can be reproduced. Therefore, the analysis results are extremely accurate and reliable. Moreover, it does not place a burden on the person in charge in the field.

 

Using task mining, the time and cost of collecting detailed business data can be significantly reduced and because it is fact-based, highly accurate and reliable analysis results can be obtained.

 

Manage

 

Robot Automation Portal. Our Robot Automation Portal is a web portal that allows customers to monitor and manage automation with RPA over a TCP/IP network (Internet and/or Intranet). The Robot Automation Portal records the results generated from the time the robot machine is registered in the portal. Customers can manage and operate all RPA robots in their company, and also report the results and monitor their status. Our Robot Automation Portal also provides an orchestration function that allows customers to send a robot to a terminal where RPA is not installed, run it in free time, and return only the results. This allows our clients to make full use of their internal resources.

 

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Orchestrator. Our Orchestrator can provision, deploy, trigger, monitor, measure, and track the successful operation of robots on any supported device, and when combined with the Robot Automation Portal, it does so through a GUI interface.

 

CUI interface. There are many cases where GUI is not available for servers such as Linux and UNIX, etc., so our RPA also has a CUI command interface.

 

All robots are provided as JAR files, so as long as customers have a Java environment, they can run the robots and automate their operations without installing RPA.

 

Run

 

Development RPA. It is possible to create robots freely using flowcharts in a GUI interface, or to create robots by coding in the same way as Java development, using an interface similar to a Java IDE. It also comes with three types of OCR, making it suitable for creating a business robot that scans documents.

 

Execution RPA. The license is only for running the robot. Only one robot can be run simultaneously per license. The execution environment can be any device and any operating system. Although there is only one concurrent execution, there can be an unlimited number of installations.

 

Measure

 

When we start to automate with RPA robots, we tend to automate even tasks that would be more efficient without automation. This is an ironic result of automation becoming inefficient, but it is difficult to identify. Using our simulation and reporting functions, it is possible to identify inefficient automated tasks and change them to efficient operations. That may possibly be tasks that are performed by people, but the cost will vary greatly.

 

Govern

 

We offer powerful, centralized governance capabilities designed to ensure compliance with business standards. Our software balances compliance with empowerment through granular control of what can be automated, who can build and publish automations, and complete lifecycle management with role-based access control and enforcement. Governance capabilities are embedded across our software. The combination of our measurement and governance capabilities are critical as they are key to enterprise-scale automation programs and are a differentiated feature of our software.

 

Competition

 

Customer Experience Management Business

 

Our market is evolving, highly competitive and fragmented, and we expect competition to increase in the future. We believe the principal competitive factors in our market are:

 

  vision for the market, product strategy and pace of innovation;
     
  inbound marketing focus and domain expertise;
     
  integrated all-in-one CXM Platform;
     
  breadth and depth of product functionality;
     
  ease of use;
     
  scalable, open architecture;
     
  time to value and total cost of ownership;

 

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  integration with third-party applications and data sources;
     
  name recognition and brand reputation; and
     
  “free products to paid services” go-to-market motion.

 

We believe we compete favorably with respect to all of these factors.

 

We face intense competition from other software companies that develop marketing, sales, service, and content management software. Our competitors offer various point applications that provide certain functions and features that we provide, including:

 

  cloud-based marketing automation providers;
     
  content management systems;
     
  email marketing software vendors;
     
  sales force automation and customer experience management software vendors;
     
  customer service platform vendors; and
     
  large-scale enterprise suites.

 

In addition, instead of using our CXM Platform, some prospective customers may elect to combine disparate point applications, such as content management, marketing automation, analytics, social media management, ticketing, and conversational bots. We expect that we will develop and introduce, or acquire, applications serving customer-facing and other front office functions.

 

Digital Transformation Business

 

The market for RPA is one of the fastest growing enterprise software markets and is increasingly competitive. We believe our competitors primarily exist across the across the following three categories:

 

 

  RPA software providers¸ which provide RPA software, but lack end-to-end automation capabilities.

 

  Automation lifecycle enhancing technology providers, such as low-code, iBPMS, iPaaS, process mining, and test automation vendors, which provide additional features that can be useful for automations. We have alliances and integrate with the key vendors in each category, but they often develop and market automation capabilities as extensions of their core software.

 

  Enterprise software vendors, which provide horizontal applications and productivity tools and are acquiring, building, or investing in RPA functionality or partnering with RPA providers.

 

Our Competitive Strengths

 

Customer Experience Management Business

 

We believe that our market leadership position is based on the following key strengths:

 

Leading Platform. We have designed and built a world-class CXM Platform. We believe our customers choose our CXM Platform over others because of its powerful, integrated, and easy-to-use applications. We built our customer experience management system on a single, unified, and intuitive platform, which we believe contrasts positively with many other customer experience management suites.

 

Market Leadership and Strong Brand. Our focus is to be a recognized thought leader in the cloud-based marketing, sales, customer service, and content management software industry with a leading brand. Our marketing, sales, service, and content management experience attracts, engages, and delights customers by being more relevant, more helpful, more personalized, and less interruptive than traditional marketing and sales tactics.

 

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Large and Growing Solutions Partner Program. Our solutions partners promote our brand and offer our CXM Platform to their clients. Solutions partners and customers referred to us by our solutions partners represented approximately 58% of our total customers as of December 31, 2020, and approximately 43% of our total revenue for the year ended December 31, 2020. These solutions partners help us to promote the vision of the inbound experience, efficiently reach new mid-market businesses at scale, and provide our mutual customers with more diverse and higher-touch services.

 

Premium Pricing Strategy. Our free model attracts customers who begin using our CXM Platform through our free products and then upgrade to our paid services. Through our free products, our customers are able to receive value from us before converting to a paid product or engaging with sales.

 

Mid-Market Focus. We believe we have significant competitive advantages reaching mid-market businesses and efficiently reach this market at scale as a result of our inbound methodology, premium pricing strategy, and our solutions partner channel.

 

Powerful Network Effects. We have built a large and growing ecosystem around our CXM Platform and company. Thousands of our customers integrate third-party applications with our CXM Platform. We believe this ecosystem drives more businesses and professionals to embrace the inbound playbook. As our engaged audience grows, more solutions partners collaborate with us, more third-party developers integrate their applications with our CXM Platform, and more professionals complete our certification programs, all of which help to drive more businesses to adopt our CXM Platform.

 

Digital Transformation Business

 

We believe that the following are key strengths of our digital transformation business:

 

Broad Set of Complementary Solutions. Our software combines OCR, AI, task mining, process mining, RPA, and process discovery capabilities to enable automation across multiple non-desktop systems, mission-critical system-to-system automation deployment environments, and cloud-to-cloud applications. We can help you automate multiple systems without desktops, automation deployment environments between mission-critical systems, and across cloud applications. We provide our customers with a comprehensive set of capabilities to discover, build, manage, execute, engage, measure, and control automation across departments and personas within an organization or agency. Our software can run on multiple operating systems, including Linux, Unix, Mac, AS-400, as well as Windows, allowing for automation across a variety of systems. Also, since it is coded in Java, any Java engineer can easily build add-on functions.

 

Open Architecture. Our software embraces an open ecosystem with hundreds of enterprise application integrations that have been built by us and our community of technology partners. Our solution includes a variety of pre-built activities and connectors so customers can quickly create and deploy robots that execute operations and seamlessly interact with third-party systems. Our open ecosystem is architecture agnostic, which allows organizations to automate existing infrastructure and accelerate digital innovation without the need to replace or make large investments in their existing infrastructure.

 

Built-In AI/ML Capabilities. We incorporate our own Java components into our products to drive continuous improvement in business automation. Our RPA is a system that allows the reuse of existing programming assets to address complex use cases. Users can incorporate their current Java applications, if any, into our RPA. Furthermore, it does not only automate that application, but also expands the scope of integration with other applications. The capabilities of our software are not limited to automating existing operations, but can also adapt to ever-changing variables, such as the application of new business models, to achieve automation capabilities that dramatically improve business results and increase the competitive advantage of our customers.

 

Human Emulation Enables Addressing Expansive Use Cases. Our RPA robots emulate human behavior and adapt to the ever-changing external variables of business. By having the robots emulate the usual business behavior of humans, companies can leverage our software to address a myriad of use cases, from simple to complex. We believe that the power of our software is only limited by the use cases that human users can come up with.

 

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Built for Mid to Enterprise Deployment. Our software grows as our customers increase their automation operations across their organizations. Customers can deploy our software on desktops, on-premises, in public clouds, private clouds, or in hybrid environments. In addition, it can be deployed on multiple operating systems and across multiple devices. Our software is designed with security and governance at its core, allowing our customers to seamlessly expand the scope of automation while ensuring that IT departments have the security they need to automate.

 

Adoption Across Workers and Functions. We make sure that workers across the organization have access to automation when they need it. Workers can interact with robots in the same way they interact with humans. For example, they can use manned robots on their desktops to get human work done faster, use unmanned robots in the background to run business processes, build applications that interact indirectly with robots, send email to robots, interact with chatbots, and so on. This will give them the freedom to choose whether to ask a robot or a human to do the work.

 

Simple, Intuitive, Quickly Deployed. Our software is easy to use, with an intuitive interface and low-code, drag-and-drop, desktop recording and playback capabilities, so that anyone working across the organization can easily take advantage of our automation features at their disposal. Automation features can be quickly and efficiently deployed throughout an organization to create immediate value. Our software can be easily learned and operated by employees with or without technical knowledge, without the need for large implementation costs or costly professional services.

 

Resilient Automations. Our software is capable of fully emulating the behavior of enterprise workers as they manipulate applications and systems to execute processes. Our robots can leverage our proprietary capabilities to fully emulate human behavior, interpreting a very wide variety of document types and adapting and responding to changes in the work environment. It can also adapt to changes in display resolution and scale, as well as user interface changes, by utilizing our proprietary OCR capabilities. For example, the process of scanning and importing postal invoices does not require the user to memorize the format of each invoice, and a single template can be used for all types of invoices. In addition, we have developed a variety of features to enable elasticity in the process and execution of automation. For example, when testing the user interface of a website, our software can create the same state as a human being browsing the site and perform operational validation tests. It also allows for management, reuse and reliability of user interface elements. Thanks to this feature, when changes are made to the application, the operation can continue without having to update the robot. With such flexibility, robots demonstrate their resilience in automating tasks and reducing the number of errors across the enterprise.

 

Integrated and Portable Object API Models. Our customers can reuse our object-oriented robots. This capability allows them to extend the capabilities of our software and improve automation results. Our software makes it easy to deploy, manage, and improve objects built by customers and third parties, allowing you to allocate more human resources to business problems and use cases. objects are designed to be deployed and customized once created.

 

Automation Performance and Business Outcome Analytics. Our software enables customers to gain powerful insights and generate key performance indicators with actionable metrics by tracking, measuring, and predicting automation performance through the use of a Robot Automation Portal. Out-of-the-box dashboards display execution metrics and allow users to measure performance and report on the value of their automation.

 

Built for Collaboration with Human and Robot. Our software is designed to allow humans and robots to work together, so that each can focus on the tasks they do best. Robots can perform time-consuming, repetitive, and routine tasks that make work less interesting and satisfying, while humans can focus on more creative thinking, innovation, solving complex problems, and improving the customer experience. Our software allows our customers to harness the power of automation to create fully automated, highly efficient enterprises where humans and robots work in harmony.

 

Accelerating the Adoption of Automation within the Enterprise. The adoption of our software will automate simple, duplicative, repetitive and time-consuming tasks in the organization that are not interesting to people, thus allowing them to focus on creative and rewarding tasks. Most of our clients use our solutions to find and automate all the tasks that can be automated in their companies. Our solution works with your employees to evaluate and score high-value automation possibilities. As employees become more comfortable with automation, they will more easily adopt and implement it, discover new processes to automate within a particular, and provide new automation ideas to RPA for development and deployment. After a few iterations of this kind of behavior, a phenomenon occurs in which certain employees build useful automation on their own, which is then deployed throughout the organization. This action is different from the automation that has been discovered so far and contributes to further operational efficiency. It helps to organically surface a number of automation ideas that could not be achieved with the traditional top-down approach.

 

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Our Growth Strategies

 

Customer Experience Management Business

 

The key elements to our growth strategy for our customer experience management business are:

 

Grow Our Customer Base. The market for our CXM Platform is large and underserved. Mid-market businesses are particularly underserved by existing point application vendors and often lack sufficient resources to implement complex solutions. Our all-in-one CXM Platform allows mid-market businesses to efficiently adopt and execute an effective inbound marketing, sales, customer service, and content management strategy to help them expand and grow. We will continue to leverage our inbound go-to-market approach, freemium pricing strategy and our network of solutions partners to keep growing our business.

 

Increase Revenue from Existing Customers. With 819 total customers from our combined business units in Japan, we believe we have a significant opportunity to increase revenue from our existing customers. We plan to increase revenue from our existing customers by expanding their use of our CXM Platform by upselling additional offerings and features, adding additional users, and cross-selling our marketing, sales, service, and content management products to existing customers through touchless or low touch in-product purchases. Our scalable pricing model allows us to capture more spend as our customers grow, increase the number of their customers and prospects managed on our CXM Platform, and offer additional functionality available from our higher price tiers and add-ons, providing us with a substantial opportunity to increase the lifetime value of our customer relationships.

 

Keep Expanding Internationally. We intend to grow our presence in international market through additional investments in local sales, marketing and professional service capabilities, as well as by leveraging our solutions partner network. We plan to open international offices. We have significant website traffic from regions outside the United States, and we believe that markets outside the United States represent a significant growth opportunity.

 

Continue to Innovate and Expand Our CXM Platform. Mid-market businesses are increasingly realizing the value of having an integrated marketing, sales, customer service, and content management platform. We believe we are well positioned to capitalize on this opportunity by introducing new products and applications to extend the functionality of our CXM Platform.

 

Selectively Pursue Acquisitions. We plan to selectively pursue acquisitions of complementary businesses, technologies and teams that would allow us to add new features and functionalities to our platform and accelerate the pace of our innovation.

 

Digital Transformation Business

 

For our digital transformation business, we are pursuing a large market opportunity with growth strategies that include:

 

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Acquire New Customers. Our market is rapidly growing. We believe that as more organizations adopt our automation software and experience quantifiable competitive advantages, other organizations will also adopt automation as a necessary tool to compete. While we sell to organizations of all sizes and across a broad range of industries, our go-to-market team’s key focus is on the largest organizations, including large enterprises and governments. We also use an inside sales team focused on small and mid-sized businesses. We plan to continue to invest in our go-to-market team to grow our customer base both domestically and internationally.

 

Expand Within Our Existing Customer Base. Our customer base represents a significant opportunity for us to become a strategic partner to our customers in their automation journeys and drive further sales expansion through the following vectors:

 

  deploy more software robots across different departments;

 

  provide more employees with their own robot assistants;

 

  increase adoption of software products; and

 

  expand use cases for automation in the organization.

 

Over time, we seek to deploy our solution where every employee interacts with multiple robots. We believe we will be able to accomplish this through our continued democratization of automation and enablement of citizen developers. The power of our strategy is evidenced by our net retention rate, which was 52% and 75% as of December 31, 2019 and 2020, respectively.

 

Grow and Cultivate Our Partner and Channel Network. We are focused on maintaining and growing our ecosystem of partners that build, train, and certify skills on our technology as well as deploy our technology on behalf of their customers. We have built a global partner ecosystem of more than 40 systems integrators, value-added resellers, business consultants, technology partners, and public cloud vendors. Our partner network includes, among others, content management systems, customer experience management systems, Heartcore Robo (RPA), Apromore, myInvenio and Controlio. We intend to continue to expand and enhance our partner relationships to grow our market presence and drive greater sales efficiencies.

 

Extend Our Technology Leadership Through Continued Innovation and Investment in Our Software. We believe that we have built a differentiated automation software and intend to continually increase the value we provide to our customers by investing in extending the capabilities of our software. For example, we have introduced over 4 new products and multiple new features over the last 24 months. We have made and will continue to make significant investments in research and development to bolster our existing technology and enhance usability to improve our customers’ productivity.

 

Foster the Next Generation of Workers and Grow Our Community. We have built an extensive ecosystem focused on training and supporting individuals on working with our software. We have created forums addressing automation in the workplace and learning plans for all the important roles in automation. We believe automation will be a foundation of the future of work and, as individuals build out their skillsets, this will drive greater adoption of our software.

 

Continue to Invest in Major Markets. Since inception, we have invested in developing an infrastructure that would allow us to scale globally. We continue seeing adoption of our products across all geographies in which we operate and believe we have a significant runway ahead of us. We believe there is a significant opportunity to expand use of our software in the top 25 countries as measured by gross domestic product. As of December 31, 2020, sales to customers located in such countries represented 100% of our total annualized renewal run-rate. We intend to continue to make significant investments to expand our sales and drive adoption of our software throughout those markets. In particular, we believe that North America represents a significant opportunity for us, and we intend on continuing to expand our sales and drive adoption of our software across the region. As of December 31, 2020, customers located in the United States represented 2% of our total annualized renewal run-rate.

 

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Opportunistically Pursue Strategic Acquisitions. We will evaluate acquisition opportunities that we believe will be complementary to our existing software, enhance our technology, and increase the value proposition we deliver to our customers.

 

Impact of the COVID-19 Pandemic

 

In December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The pandemic, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours.

 

For example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions, closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. In March 2020, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all HeartCore Co employees were required to work from home for several months during the height of the pandemic. We cancelled or shifted our customer and industry events to virtual-only experiences. Although we have begun to slowly re-open our offices on a staggered, region-by-region basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. All of these changes may disrupt the way we operate our business. In addition, our management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic and seeking to minimize the risk of the virus and manage its effects on our business and workforce.

 

Although we were recently formed, our wholly owned operating subsidiary, HeartCore Co, has been operating through the pandemic. The operations of HeartCore Co have been impacted by a range of external factors related to the pandemic that are not within our control. As for existing customers, the pandemic has not affected their use our software. As for new customers in the travel, hotel, airline, railroad, and restaurant industry for the CX division, the pandemic has resulted in a reduction in new orders. However, as for new customers in the retail and finance industry for the CX division, orders have increased despite the pandemic, resulting in an overall increase in sales for the CX division of $1,908,847 for the nine months ended September 30, 2021 as compared to nine months ended September 30, 2020. As for the impact of the pandemic on the DX division, large companies were forced to change the way they operate, as employees were forced to work remotely, which increased the demand for our DX software, but due to the delay in the sales cycle by the pandemic, realization of sales were delayed resulting in reduction of sales of $(127,323) for the nine months ended September 30, 2021 as compared to nine months ended September 30, 2020.

 

The duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

 

To the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section, including, in particular, risks related to our dependence on customer renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions may harm our industry, business and results of operations.

 

Recent Developments

 

For a detailed description of recent developments of the Company, see “Description of Business—Recent Developments” on page 108 of this prospectus.

 

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Risks Related to Our Business

 

Our business and our ability to execute our business strategy are subject to a number of risks as more fully described in the section titled “Risk Factors” beginning on page 27. These risks include, among others:

  

  Our industry and the markets in which we operate are highly competitive and increased competitive pressures could reduce our share of the markets we serve and adversely affect our business, financial position, results of operations and cash flows;

 

  We are a holding company and depend upon our subsidiaries for our cash flows;
     
  We may require additional funding for our growth plans, and such funding may result in a dilution of your investment;

 

  We currently are, and will continue to be after this offering, a “controlled company” within the meaning of the Nasdaq rules and the rules of the Securities and Exchange Commission (the “SEC”) and, as a result, qualify for exemptions from certain corporate governance requirements. You do not have the same protections afforded to stockholders of other companies that are subject to such requirements;

 

  If the voting power of our capital stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest;

 

  The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain;

 

  We are dependent upon customer renewals, the addition of new customers, increased revenue from existing customers and the continued growth of the market for content management, customer experience management, task and process mining, and robotic process automation;

 

  Our subscription renewal rates may decrease, and any decrease could harm our future revenue and operating results;

 

  If we do not accurately predict subscription renewal rates or otherwise fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our operating results could be adversely affected;

 

  Because we generally recognize revenue from subscriptions ratably over the term of the agreement, near term changes in sales may not be reflected immediately in our operating results;

 

  We face significant competition from both established and new companies offering digital marketing, task and process mining, content management, customer experience management, and robotic process automation, and other related applications, as well as internally developed software, which may harm our ability to add new customers, retain existing customers and grow our business;

 

  We have experienced rapid growth and organizational change in recent periods and expect continued future growth. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately;

 

  Failure to effectively develop and expand our digital marketing, task and process mining, content management, customer experience management, and robotic process automation capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our software;

 

  The rate of growth of our business depends on the continued participation and level of service of our third-party partners;

 

  We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations or our guidance;

 

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  If we fail to maintain our inbound thought leadership position, our business may suffer;

 

  If we fail to further enhance our brand and maintain our existing strong brand awareness, our ability to expand our customer base will be impaired and our financial condition may suffer;

 

  If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs or requirements, our software may become less competitive;

 

  If we fail to offer high-quality customer support, our business and reputation may suffer;

 

  We may not be able to scale our business quickly enough to meet our customers’ growing needs and if we are not able to grow efficiently, our operating results could be harmed;

 

  Our ability to introduce new products and features is dependent on adequate research and development resources. If we do not adequately fund our research and development efforts, we may not be able to compete effectively and our business and operating results may be harmed;

 

  Changes in the sizes or types of businesses that purchase our software or in the applications within our software purchased or used by our customers could negatively affect our operating results;

 

  We have in the past completed acquisitions and may acquire or invest in other companies or technologies in the future, which could divert management’s attention, fail to meet our expectations, result in additional dilution to our stockholders, increase expenses, disrupt our operations or harm our operating results;

 

  Because our long-term growth strategy involves further expansion of our sales to customers outside Japan, our business will be susceptible to risks associated with international operations;

 

  If we cannot maintain our company culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success and our business may be harmed;

 

  We rely on our management team and other key employees, and the loss of one or more key employees could harm our business;

 

  The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy;

 

  Interruptions or delays in service from our third-party data center providers could impair our ability to deliver our software to our customers, resulting in customer dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenue;

 

  If our software has outages or fails due to defects or similar problems, and if we fail to correct any defect or other software problems, we could lose customers, become subject to service performance or warranty claims or incur significant costs;

 

  We are dependent on the continued availability of third-party data hosting and transmission services;

 

  If we do not or cannot maintain the compatibility of our software with third-party applications that our customers use in their businesses, our revenue will decline;

 

  We rely on data provided by third parties, the loss of which could limit the functionality of our software and disrupt our business;

 

  Privacy concerns and end users’ acceptance of Internet behavior tracking may limit the applicability, use and adoption of our software;

 

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  If our or our customers’ security measures are compromised or unauthorized access to data of our customers or their customers is otherwise obtained, our software may be perceived as not being secure, our customers may be harmed and may curtail or cease their use of our software, our reputation may be damaged and we may incur significant liabilities;

 

  Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others;

 

  If we fail to adequately protect our proprietary rights, in Japan and abroad, our competitive position could be impaired and we may lose valuable assets, experience reduced revenue and incur costly litigation to protect our rights;

 

  Our use of “open-source” software could negatively affect our ability to offer our software and subject us to possible litigation;

 

  We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could harm our business. Compliance with such laws could also impair our efforts to maintain and expand our customer base, and thereby decrease our revenue;

 

  The standards that private entities use to regulate the use of email have in the past interfered with, and may in the future interfere with, the effectiveness of our software and our ability to conduct business;

 

  Existing federal, state and foreign laws regulate Internet tracking software, the senders of commercial emails and text messages, website owners and other activities, and could impact the use of our software and potentially subject us to regulatory enforcement or private litigation;

 

  We are subject to governmental export controls and economic sanctions laws that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws;

 

  Our substantial indebtedness could have important adverse consequences and adversely affect our financial condition;

 

  We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which could have a material adverse effect on our business, financial condition and results of operations;

 

  Despite our level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, including off-balance sheet financing, contractual obligations and general and commercial liabilities. This could further exacerbate the risks to our financial condition described above; and

 

  Once our common stock is listed on Nasdaq Capital Market, there can be no assurance that we will be able to comply with Nasdaq Capital Market’s continued listing standards.

 

Implications of Being an Emerging Growth Company and a Smaller Reporting Company

 

As a company with less than $1.07 billion in revenues during our last fiscal year, we qualify as an emerging growth company as defined in the Jumpstart Our Business Startups Act enacted in 2012 (the “JOBS Act”). As an emerging growth company, we expect to take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

  being permitted to present only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus;

 

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  not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;

 

  reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

  exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

  

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our consolidated financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We may use these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.07 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

 

To the extent that we continue to qualify as a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue to be available to us as a smaller reporting company, including: (i) not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes Oxley Act; (ii) scaled executive compensation disclosures; and (iii) the requirement to provide only two years of audited financial statements, instead of three years.

 

Implications of Being a Controlled Company

 

The “controlled company” exception to Nasdaq’s rules provides that a company of which more than 50% of the voting power is held by an individual, group or another company, a “controlled company,” need not comply with certain requirements of Nasdaq’s corporate governance rules. As of the date of this prospectus, Sumitaka Yamamoto, our Chief Executive Officer, beneficially owned an aggregate of 10,984,539 shares of our common stock, which represents 69.43% of the voting power of our outstanding common stock. Following this offering, Mr. Yamamoto will control approximately 59.96% of the voting power of our outstanding common stock if all the common stock being offered are sold. Accordingly, if we obtain listing on Nasdaq, we will be a “controlled company” within the meaning of Nasdaq’s corporate governance rules. Controlled companies are exempt from Nasdaq’s corporate governance rules requiring that listed companies have (i) a majority of the board of directors consist of “independent” directors under the listing standards of Nasdaq, (ii) a nominating/corporate governance committee composed entirely of independent directors and a written nominating/corporate governance committee charter meeting the requirements of Nasdaq, and (iii) a compensation committee composed entirely of independent directors and a written compensation committee charter meeting the requirements of Nasdaq. We currently utilize and presently intend to continue to utilize these exemptions. As a result, we may not have a majority of independent directors, our nomination and corporate governance committee and compensation committee may not consist entirely of independent directors and such committees may not be subject to annual performance evaluations. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq. See also “Management—Controlled Company and Director Independence.”

 

Corporate Information

 

We are currently incorporated and in good standing in the State of Delaware. Our principal executive offices are located at 1-2-33, Higashigotanda, Shinagawa-ku, Tokyo, Japan, and our telephone number is +81-3-6409-6966. Our website address is www.heartcore.co.jp. The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common shares.

 

Nasdaq Listing

 

We intend to list of our common stock on Nasdaq. There is no assurance that our listing application will be approved by Nasdaq. The approval of our listing on Nasdaq is a condition of closing. If our application to Nasdaq is not approved or we otherwise determine that we will not be able to secure the listing of the common stock on Nasdaq, we will not complete the offering.

 

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THE OFFERING

 

Securities offered by us:   2,500,000 shares of common stock (up to 2,875,000 shares if the underwriter exercises their over-allotment option in full).
     
Public offering price:   We expect the initial public offering price to be between $5.00 and $7.00 per share. For purposes of this prospectus, the assumed initial public offering price per share is $6.00, the mid-point of the anticipated price range. The actual offering price per share will be as determined between the representative and us based on market conditions at the time of pricing. Therefore, the assumed public offering price used throughout this prospectus may not be indicative of the final offering price.
     
Over-allotment option:   We have granted to the underwriters an option to purchase up to an additional 375,000 shares of common stock exercisable solely to cover over-allotments, if any, at the applicable public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus. The representative may exercise this option in full or in part at any time and from time to time until 45 days after the date of this prospectus.
     
Common stock outstanding before this offering:   15,819,943 shares of common stock(1)
     
Common stock to be outstanding after this offering:   18,319,943 shares of common stock. If the underwriters’ over-allotment option is exercised in full, the total number of shares of common stock outstanding immediately after this offering would be 18,694,943.
     
Controlled Company:   Following this offering, Mr. Yamamoto will control approximately 59.96% of the voting power of our outstanding capital stock if all the common stock being offered are sold. As a result, if we obtain listing on Nasdaq Capital Market, we will be a “controlled company” under the Nasdaq Capital Market corporate governance standards. Under these standards, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance standards. See “Management – Board Committees and Director Independence - Controlled Company and Director Independence”.
     
Representative’s warrants:   The registration statement of which this prospectus is a part also registers for sale warrants to purchase 201,250 shares of our common stock (7% of the shares of common stock sold in this offering) to be issued to the representative and/or its affiliates, (assuming the exercise of the over-allotment option by the Representative in full) and the common stock issuable upon exercise of such warrants, as a portion of the underwriting compensation payable in connection with this offering. The warrants will be exercisable at any time, and from time to time, in whole or in part, commencing from the closing of the offering and expiring five (5) years from the effectiveness of the offering, at an exercise price of $7.50 (125% of the public offering price of the common stock). Please see “Underwriting—Representative’s Warrants” for a description of these warrants.
     
Use of proceeds:   We expect to receive net proceeds from this offering of approximately $13,299,975 (or approximately $15,392,475 if the representative exercises in full its over-allotment option) after deducting estimated underwriting discounts and commissions (7% of the gross proceeds of the offering) and after our offering expenses, estimated at $650,025. We intend to use the net proceeds from this offering to fund the development of technology, acquisition of other companies, working capital and general corporate purposes. See “Use of Proceeds.”
     
Risk factors:   See “Risk Factors” beginning on page 27 of this prospectus for a discussion of some of the factors you should carefully consider before deciding to invest in our common stock.
     
Listing:   We intend to list our common stock on Nasdaq under the symbol “HTCR” The approval of our listing on Nasdaq is a condition of closing this offering.

 

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Lock-Ups:   We, all of our directors and executive officers, and holders of five percent (5%) or more of our outstanding securities (or securities convertible into shares of our common stock) have agreed not to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible into common stock without the prior written consent of the representative for a period of twelve (12) months from the consummation of the offering, subject to certain limited exceptions. See “Underwriting—Lock-Up Agreements.”
     
Dividend policy:   We do not anticipate declaring or paying any cash dividends on our common stock following our public offering.

 

(1) Unless we indicate otherwise, all information in this prospectus:

 

  is based on 15,819,943 shares of common stock issued and outstanding as of January 3, 2022;
     
  assumes no exercise by the representative of its option to purchase up to an additional 375,000 shares of common stock to cover over-allotments, if any;
     
  excludes 1,534,500 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.50 per share; and
     
  excludes 175,000 shares of our common stock underlying the warrants to be issued to the representative and/or its affiliates in connection with this offering.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following table presents our selected historical consolidated financial data for the periods indicated. The selected historical consolidated financial data for the years ended December 31, 2020 and 2019 and the balance sheet data as of December 31, 2020 and 2019 are derived from the audited financial statements included elsewhere in this prospectus. The summary historical financial data for the nine months ended September 30, 2021 and 2020 and the balance sheet data as of September 30, 2021 and 2020 are derived from our unaudited financial statements included elsewhere in this prospectus.

 

All financial statements included in this prospectus are prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). The data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this prospectus. Historical results are included for illustrative and informational purposes only and are not necessarily indicative of results we expect in future periods, and results of interim periods are not necessarily indicative of results for the entire year. The financial statements contained elsewhere fully represent our financial condition and operations.

 

    Year Ended     Nine Months Ended  
   

December 31,

2020

   

December 31,

2019

    September 30, 2021     September 30, 2020  
                (unaudited)  
Statement of Operations Data                        
Total revenues   $ 9,026,463     $ 7,208,964     $ 8,446,011     $ 6,664,487  
Cost of revenues     5,008,311       4,547,551       4,369,144       3,616,972  
Total gross profit     4,018,152       2,661,413       4,076,867       3,047,515  
Total operating expenses     3,759,447       3,928,285       3,535,051       2,596,667  
Income (loss) from operations     258,705       (1,266,872 )     541,816       450,848  
Total other expense     (31,424 )     (50,212 )     (29,553 )     (11,994 )
Income (loss) before provision for taxes     227,281       (1,317,084 )     512,263       438,854  
Income tax provisions     72,217       (56,057 )     97,437       40,539  
Net income (loss)   $ 155,064     $ (1,261,027 )   $ 414,826     $ 398,315  
Net income (loss) attributable to non-controlling interest     4,109       (37,453 )     11,112       10,555  
Net income (loss) attributable to HeartCore Enterprises, Inc.     150,955       (1,223,574 )     403,714       387,760  
Other comprehensive income (loss)     (65,893 )     (16,900 )     68,365       (36,719 )
Total comprehensive income (loss)     89,171       (1,277,927 )     483,191       361,596  
Comprehensive income (loss) attributable to non-controlling interest     2,602       (37,845 )     12,923       9,821  
Comprehensive income (loss) attributable to HeartCore Enterprises, Inc.     86,569       (1,240,082 )     470,268       351,775  
Basic and diluted net earnings (loss) per share   $ (0.01 )   $ (0.10 )   $ 0.03     $ 0.03  
                                 
Balance Sheet Data (at period end)                                
Cash and cash equivalents   $ 3,058,175     $ 535,287     $ 3,090,782          
Working capital (deficit) (1)     152,395     (1,658,288 )     (83,688 )        
Total assets     10,356,802       7,943,280       9,990,170          
Total liabilities     11,417,074       10,025,001       10,567,251          
Shareholders’ deficit     (1,060,272 )     (2,081,721 )     (577,081 )        

 

(1) Working capital (deficit) represents total current assets less total current liabilities.

 

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RISK FACTORS

 

An investment in our securities carries a significant degree of risk. You should carefully consider the following risks, as well as the other information contained in this prospectus, including our historical financial statements and related notes included elsewhere in this prospectus, before you decide to purchase our securities. Any one of these risks and uncertainties has the potential to cause material adverse effects on our business, prospects, financial condition and operating results which could cause actual results to differ materially from any forward-looking statements expressed by us and a significant decrease in the value of our common shares. Refer to “Cautionary Statement Regarding Forward-Looking Statements.”

 

We may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause. These potential risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional risks and uncertainties that we are presently unaware of, or presently consider immaterial, that may become material in the future and have a material adverse effect on us. You could lose all or a significant portion of your investment due to any of these risks and uncertainties.

 

Below is a summary of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:

 

  Our industry and the markets in which we operate are highly competitive and increased competitive pressures could reduce our share of the markets we serve and adversely affect our business, financial position, results of operations and cash flows;

 

  We are a holding company and depend upon our subsidiaries for our cash flows;
     
  We may require additional funding for our growth plans, and such funding may result in a dilution of your investment;

 

  We currently are, and will continue to be after this offering, a “controlled company” within the meaning of the Nasdaq rules and the rules of the SEC and, as a result, qualify for exemptions from certain corporate governance requirements. You do not have the same protections afforded to stockholders of other companies that are subject to such requirements;

 

  If the voting power of our capital stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest;

 

  The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain;

 

  We are dependent upon customer renewals, the addition of new customers, increased revenue from existing customers and the continued growth of the market for content management, customer experience management, task and process mining, and robotic process automation;

 

  Our subscription renewal rates may decrease, and any decrease could harm our future revenue and operating results;

 

  If we do not accurately predict subscription renewal rates or otherwise fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our operating results could be adversely affected;

 

  Because we generally recognize revenue from subscriptions ratably over the term of the agreement, near term changes in sales may not be reflected immediately in our operating results;

 

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  We face significant competition from both established and new companies offering digital marketing, task and process mining, content management, customer experience management, and robotic process automation, and other related applications, as well as internally developed software, which may harm our ability to add new customers, retain existing customers and grow our business;

 

  We have experienced rapid growth and organizational change in recent periods and expect continued future growth. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately;

 

  Failure to effectively develop and expand our digital marketing, task and process mining, content management, customer experience management, and robotic process automation capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our software;

 

  The rate of growth of our business depends on the continued participation and level of service of our third-party partners;

 

  We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations or our guidance;

 

  If we fail to maintain our inbound thought leadership position, our business may suffer;

 

  If we fail to further enhance our brand and maintain our existing strong brand awareness, our ability to expand our customer base will be impaired and our financial condition may suffer;

 

  If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs or requirements, our software may become less competitive;

 

  If we fail to offer high-quality customer support, our business and reputation may suffer;

 

  We may not be able to scale our business quickly enough to meet our customers’ growing needs and if we are not able to grow efficiently, our operating results could be harmed;

 

  Our ability to introduce new products and features is dependent on adequate research and development resources. If we do not adequately fund our research and development efforts, we may not be able to compete effectively and our business and operating results may be harmed;

 

  Changes in the sizes or types of businesses that purchase our software or in the applications within our software purchased or used by our customers could negatively affect our operating results;

 

  We have in the past completed acquisitions and may acquire or invest in other companies or technologies in the future, which could divert management’s attention, fail to meet our expectations, result in additional dilution to our stockholders, increase expenses, disrupt our operations or harm our operating results;

 

  Because our long-term growth strategy involves further expansion of our sales to customers outside Japan, our business will be susceptible to risks associated with international operations;

 

  If we cannot maintain our company culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success and our business may be harmed;

 

  We rely on our management team and other key employees, and the loss of one or more key employees could harm our business;

 

  The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy;

 

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  Interruptions or delays in service from our third-party data center providers could impair our ability to deliver our software to our customers, resulting in customer dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenue;

 

  If our software has outages or fails due to defects or similar problems, and if we fail to correct any defect or other software problems, we could lose customers, become subject to service performance or warranty claims or incur significant costs;

 

  We are dependent on the continued availability of third-party data hosting and transmission services;

 

  If we do not or cannot maintain the compatibility of our software with third-party applications that our customers use in their businesses, our revenue will decline;

 

  We rely on data provided by third parties, the loss of which could limit the functionality of our software and disrupt our business;

 

  Privacy concerns and end users’ acceptance of Internet behavior tracking may limit the applicability, use and adoption of our software;

 

  If our or our customers’ security measures are compromised or unauthorized access to data of our customers or their customers is otherwise obtained, our software may be perceived as not being secure, our customers may be harmed and may curtail or cease their use of our software, our reputation may be damaged and we may incur significant liabilities;

 

  Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others;

 

  If we fail to adequately protect our proprietary rights, in Japan and abroad, our competitive position could be impaired and we may lose valuable assets, experience reduced revenue and incur costly litigation to protect our rights;

 

  Our use of “open-source” software could negatively affect our ability to offer our software and subject us to possible litigation;

 

  We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could harm our business. Compliance with such laws could also impair our efforts to maintain and expand our customer base, and thereby decrease our revenue;

 

  The standards that private entities use to regulate the use of email have in the past interfered with, and may in the future interfere with, the effectiveness of our software and our ability to conduct business;

 

  Existing federal, state and foreign laws regulate Internet tracking software, the senders of commercial emails and text messages, website owners and other activities, and could impact the use of our software and potentially subject us to regulatory enforcement or private litigation;

 

  We are subject to governmental export controls and economic sanctions laws that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws;

 

  Our substantial indebtedness could have important adverse consequences and adversely affect our financial condition;

 

  We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which could have a material adverse effect on our business, financial condition and results of operations;

 

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  Despite our level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, including off-balance sheet financing, contractual obligations and general and commercial liabilities. This could further exacerbate the risks to our financial condition described above; and

 

  Once our common stock is listed on Nasdaq, there can be no assurance that we will be able to comply with Nasdaq’s continued listing standards.

 

Risks Related to Our Business and Strategy

 

We are a holding company and depend upon our subsidiaries for our cash flows.

 

We are a holding company. All of our operations are conducted, and almost all of our assets are owned, by our subsidiaries. Consequently, our cash flows and our ability to meet our obligations depend upon the cash flows of our subsidiaries and the payment of funds by these subsidiaries to us in the form of dividends, distributions or otherwise. The ability of our subsidiaries to make any payments to us depends on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal restrictions. Any failure to receive dividends or distributions from our subsidiaries when needed could have a material adverse effect on our business, results of operations or financial condition.

 

We may require additional funding for our growth plans, and such funding may result in a dilution of your investment.

 

We attempted to estimate our funding requirements in order to implement our growth plans. If the costs of implementing such plans should exceed these estimates significantly or if we come across opportunities to grow through expansion plans which cannot be predicted at this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise additional funds to meet these funding requirements.

 

These additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain additional financing on terms that are acceptable to us, we will not be able to implement such plans fully if at all. Such financing even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’ consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain corporate actions.

 

Further, if we raise additional funds by way of a rights offering or through the issuance of new shares, any shareholders who are unable or unwilling to participate in such an additional round of fund raising may suffer dilution in their investment.

 

The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.

 

In December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The pandemic, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours.

 

 

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For example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions, closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. In March 2020, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all HeartCore Co employees were required to work from home for several months during the height of the pandemic. We cancelled or shifted our customer and industry events to virtual-only experiences. Although we have begun to slowly re-open our offices on a staggered, region-by-region basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. All of these changes may disrupt the way we operate our business. In addition, our management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic and seeking to minimize the risk of the virus and manage its effects on our business and workforce.

 

Although we were recently formed, our wholly owned operating subsidiary, HeartCore Co, has been operating through the pandemic. The operations of HeartCore Co have been impacted by a range of external factors related to the pandemic that are not within our control. As for existing customers, the pandemic has not affected their use our software. As for new customers in the travel, hotel, airline, railroad, and restaurant industry for the CX division, the pandemic has resulted in a reduction in new orders. However, as for new customers in the retail and finance industry for the CX division, orders have increased despite the pandemic, resulting in an overall increase in sales for the CX division of $1,908,847 for the nine months ended September 30, 2021 as compared to nine months ended September 30, 2020. As for the impact of the pandemic on the DX division, large companies were forced to change the way they operate, as employees were forced to work remotely, which increased the demand for our DX software, but due to the delay in the sales cycle by the pandemic, realization of sales were delayed resulting in reduction of sales of $(127,323) for the nine months ended September 30, 2021 as compared to nine months ended September 30, 2020.

 

The duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

 

To the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, including, in particular, risks related to our dependence on customer renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions may harm our industry, business and results of operations.

 

We are dependent upon customer renewals, the addition of new customers, increased revenue from existing customers and the continued growth of the market for content management, customer experience management, task and process mining, and robotic process automation.

 

We derive, and expect to continue to derive, a substantial portion of our revenue from the sale of subscriptions to use our software for digital marketing, task and process mining, content management, customer experience management, and robotic process animation. The market for digital marketing, task and process mining, content management, customer experience management, and robotic process animation is still evolving, and competitive dynamics may cause pricing levels to change as the market matures and as existing and new market participants introduce new types of point applications and different approaches to enable businesses to address their respective needs. As a result, we may be forced to reduce the prices we charge for our software and may be unable to renew existing customer agreements or enter into new customer agreements at the same prices and upon the same terms that we have historically. In addition, our growth strategy involves a scalable pricing model intended to provide us with an opportunity to increase the value of our customer relationships over time as we expand their use of our software, sell to other parts of their organizations, cross-sell our sales products to existing marketing product customers and vice versa through touchless or low touch in product purchases, and upsell additional offerings and features. If our cross-selling efforts are unsuccessful or if our existing customers do not expand their use of our software or adopt additional offerings and features, our operating results may suffer.

 

Our subscription renewal rates may decrease, and any decrease could harm our future revenue and operating results.

 

Our customers have no obligation to renew their subscriptions for our software after the expiration of their subscription periods, substantially all of which are one year or less. In addition, our customers may seek to renew for lower subscription tiers, for fewer contacts or seats, or for shorter contract lengths. Also, customers may choose not to renew their subscriptions for a variety of reasons. Our renewal rates may decline or fluctuate as a result of a number of factors, including limited customer resources, pricing changes, the prices of services offered by our competitors, adoption and utilization of our services and add-on applications by our customers, adoption of our new software, customer satisfaction with our services, mergers and acquisitions affecting our customer base, reductions in our customers’ spending levels or declines in customer activity as a result of economic downturns or uncertainty in financial markets. If our customers do not renew their subscriptions for our software or decrease the amount they spend with us, our revenue will decline and our business will suffer. In addition, a subscription model creates certain risks related to the timing of revenue recognition and potential reductions in cash flows. A portion of the subscription-based revenue we report each quarter results from the recognition of deferred revenue relating to subscription agreements entered into during previous quarters. A decline in new or renewed subscriptions in any period may not be immediately reflected in our reported financial results for that period, but may result in a decline in our revenue in future quarters. If we were to experience significant downturns in subscription sales and renewal rates, our reported financial results might not reflect such downturns until future periods.

 

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If we do not accurately predict subscription renewal rates or otherwise fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our operating results could be adversely affected.

 

Because our recent growth has resulted in the rapid expansion of our business, we do not have a long history upon which to base forecasts of renewal rates with customers or future operating revenue. As a result, our operating results in future reporting periods may be significantly below the expectations of the public market, equity research analysts or investors, which could harm the price of our common stock.

 

Because we generally recognize revenue from subscriptions ratably over the term of the agreement, near term changes in sales may not be reflected immediately in our operating results.

 

We offer our software primarily through a mix of monthly, quarterly and single-year subscription agreements, which are generally paid upfront and some are with ratable revenue recognition over the subscription period. As a result, some of the revenue we report in each quarter is derived from agreements entered into during prior months, quarters or years. In addition, we do not record deferred revenue beyond amounts invoiced as a liability on our balance sheet. A decline in new or renewed subscriptions or marketing solutions agreements in any one quarter is not likely to be reflected immediately in our revenue results for that quarter. Such declines, however, would negatively affect our revenue and deferred revenue balances in future periods, and the effect of significant downturns in sales and market acceptance of our software, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our total revenue and deferred revenue balance through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

 

We face significant competition from both established and new companies offering digital marketing, task and process mining, content management, customer experience management, and robotic process automation, and other related applications, as well as internally developed software, which may harm our ability to add new customers, retain existing customers and grow our business.

 

The digital marketing, task and process mining, content management, customer experience management, and robotic process automation market is evolving, highly competitive and significantly fragmented. With the introduction of new technologies and the potential entry of new competitors into the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices.

 

We face intense competition from other companies that develop software for digital marketing, task and process mining, content management, customer experience management, and robotic process automation and from marketing services companies that provide interactive marketing services. Competition could significantly impede our ability to sell subscriptions to use our software on terms favorable to us. Our current and potential competitors may develop and market new technologies that render our existing or future products less competitive, or obsolete. In addition, if these competitors develop software with similar or superior functionality to our software, we may need to decrease the prices or accept less favorable terms for our software subscriptions in order to remain competitive. If we are unable to maintain our pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected.

 

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Our competitors include:

 

●          task and process mining vendors;

 

●          email marketing software vendors;

 

●          content management system providers;

 

●          customer experience management system\ providers;

 

●          robotic process automation vendors;

 

●          cloud-based marketing automation providers;

 

●          large-scale enterprise suites;

 

●          customer service software providers; and

 

●          Customer experience management systems.

 

In addition, instead of using our software, some prospective customers may elect to combine disparate point applications, such as content management, marketing automation, analytics and social media management. We expect that new competitors, such as enterprise software vendors that have traditionally focused on enterprise resource planning or other applications supporting back office functions, will develop and introduce applications serving customer-facing and other front office functions. This development could have an adverse effect on our business, operating results and financial condition. In addition, sales force automation and contact relationship management vendors could acquire or develop applications that compete with our marketing software offerings. Some of these companies have acquired social media marketing and other marketing software providers to integrate with their broader offerings.

 

Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able to devote greater resources to the development, promotion, sale and support of their products and services, may have more extensive customer bases and broader customer relationships than we have, and may have longer operating histories and greater name recognition than we have. As a result, these competitors may respond faster to new technologies and undertake more extensive marketing campaigns for their products. In a few cases, these vendors may also be able to offer marketing, sales, customer service and content management software at little or no additional cost by bundling it with their existing suite of applications. To the extent any of our competitors has existing relationships with potential customers for either marketing software or other applications, those customers may be unwilling to purchase our software because of their existing relationships with our competitor. If we are unable to compete with such companies, the demand for our software could substantially decline.

 

In addition, if one or more of our competitors were to merge or partner with another of our competitors, our ability to compete effectively could be adversely affected. Our competitors may also establish or strengthen cooperative relationships with our current or future strategic distribution and technology partners or other parties with whom we have relationships, thereby limiting our ability to promote and implement our software. We may not be able to compete successfully against current or future competitors, and competitive pressures may harm our business, operating results and financial condition.

 

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We have expect continued future growth and if we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.

 

Our head count and operations have grown. We plan to open international offices in the future. This growth has placed, and will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. We anticipate further growth will be required to address increases in our product offerings and continued expansion. Our success will depend in part upon our ability to recruit, hire, train, manage and integrate a significant number of qualified managers, technical personnel and employees in specialized roles within our company, including in technology, sales and marketing. Furthermore, preservation of our corporate culture has been made more difficult as our work force has been working from home in connection with restrictions placed upon businesses due to the pandemic. A long-term continuation of these restrictions could, among other things, negatively impact employee morale and productivity. Any failure to preserve our culture could harm our future success, including our ability to retain and recruit personnel, innovate and operate effectively and execute on our business strategy. Furthermore, as our employees work remotely from geographic areas across the globe and more of our employees work remotely on a permanent basis due to the pandemic, we may need to reallocate our investment of resources and closely monitor a variety of local regulations and requirements, including local tax laws, and we may experience unpredictability in our expenses and employee work culture. If we experience any of these effects in connection with future growth, if our new employees perform poorly, or if we are unsuccessful in recruiting, hiring, training, managing and integrating these new employees, or retaining these or our existing employees, it could materially impair our ability to attract new customers, retain existing customers and expand their use of our software, all of which would materially and adversely affect our business, financial condition and results of operations.

 

In addition, to manage the expected continued growth of our head count, operations and geographic expansion, we will need to continue to improve our information technology infrastructure, operational, financial and management systems and procedures. Our anticipated additional head count and capital investments will increase our costs, which will make it more difficult for us to address any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our growth, we will be unable to successfully execute our business plan, which could have a negative impact on our business, results of operations or financial condition.

 

Failure to effectively develop and expand our digital marketing, task and process mining, content management, customer experience management, and robotic process automation capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our software.

 

To increase total customers and achieve broader market acceptance of our software, we will need to expand our digital marketing, task and process mining, content management, customer experience management, and robotic process automation operations, including our sales force and third-party channel partners. We will continue to dedicate significant resources to inbound sales and marketing programs. The effectiveness of our inbound sales and marketing and third-party channel partners has varied over time and may vary in the future and depends on our ability to maintain and improve our digital marketing, task and process mining, content management, customer experience management, and robotic process automation capabilities. All of these efforts will require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if our sales and marketing programs are not effective.

 

The rate of growth of our business depends on the continued participation and level of service of our third-party partners.

 

We rely on our task and process mining third-party partners to provide certain services to our customers, as well as pursue sales of our software to customers. To the extent we do not attract new partners, or existing or new partners do not refer a growing number of customers to us, our revenue and operating results would be harmed. In addition, if our partners do not continue to provide services to our customers, we would be required to provide such services ourselves either by expanding our internal team or engaging other third-party providers, which would increase our operating costs.

 

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We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.

 

Our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance, and comparing our operating results on a period-to-period basis may not be meaningful. In addition to the other risks described in this prospectus, factors that may affect our quarterly operating results include the following:

 

changes in spending on marketing, task and process mining, content management, customer experience management, and robotic process automation software by our current or prospective customers;

 

pricing our software subscriptions effectively so that we are able to attract and retain customers without compromising our profitability;

 

attracting new customers for our marketing, sales, customer service, and content management software, increasing our existing customers’ use of our software and providing our customers with excellent customer support;

 

customer renewal rates and the amounts for which agreements are renewed;

 

global awareness of our thought leadership and brand;

 

changes in the competitive dynamics of our market, including consolidation among competitors or customers and the introduction of new products or product enhancements;

 

changes to the commission plans, quotas and other compensation-related metrics for our sales representatives;

 

the amount and timing of payment for operating expenses, particularly research and development, sales and marketing expenses and employee benefit expenses;

 

the amount and timing of costs associated with recruiting, training and integrating new employees while maintaining our company culture;

 

our ability to manage our existing business and future growth, including increases in the number of customers on our software and the introduction and adoption of our software in new markets outside of the United States;

 

unforeseen costs and expenses related to the expansion of our business, operations and infrastructure, including disruptions in our hosting network infrastructure and privacy and data security;

 

foreign currency exchange rate fluctuations; and

 

general economic and political conditions in our domestic and international markets.

 

We may not be able to accurately forecast the amount and mix of future subscriptions, revenue and expenses and, as a result, our operating results may fall below our estimates or the expectations of public market analysts and investors. If our revenue or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide, the price of our common stock could decline.

 

If we fail to maintain our inbound thought leadership position, our business may suffer.

 

We believe that maintaining our thought leadership position in inbound digital marketing, content management, customer experience management, and robotic process automation, is an important element in attracting new customers. We devote significant resources to develop and maintain our thought leadership position, with a focus on identifying and interpreting emerging trends in the inbound experience, shaping and guiding industry dialog and creating and sharing the best inbound practices. Our activities related to developing and maintaining our thought leadership may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in such effort. We rely upon the continued services of our management and employees with domain expertise with inbound digital marketing, content management, customer experience management, and robotic process automation, and the loss of any key employees in this area could harm our competitive position and reputation. If we fail to successfully grow and maintain our thought leadership position, we may not attract enough new customers or retain our existing customers, and our business could suffer.

 

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If we fail to further enhance our brand and maintain our existing strong brand awareness, our ability to expand our customer base will be impaired and our financial condition may suffer.

 

We believe that our development of the HeartCore brand is critical to achieving widespread awareness of our existing and future inbound and automation experience solutions, and, as a result, is important to attracting new customers and maintaining existing customers. In the past, our efforts to build our brand have involved significant expenses, and we believe that this investment has resulted in strong brand recognition. Successful promotion and maintenance of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide a reliable and useful software at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, our business could suffer.

 

If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs or requirements, our software may become less competitive.

 

Our future success depends on our ability to adapt and innovate our software. To attract new customers and increase revenue from existing customers, we need to continue to enhance and improve our offerings to meet customer needs at prices that our customers are willing to pay. Such efforts will require adding new functionality and responding to technological advancements, which will increase our research and development costs. If we are unable to develop new applications that address our customers’ needs, or to enhance and improve our software in a timely manner, we may not be able to maintain or increase market acceptance of our software. Our ability to grow is also subject to the risk of future disruptive technologies.

 

If we fail to offer high-quality customer support, our business and reputation may suffer.

 

High-quality education, training and customer support are important for the successful marketing, sale and use of our software and for the renewal of existing customers. Providing this education, training and support requires that our personnel who manage our online training or provide customer support have specific inbound experience domain knowledge and expertise, making it more difficult for us to hire qualified personnel and to scale up our support operations. The importance of high-quality customer support will increase as we expand our business and pursue new customers. If we do not help our customers use multiple applications within our software and provide effective ongoing support, our ability to sell additional functionality and services to, or to retain, existing customers may suffer and our reputation with existing or potential customers may be harmed.

 

We may not be able to scale our business quickly enough to meet our customers’ growing needs and if we are not able to grow efficiently, our operating results could be harmed.

 

As usage of our software grows and as customers use our software for additional inbound applications, we will need to devote additional resources to improving our application architecture, integrating with third-party systems and maintaining infrastructure performance. In addition, we will need to appropriately scale our internal business systems and our services organization, including customer support and professional services, to serve our growing customer base, particularly as our customer demographics change over time. Any failure of or delay in these efforts could cause impaired system performance and reduced customer satisfaction. These issues could reduce the attractiveness of our software to customers, resulting in decreased sales to new customers, lower renewal rates by existing customers, the issuance of service credits, or requested refunds, which could impede our revenue growth and harm our reputation. Even if we are able to upgrade our systems and expand our staff, any such expansion will be expensive and complex, requiring management’s time and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins and adversely affect our financial results.

 

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Our ability to introduce new products and features is dependent on adequate research and development resources. If we do not adequately fund our research and development efforts, we may not be able to compete effectively and our business and operating results may be harmed.

 

To remain competitive, we must continue to develop new product offerings, applications, features and enhancements to our existing software. Maintaining adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable to develop our software internally due to certain constraints, such as high employee turnover, lack of management ability or a lack of other research and development resources, we may miss market opportunities. Further, many of our competitors expend a considerably greater amount of funds on their research and development programs, and those that do not may be acquired by larger companies that would allocate greater resources to our competitors’ research and development programs. Our failure to maintain adequate research and development resources or to compete effectively with the research and development programs of our competitors could materially adversely affect our business.

 

Changes in the sizes or types of businesses that purchase our software or in the applications within our software purchased or used by our customers could negatively affect our operating results.

 

Our strategy is to sell subscriptions to our software to mid to enterprise-sized businesses, but we have sold and will continue to sell to organizations ranging from small businesses to enterprises. Our gross margins can vary depending on numerous factors related to the implementation and use of our software, including the sophistication and intensity of our customers’ use of our software and the level of professional services and support required by a customer. Sales to enterprise customers may entail longer sales cycles and more significant selling efforts. Selling to small businesses may involve greater credit risk and uncertainty. If there are changes in the mix of businesses that purchase our software or the mix of the product plans purchased by our customers, our gross margins could decrease and our operating results could be adversely affected.

 

We may acquire or invest in other companies or technologies in the future, which could divert management’s attention, fail to meet our expectations, result in additional dilution to our stockholders, increase expenses, disrupt our operations or harm our operating results.

 

We may in the future acquire or invest in, businesses, products or technologies that we believe could complement or expand our software, enhance our technical capabilities or otherwise offer growth opportunities. We may not be able to fully realize the anticipated benefits of these or any future acquisitions. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses related to identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

 

There are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not be able to assimilate or integrate the acquired personnel, operations and technologies successfully or effectively manage the combined business following the acquisition and our management may be distracted from operating our business. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including: unanticipated costs or liabilities associated with the acquisition; incurrence of acquisition-related costs, which would be recognized as a current period expense; inability to generate sufficient revenue to offset acquisition or investment costs; the inability to maintain relationships with customers and partners of the acquired business; the difficulty of incorporating acquired technology and rights into our software and of maintaining quality and security standards consistent with our brand; delays in customer purchases due to uncertainty related to any acquisition; the need to integrate or implement additional controls, procedures and policies; challenges caused by distance, language and cultural differences; harm to our existing business relationships with business partners and customers as a result of the acquisition; the potential loss of key employees; use of resources that are needed in other parts of our business and diversion of management and employee resources; the inability to recognize acquired deferred revenue in accordance with our revenue recognition policies; and use of substantial portions of our available cash or the incurrence of debt to consummate the acquisition. Acquisitions also increase the risk of unforeseen legal liability, including for potential violations of applicable law or industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses which are not discovered by due diligence during the acquisition process. Generally, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our business, results of operations or financial condition.

 

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In addition, a significant portion of the purchase price of companies we acquire may be allocated to goodwill and other intangible assets, which must be assessed for impairment at least annually. If our acquisitions do not ultimately yield expected returns, we may be required to make charges to our operating results based on our impairment assessment process, which could harm our results of operations.

 

Because our long-term growth strategy involves further expansion of our sales to customers outside Japan, our business will be susceptible to risks associated with international operations.

 

A component of our growth strategy involves the further expansion of our operations and customer base worldwide. We plan to open international offices in the future. These international offices will focus primarily on sales, professional services and support. Our future international operations and future initiatives will involve a variety of risks, including:

 

difficulties in maintaining our company culture with a dispersed and distant workforce;

 

more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information;

 

the timing of our sales with our international clients and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for these clients;

 

unexpected changes in regulatory requirements, taxes or trade laws;

 

differing labor regulations where labor laws are generally more advantageous to employees as compared to Japan, including deemed hourly wage and overtime regulations in these locations;

 

challenges inherent in efficiently managing an increased number of employees, including remote employees, over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

 

difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems;

 

currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we chose to do so in the future;

 

global economic uncertainty caused by global political events;

 

limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

 

limited or insufficient intellectual property protection;

 

political instability or terrorist activities;

 

likelihood of potential or actual violations of domestic and international anticorruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, or of U.S. and international export control and sanctions regulations, which likelihood may increase with an increase of sales or operations in foreign jurisdictions and operations in certain industries; and

 

adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.

 

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Our inexperience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to establish our international operations and are unable to do so successfully and in a timely manner, our business and operating results will suffer. We continue to implement policies and procedures to facilitate our compliance with U.S. laws and regulations applicable to or arising from our international business. Inadequacies in our past or current compliance practices may increase the risk of inadvertent violations of such laws and regulations, which could lead to financial and other penalties that could damage our reputation and impose costs on us.

 

Our customers may fail to pay us in accordance with the terms of their agreements, at times necessitating action by us to attempt to compel payment.

 

If our customers fail to pay us in accordance with the terms of our agreements, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our agreements, including litigation and arbitration costs. The risk of these issues increases with the term length of our customer arrangements. Furthermore, some of our customers may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our results of operations, financial condition and cash flow.

 

We believe our success depends on continuing to invest in the growth of our worldwide operations by entering new geographic markets. If our investments in these markets are greater than anticipated, or if our customer growth or sales in these markets do not meet our expectations, our results of operations and financial condition may be adversely affected.

 

We believe our success depends on expanding our business into new geographic markets and attracting customers in countries other than the United States. We anticipate continuing to expand our operations worldwide and have made, and will continue to make, substantial investments and incur substantial costs as we enter new geographic markets. This includes investments in facilities, information technology investments, sales, marketing and administrative personnel and facilities. Often we must make these investments when it is still unclear whether future sales in the new market will justify the costs of these investments. In addition, these investments may be more expensive than we initially anticipate. If our investments are greater than we initially anticipate or if our customer growth or sales in these markets do not meet our expectations or justify the cost of the initial investments, our results of operations and financial condition may be adverse affected.

 

General Risks

 

Failure to comply with laws and regulations could harm our business.

 

Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions.

 

We are exposed to fluctuations in currency exchange rates.

 

We face exposure to movements in currency exchange rates, which may cause our revenue and operating results to differ materially from expectations. As we have expanded our international operations our exposure exchange rate fluctuations has increased, in particular with respect to the British Pound Sterling and Japanese Yen. As exchange rates vary, revenue, cost of revenue, operating expenses and other operating results, when re-measured, may differ materially from expectations. In addition, our operating results are subject to fluctuation if our mix of U.S. and foreign currency denominated transactions and expenses changes in the future. Furthermore, global political events, including Brexit and similar geopolitical developments, fluctuating commodity prices and trade tariff developments, have caused global economic uncertainty, which could amplify the volatility of currency fluctuations. Such volatility, even when it increases our revenues or decreases our expenses, impacts our ability to predict our future results and earnings accurately. Although we may apply certain strategies to mitigate foreign currency risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategies and potential accounting implications. Additionally, as we anticipate growing our business further outside of the United States, the effects of movements in currency exchange rates will increase as our transaction volume outside of the United States increases.

 

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Weakened global economic conditions may harm our industry, business and results of operations.

 

Our overall performance depends in part on worldwide economic conditions. Global financial developments and downturns seemingly unrelated to us or the software industry may harm us. The United States and other key international economies have been affected from time to time by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, and overall uncertainty with respect to the economy, including with respect to tariff and trade issues. In particular, the economies of countries in Europe have been experiencing weakness associated with high sovereign debt levels, weakness in the banking sector, uncertainty over the future of the Euro zone and volatility in the value of the pound sterling and the Euro, including instability surrounding Brexit. We have operations, as well as current and potential new customers, throughout most of Europe. If economic conditions in Europe and other key markets for our software continue to remain uncertain or deteriorate further, it could adversely affect our customers’ ability or willingness to subscribe to our software, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscriptions or affect renewal rates, all of which could harm our operating results.

 

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.

 

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds to invest in future growth opportunities. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could seriously harm our business and operating results. If we incur debt, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Any additional equity or equity-linked financings would be dilutive to our stockholders. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

 

The certificate of incorporation and bylaws provides that state or federal court located within the state of Delaware will be the sole and exclusive forum for substantially all disputes between us and our shareholders, which could limit its stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

 

Section 21 of our certificate of incorporation and Section 7.4 of our bylaws provides that “[u]nless the corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located in the county in which the principal office of the corporation in the State of Delaware is established, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. Notwithstanding the foregoing, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange of 1934, as amended, the Securities Act of 1933, as amended, or any claim for which the federal courts have exclusive or concurrent jurisdiction.” Therefore, the exclusive forum provision in our certificate of incorporation and our bylaws will not relieve us of our duty to comply with the federal securities laws and the rules and regulations thereunder, and shareholders will not be deemed to have waived our compliance with these laws, rules and regulations.

 

This exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us or our directors, officers or other employees. In addition, shareholders who do bring a claim in the state or federal court in the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The state or federal court of the State of Delaware may also reach different judgments or results than would other courts, including courts where a shareholder would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our shareholders. However, the enforceability of similar exclusive forum provisions in other companies’ certificates of incorporation have been challenged in legal proceedings, and it is possible that a court could find this type of provision to be inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings. If a court were to find the exclusive forum provision contained in our certificate of incorporation and our bylaws to be inapplicable or unenforceable in an action, we might incur additional costs associated with resolving such action in other jurisdictions.

 

By purchasing common stock in this offering, you are bound by the fee-shifting provision contained in our bylaws, which may discourage you to pursue actions against us and could discourage shareholder lawsuits that might otherwise benefit the Company and its shareholders.

 

Section 7.4 of our bylaws provides that “[i]f any action is brought by any party against another party, relating to or arising out of these Bylaws, or the enforcement hereof, the prevailing party shall be entitled to recover from the other party reasonable attorneys’ fees, costs and expenses incurred in connection with the prosecution or defense of such action.” 

 

Our bylaws provide that for this section, the term “attorneys’ fees” or “attorneys’ fees and costs” means the fees and expenses of counsel to the Company and any other parties asserting a claim subject to Section 7.4 of the bylaws, which may include printing, photocopying, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals and other persons not admitted to the bar but performing services under the supervision of an attorney, and the costs and fees incurred in connection with the enforcement or collection of any judgment obtained in any such proceeding.

 

We adopted the fee-shifting provision to eliminate or decrease nuisance and frivolous litigation. We intend to apply the fee-shifting provision broadly to all actions except for claims brought under the Exchange Act and Securities Act.

 

There is no set level of recovery required to be met by a plaintiff to avoid payment under this provision. Instead, whoever is the prevailing party is entitled to recover the reasonable attorneys’ fees, costs and expenses incurred in connection with the prosecution or defense of such action. Any party who brings an action, and the party against whom such action is brought under Section 7.4 of our bylaws, which could include, but is not limited to former and current shareholders, Company directors, officers, affiliates, legal counsel, expert witnesses and other parties, are subject to this provision. Additionally, any party who brings an action, and the party against whom such action is brought under Section 7.4 of our bylaws, which could include, but is not limited to former and current shareholders, Company directors, officers, affiliates, legal counsel, expert witnesses and other parties, would be able to recover fees under this provision.

 

In the event you initiate or assert a claim against us, in accordance with the dispute resolution provisions contained in our Bylaws, and you do not, in a judgment prevail, you will be obligated to reimburse us for all reasonable costs and expenses incurred in connection with such claim, including, but not limited to, reasonable attorney’s fees and expenses and costs of appeal, if any. Additionally, this provision in Section 7.4 of our bylaws could discourage shareholder lawsuits that might otherwise benefit the Company and its shareholders.

 

THE FEE SHIFTING PROVISION CONTAINED IN THE BYLAWS IS NOT INTENDED TO BE DEEMED A WAIVER BY ANY HOLDER OF COMMON STOCK OF THE COMPANY’S COMPLIANCE WITH THE U.S. FEDERAL SECURITIES LAWS AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. THE FEE SHIFTING PROVISION CONTAINED IN THE BYLAWS DO NOT APPLY TO CLAIMS BROUGHT UNDER THE EXCHANGE ACT AND SECURITIES ACT.

 

Risks Related to Employee Matters

 

If we cannot maintain our company culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success and our business may be harmed.

 

We believe that a critical component to our success has been our company culture, which is based on transparency and personal autonomy. We have invested substantial time and resources in building our team within this company culture. Any failure to preserve our culture could negatively affect our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives. As we grow as and continue to develop the infrastructure of a public company, we may find it difficult to maintain these important aspects of our company culture. If we fail to maintain our company culture, our business may be adversely impacted.

 

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We rely on our management team and other key employees, and the loss of one or more key employees could harm our business.

 

Our success and future growth depend upon the continued services of our management team, including our Chief Executive Officer, Sumitaka Yamamoto, and other key employees in the areas of research and development, marketing, sales, services, content management, and general and administrative functions. From time to time, there may be changes in our management team resulting from the hiring or departure of executives, which could disrupt our business. We also are dependent on the continued service of our existing software engineers and information technology personnel because of the complexity of our software, technologies and infrastructure. We may terminate any employee’s employment at any time, with or without cause, and any employee may resign at any time, with or without cause (In Japan, termination of employee can only be justified for material cause). We do not have employment agreements with any of our key personnel. The loss of one or more of our key employees could harm our business.

 

The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.

 

To execute our business strategy, we must attract and retain highly qualified personnel. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing cloud-based software, as well as for skilled information technology, marketing, sales and operations professionals, and we may not be successful in attracting and retaining the professionals we need. Also, inbound sales, marketing, services, and content management domain experts are very important to our success and are difficult to replace. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and difficulty in retaining highly skilled employees with appropriate qualifications. In particular, we have experienced a competitive hiring environment in Japan, where we are headquartered and will continue to experience a competitive hiring environment as we recruit for remote talent worldwide. Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. If the price of our stock declines, or experiences significant volatility, our ability to attract or retain key employees will be adversely affected. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.

 

Risks Related to Our Technical Operations Infrastructure and Dependence on Third Parties

 

Interruptions or delays in service from our third-party data center providers could impair our ability to deliver our software to our customers, resulting in customer dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenue.

 

We currently serve some parts of our software functions from third-party data center hosting facilities operated by Amazon and IBM. In addition, we serve ancillary functions for our customers from third-party data center hosting facilities operated by Amazon, with a backup facility in Amazon. Our operations depend, in part, on our third-party facility providers’ abilities to protect these facilities against damage or interruption from natural disasters, such as earthquakes and hurricanes, actual or threatened public health emergency (e.g., COVID-19), power or telecommunications failures, criminal acts and similar events. In the event that any of our third-party facilities arrangements is terminated, or if there is a lapse of service or damage to a facility, we could experience interruptions in our software as well as delays and additional expenses in arranging new facilities and services.

 

Any damage to, or failure of, the systems of our third-party providers could result in interruptions to our software. Despite precautions taken at our data centers, the occurrence of spikes in usage volume, a natural disaster, such as earthquakes or hurricane, an act of terrorism, vandalism or sabotage, a decision to close a facility without adequate notice, or other unanticipated problems at a facility could result in lengthy interruptions in the availability of our on-demand software. Even with current and planned disaster recovery arrangements, our business could be harmed. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability and cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could materially adversely affect our business.

 

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If our software has outages or fails due to defects or similar problems, and if we fail to correct any defect or other software problems, we could lose customers, become subject to service performance or warranty claims or incur significant costs.

 

Our software and its underlying infrastructure are inherently complex and may contain material defects or errors. We release modifications, updates, bug fixes and other changes to our software several times per day, without traditional human-performed quality control reviews for each release. We have from time to time found defects in our software and may discover additional defects in the future. We may not be able to detect and correct defects or errors before customers begin to use our software or its applications. Consequently, we or our customers may discover defects or errors after our software has been implemented.

 

In the past, we have experienced software outages caused by power supply failures. Although no data was lost due to the outages, our customers experienced disruptions in using our software as our website stopped operating as well as our marketing campaigns, e-mail newsletters and other functions were shut down.  Notwithstanding, the outages were short in duration and we are not aware of any negative customer reviews and negative press as a result of the outages. We believe there was no significant damage to our customer relationships, reputation and brand due to these outages. We believe the outage did not compromise our ability to meet customer expectations, manage our software, or meet our operating efficiency and profitability goals.

 

Defects or errors could result in product outages and could also cause inaccuracies in the data we collect and process for our customers, or even the loss, damage or inadvertent release of such confidential data. We implement bug fixes and upgrades as part of our regular system maintenance, which may lead to system downtime. Even if we are able to implement the bug fixes and upgrades in a timely manner, any history of product outages, defects or inaccuracies in the data we collect for our customers, or the loss, damage or inadvertent release of confidential data could cause our reputation to be harmed, and customers may elect not to purchase or renew their agreements with us. Furthermore, these issues could subject us to service performance credits (whether offered by us or required by contract), warranty claims or increased insurance costs. The costs associated with product outages, any material defects or errors in our software or other performance problems may be substantial and could materially adversely affect our operating results.

 

In addition, third-party apps and features on our software may not meet the same quality standards that we apply to our own development efforts and, to the extent they contain bugs, vulnerabilities or defects, they may create disruptions in our customers’ use of our products, lead to data loss, unauthorized access to customer data, damage our brand and reputation and affect the continued use of our products, any of which could harm our business, results of operations and financial condition.

 

We are dependent on the continued availability of third-party data hosting and transmission services.

 

A significant portion of our operating cost is from our third-party data hosting and transmission services. If the costs for such services increase due to vendor consolidation, regulation, contract renegotiation, or otherwise, we may not be able to increase the fees for our software or services to cover the changes. As a result, our operating results may be significantly worse than forecasted.

 

If we do not or cannot maintain the compatibility of our software with third-party applications that our customers use in their businesses, our revenue will decline.

 

A significant percentage of our customers choose to integrate our software with certain capabilities provided by third-party application providers using APIs published by these providers. The functionality and popularity of our software depends, in part, on our ability to integrate our software with third-party applications and software, including content management systems, customer experience management systems, e-commerce, call center, analytics and social media sites that our customers use and from which they obtain data. Third-party providers of applications and APIs may change the features of their applications and software, restrict our access to their applications and software, or alter the terms governing use of their applications and APIs and access to those applications and software in an adverse manner. Such changes could functionally limit or terminate our ability to use these third-party applications and software in conjunction with our software, which could negatively impact our offerings and harm our business. If we fail to integrate our software with new third-party applications and software that our customers use for marketing, content management, customer experience management, or robotic process automation purposes, or fail to renew existing relationships pursuant to which we currently provide such integration, we may not be able to offer the functionality that our customers need, which would negatively impact our ability to generate new revenue or maintain existing revenue and adversely impact our business.

 

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We rely on data provided by third parties, the loss of which could limit the functionality of our software and disrupt our business.

 

Select functionality of our software depends on our ability to deliver data, including search engine results and social media updates, provided by unaffiliated third parties, such as Facebook, Google, LinkedIn and Twitter. Some of this data is provided to us pursuant to third-party data sharing policies and terms of use, under data sharing agreements by third-party providers or by customer consent. In the future, any of these third parties could change its data sharing policies, including making them more restrictive, or alter its algorithms that determine the placement, display, and accessibility of search results and social media updates, any of which could result in the loss of, or significant impairment to, our ability to collect and provide useful data to our customers. These third parties could also interpret our, or our service providers’, data collection policies or practices as being inconsistent with their policies, which could result in the loss of our ability to collect this data for our customers. Any such changes could impair our ability to deliver data to our customers and could adversely impact select functionality of our software, impairing the return on investment that our customers derive from using our solution, as well as adversely affecting our business and our ability to generate revenue. We also rely on the availability and accuracy of this data, and any changes in the availability or accuracy of such data could adversely impact our business and results of operations and harm our reputation and brand.

 

Privacy concerns and end users’ acceptance of Internet behavior tracking may limit the applicability, use and adoption of our software.

 

Privacy concerns may cause end users to resist providing the personal data necessary to allow our customers to use our software effectively. We have implemented various features intended to enable our customers to better protect end user privacy, but these measures may not alleviate all potential privacy concerns and threats. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our software, especially in certain industries that rely on sensitive personal information. Privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. The costs of compliance with, and other burdens imposed by these groups’ policies and actions may limit the use and adoption of our software and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance or loss of any such action.

 

If our or our customers’ security measures are compromised or unauthorized access to data of our customers or their customers is otherwise obtained, our software may be perceived as not being secure, our customers may be harmed and may curtail or cease their use of our software, our reputation may be damaged and we may incur significant liabilities.

 

Our operations involve the storage and transmission of data of our customers and their customers, including personally identifiable information. Our storage is typically the sole source of record for portions of our customers’ businesses and end user data, such as initial contact information and online interactions. Security incidents could result in unauthorized access to, loss of or unauthorized disclosure of this information, litigation, indemnity obligations and other possible liabilities, as well as negative publicity, which could damage our reputation, impair our sales and harm our customers and our business. Cyber-attacks and other malicious Internet-based activity continue to increase generally, and cloud-based software providers of marketing services have been targeted. If our security measures are compromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business may be harmed and we could incur significant liability. If third parties with whom we work, such as vendors or developers, violate applicable laws, our security policies or our acceptable use policy, such violations may also put our customers’ information at risk and could in turn have an adverse effect on our business. In addition, if the security measures of our customers are compromised, even without any actual compromise of our own systems, we may face negative publicity or reputational harm if our customers or anyone else incorrectly attributes the blame for such security breaches to us or our systems. We may be unable to anticipate or prevent techniques used to obtain unauthorized access or to sabotage systems because they change frequently and generally are not detected until after an incident has occurred. As we increase our customer base and our brand becomes more widely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’ data. Additionally, we provide extensive access to our database, which stores our customer data, to our development team to facilitate our rapid pace of product development. If such access or our own operations cause the loss, damage or destruction of our customers’ business data, their sales, lead generation, support and other business operations may be permanently harmed. As a result, our customers may bring claims against us for lost profits and other damages.

 

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Our internal computer systems and those of our current and any future strategic collaborators, vendors, and other contractors or consultants are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, cybersecurity threats, terrorism, war and telecommunication and electrical failures. Cyber incidents have been increasing in sophistication and frequency and can include third parties gaining access to employee or customer data using stolen or inferred credentials, computer malware, viruses, spamming, phishing attacks, ransomware, card skimming code, and other deliberate attacks and attempts to gain unauthorized access. Because the techniques used by computer programmers who may attempt to penetrate and sabotage our network security or our website change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Additionally, during the ongoing pandemic, and potentially beyond as remote work and resource access expand, there is an increased risk that we may experience cybersecurity-related events such as COVID-19 themed phishing attacks, exploitation of any cybersecurity flaws that may exist, an increase in the number cybersecurity threats or attacks, and other security challenges as a result of most of our employees and our service providers continuing to work remotely from non-corporate managed networks.

 

If we were to experience a cyberattack and suffer interruptions in our operations, it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other disruptions. These cyber-attacks could be carried out by threat actors of all types (including but not limited to nation states, organized crime, other criminal enterprises, individual actors and/or advanced persistent threat groups). In addition, we may experience intrusions on our physical premises by any of these threat actors. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and our competitive position could be harmed. Any breach, loss, or compromise of personal data may also subject us to civil fines and penalties, or claims for damages either under foreign laws, and other relevant state and federal privacy laws.

 

Many governments have enacted laws requiring companies to notify individuals of data security incidents or unauthorized transfers involving certain types of personal data. In addition, some of our customers contractually require notification of any data security compromise. Security compromises experienced by our competitors, by our customers or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.

 

There can be no assurance that any limitations of liability provisions in our contracts for a security breach would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results.

 

Risks Related to Intellectual Property

 

Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others.

 

The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual and proprietary rights. Companies in the software industry, including those in marketing software, are often required to defend against litigation claims based on allegations of infringement or other violations of intellectual property rights. Many of our competitors and other industry participants have been issued patents and/or have filed patent applications and may assert patent or other intellectual property rights within the industry. Moreover, in recent years, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” have purchased patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters or notices or may be the subject of claims that our services and/or software and underlying technology infringe or violate the intellectual property rights of others. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses. Our technologies may not be able to withstand any third-party claims or rights against their use. Claims of intellectual property infringement might require us to redesign our application, delay releases, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling our software. If we cannot or do not license the infringed technology on reasonable terms or at all, or substitute similar technology from another source, our revenue and operating results could be adversely impacted. Additionally, our customers may not purchase our software if they are concerned that they may infringe third-party intellectual property rights. The occurrence of any of these events may have a material adverse effect on our business.

 

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In our subscription agreements with our customers, we generally do not agree to indemnify our customers against any losses or costs incurred in connection with claims by a third party alleging that a customer’s use of our services or software infringes the intellectual property rights of the third party. There can be no assurance, however, that customers will not assert a common law indemnity claim or that any existing limitations of liability provisions in our contracts would be enforceable or adequate, or would otherwise protect us from any such liabilities or damages with respect to any particular claim. Our customers who are accused of intellectual property infringement may in the future seek indemnification from us under common law or other legal theories. If such claims are successful, or if we are required to indemnify or defend our customers from these or other claims, these matters could be disruptive to our business and management and have a material adverse effect on our business, operating results and financial condition.

 

If we fail to adequately protect our proprietary rights, in Japan and abroad, our competitive position could be impaired and we may lose valuable assets, experience reduced revenue and incur costly litigation to protect our rights.

 

Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Any of our trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy our technology and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our offerings may be unenforceable under the laws of certain jurisdictions and foreign countries. In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of Japan or the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our technology and proprietary information may increase.

 

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements may not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our software and offerings.

 

We may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Such litigation could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation, could delay further sales or the implementation of our software and offerings, impair the functionality of our software and offerings, delay introductions of new features or enhancements, result in our substituting inferior or more costly technologies into our software and offerings, or injure our reputation.

 

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Our use of “open-source” software could negatively affect our ability to offer our software and subject us to possible litigation.

 

A substantial portion of our cloud-based software incorporates so-called “open source” software, and we may incorporate additional open-source software in the future. Open-source software is generally freely accessible, usable and modifiable. Certain open-source licenses may, in certain circumstances, require us to offer the components of our software that incorporate the open-source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open-source software and that we license such modifications or derivative works under the terms of the particular open source license. If an author or other third party that distributes open source software we use were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, including being enjoined from the offering of the components of our software that contained the open source software and being required to comply with the foregoing conditions, which could disrupt our ability to offer the affected software. We could also be subject to suits by parties claiming ownership of what we believe to be open-source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition and require us to devote additional research and development resources to change our products.

 

Risks Related to Government Regulation

 

We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and our actual or perceived failure to comply with such obligations could harm our business. Compliance with such laws could also impair our efforts to maintain and expand our customer base, and thereby decrease our revenue.

 

Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the Ministry of Internal Affairs and Communications, Personal Information Protection Commission Japan (the “PPCJ”), the U.S. Federal Trade Commission (the “FTC”), and various state, local and foreign agencies. We collect personally identifiable information and other data from our customers and leads. We also handle personally identifiable information about our customers’ customers. We use this information to provide services to our customers, to support, expand and improve our business. We may also share customers’ personally identifiable information with third parties as authorized by the customer or as described in our privacy policy.

 

The Japanese and U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of personal information of individuals. In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws, and in Japan, the PPCJ are issuing orders and guidelines based on the Personal Information Protection Act, as imposing standards for the online collection, use and dissemination of data. However, these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other requirements or our practices. Any failure or perceived failure by us to comply with privacy or security laws, policies, legal obligations or industry standards or any security incident that results in the unauthorized release or transfer of personally identifiable information or other customer data may result in governmental enforcement actions, litigation, fines and penalties and/or adverse publicity, and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

 

Laws and regulations concerning privacy, data protection and information security are evolving, and changes to such laws and regulations could require us to change features of our software or restrict our customers’ ability to collect and use email addresses, page viewing data and personal information, which may reduce demand for our software. Our failure to comply with national, federal, state and international data privacy laws and regulations could harm our ability to successfully operate our business and pursue our business goals. For example, California recently enacted the California Consumer Privacy Act (the “CCPA”) that, among other things, require covered companies to provide new disclosures to California consumers and afford such consumers new abilities to opt-out of certain sales of personal information. The CCPA recently was amended and it is not yet fully clear how the CCPA will be enforced and how certain of its requirements will be interpreted. We cannot yet predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply.

 

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Additionally, a new California ballot initiative, the California Privacy Rights Act (the “CPRA”) was passed in November 2020. Effective starting on January 1, 2023, the CPRA imposes additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. The effects of the CCPA and the CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation.

 

Certain other state laws impose similar privacy obligations and we also expect anticipate that more states to may enact legislation similar to the CCPA, which provides consumers with new privacy rights and increases the privacy and security obligations of entities handling certain personal information of such consumers. The CCPA has prompted a number of proposals for new federal and state-level privacy legislation. Such proposed legislation, if enacted, may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data and could result in increased compliance costs and/or changes in business practices and policies.

 

In addition, on March 2, 2021, Virginia enacted the Consumer Data Protection Act (the “CDPA”). The CDPA will become effective January 1, 2023. The CDPA will regulate how businesses (which the CDPA refers to as “controllers”) collect and share personal information. While the CDPA incorporates many similar concepts of the CCPA and CPRA, there are also several key differences in the scope, application, and enforcement of the law that will change the operational practices of controllers. The new law will impact how controllers collect and process personal sensitive data, conduct data protection assessments, transfer personal data to affiliates, and respond to consumer rights requests.

 

In addition, several foreign jurisdictions, including the European Union and Canada, have regulations dealing with the collection and use of personal information obtained from their residents, which are often more restrictive than those in the U.S. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personal information that identifies or may be used to identify an individual. In relevant part, these laws and regulations may affect our ability to engage in lead generation activities by imposing heightened requirements, such as affirmative opt-ins or consent prior to sending commercial correspondence or engaging in electronic tracking activities. For example, a recent ruling of the European Court of Justice in Case C-673/17 provides that a pre-checked opt-in is insufficient to constitute a valid active consumer consent to cookie storage. In order to obtain “the adequate protection” status under the European Union’s General Data Protection Regulation (the “GDPR”), the Japanese laws and regulations in this area were amended as much as practically possible by January 23, 2019 and thus the collection, use and transfer of personal data is similarly restricted.

 

Within the European Union, legislators have adopted the GDPR and which became effective in May 2018 which may impose additional obligations and risk upon our business and which may increase substantially the penalties to which we could be subject in the event of any non-compliance. In addition, further to the United Kingdom’s exit from the European Union on January 31, 2020, the GDPR ceased to apply in the United Kingdom at the end of the transition period on December 31, 2020. However, as of January 1, 2021, the United Kingdom’s European Union (Withdrawal) Act 2018 incorporated the GDPR (as it existed on December 31, 2020 but subject to certain United Kingdom specific amendments) into United Kingdom law (the “UK GDPR”). The UK GDPR and the UK Data Protection Act 2018 set out the United Kingdom’s data protection regime, which is independent from but aligned to the European Union’s data protection regime. Non-compliance with the UK GDPR may result in monetary penalties of up to £17.5 million or 4% of worldwide revenue, whichever is higher. The United Kingdom, however, is now regarded as a third country under the European Union’s GDPR which means that transfers of personal data from the European Economic Area to the United Kingdom will be restricted unless an appropriate safeguard, as recognized by the European Union’s GDPR, has been put in place. However, under the EU-UK Trade Cooperation Agreement it is lawful to transfer personal data between the United Kingdom and the European Economic Area for a 6 month period following the end of the transition period, with a view to achieving an adequacy decision from the European Commission during that period. Like the GDPR, the UK GDPR restricts personal data transfers outside the United Kingdom to countries not regarded by the United Kingdom as providing adequate protection (this means that personal data transfers from the United Kingdom to the European Economic Area remain free flowing).

 

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On July 12, 2016, the European Commission adopted the EU-US Privacy Shield, a framework for the transfer of personal data from the European Union to the United States, as a successor to the Safe Harbor framework that was invalidated by the European Court of Justice in October 2015. On July 16, 2020, the European Court of Justice invalidated the EU–US Privacy Shield ruling that it failed to offer adequate protections for European Union personal data transferred to the United States. The European Court of Justice, in the same decision, deemed that the Standard Contractual Clauses (“SCCs”), approved by the European Commission for transfers of personal data between European Union controllers and non-European Union processors are valid, however the European Court of Justice deemed that transfers made pursuant to the SCCs need to be analyzed on a case-by-case basis to ensure the European Union’s standards of data protection are met. Our customer agreements include SCCs. However, as a result of this decision, companies may be required to adopt additional measures to accomplish transfers of personal data to the United States and other third countries in compliance with the GDPR, and there continue to be concerns about whether the SCCs will face additional challenges. Until the remaining legal uncertainties regarding how to legally continue these transfers are settled, we will continue to face uncertainty as to whether our customers will be permitted to transfer personal data to the United States for processing by us as part of our software services. If such data transfer to the United States is not permitted, it could have a negative effect on our existing business and on our ability to attract and retain new customers. Our customers may view alternative data transfer mechanisms as being too costly, too burdensome, too legally uncertain or otherwise objectionable and therefore decide not to do business with us. For example, some of our customers or potential customers who do business in the European Union may require their vendors to host all personal data within the European Union and may decide to do business with one of our competitors who hosts personal data within the European Union instead of doing business with us.

 

The regulatory framework governing the collection, processing, storage, use and sharing of certain information, particularly financial and other personal information, is rapidly evolving and is likely to continue to be subject to uncertainty and varying interpretations. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our services and software capabilities. Any failure or perceived failure by us, or any third parties with which we do business, to comply with our posted privacy policies, changing consumer expectations, evolving laws, rules and regulations, industry standards, or contractual obligations to which we or such third parties are or may become subject, may result in actions or other claims against us by governmental entities or private actors, the expenditure of substantial costs, time and other resources or the incurrence of significant fines, penalties or other liabilities. In addition, any such action, particularly to the extent we were found to be guilty of violations or otherwise liable for damages, would damage our reputation and adversely affect our business, financial condition and results of operations.

 

We publicly post documentation regarding our practices concerning the collection, processing, use and disclosure of data. Although we endeavor to comply with our published policies and documentation, we may at times fail to do so or be alleged to have failed to do so. Any failure or perceived failure by us to comply with our privacy policies or any applicable privacy, security or data protection, information security or consumer-protection related laws, regulations, orders or industry standards could expose us to costly litigation, significant awards, fines or judgments, civil and/or criminal penalties or negative publicity, and could materially and adversely affect our business, financial condition and results of operations. The publication of our privacy policy and other documentation that provide promises and assurances about privacy and security can subject us to potential state and federal action if they are found to be deceptive, unfair, or misrepresentative of our actual practices, which could, individually or in the aggregate, materially and adversely affect our business, financial condition and results of operations.

 

If our privacy or data security measures fail to comply with current or future laws and regulations, we may be subject to claims, legal proceedings or other actions by individuals or governmental authorities based on privacy or data protection regulations and our commitments to customers or others, as well as negative publicity and a potential loss of business. Moreover, if future laws and regulations limit our subscribers’ ability to use and share personal information or our ability to store, process and share personal information, demand for our solutions could decrease, our costs could increase, and our business, results of operations and financial condition could be harmed.

 

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We could face liability, or our reputation might be harmed, as a result of the activities of our customers, the content of their websites or the data they store on our servers.

 

As a provider of a cloud-based inbound marketing, content management, customer experience management, and robotic process automation software, we may be subject to potential liability for the activities of our customers on or in connection with the data they store on our servers. Although our customer terms of use prohibit illegal use of our services by our customers and permit us to take down websites or take other appropriate actions for illegal use, customers may nonetheless engage in prohibited activities or upload or store content with us in violation of applicable law or the customer’s own policies, which could subject us to liability or harm our reputation. Furthermore, customers may upload, store, or use content on our software that may violate our policy on acceptable use which prohibits content that is threatening, abusive, harassing, deceptive, false, misleading, vulgar, obscene, or indecent. While such content may not be illegal, use of our software for such content could harm our reputation resulting in a loss of business.

 

Several U.S. federal statutes may apply to us with respect to various customer activities:

 

The Digital Millennium Copyright Act of 1998 (“DMCA”) provides recourse for owners of copyrighted material who believe that their rights under U.S. copyright law have been infringed on the Internet. Under the DMCA, based on our current business activity as an Internet service provider that does not own or control website content posted by our customers, we generally are not liable for infringing content posted by our customers or other third parties, provided that we follow the procedures for handling copyright infringement claims set forth in the DMCA. Generally, if we receive a proper notice from, or on behalf, of a copyright owner alleging infringement of copyrighted material located on websites we host, and we fail to expeditiously remove or disable access to the allegedly infringing material or otherwise fail to meet the requirements of the safe harbor provided by the DMCA, the copyright owner may seek to impose liability on us. Technical mistakes in complying with the detailed DMCA take-down procedures could subject us to liability for copyright infringement.

 

The Communications Decency Act of 1996 (the “CDA”) generally protects online service providers, such as us, from liability for certain activities of their customers, such as the posting of defamatory or obscene content, unless the online service provider is participating in the unlawful conduct. Under the CDA, we are generally not responsible for the customer-created content hosted on our servers. Consequently, we do not monitor hosted websites or prescreen the content placed by our customers on their sites. However, the CDA does not apply in foreign jurisdictions and we may nonetheless be brought into disputes between our customers and third parties which would require us to devote management time and resources to resolve such matters and any publicity from such matters could also have an adverse effect on our reputation and therefore our business.

 

In addition to the CDA, the Securing the Protection of our Enduring and Established Constitutional Heritage Act (the “SPEECH Act”) provides a statutory exception to the enforcement by a U.S. court of a foreign judgment for defamation under certain circumstances. Generally, the exception applies if the defamation law applied in the foreign court did not provide at least as much protection for freedom of speech and press as would be provided by the First Amendment of the U.S. Constitution or by the constitution and law of the state in which the U.S. court is located, or if no finding of defamation would be supported under the First Amendment of the U.S. Constitution or under the constitution and law of the state in which the U.S. court is located. Although the SPEECH Act may protect us from the enforcement of foreign judgments in the United States, it does not affect the enforceability of the judgment in the foreign country that issued the judgment. Given our international presence, we may therefore, nonetheless, have to defend against or comply with any foreign judgments made against us, which could take up substantial management time and resources and damage our reputation.

 

In Japan, the statute which provides similar protection is the Provide Liability Limitation Act (the law No, 137 of 2001, as amended). This law provides for the limitation of liability on Internet service providers and the rights of persons whose copyrights or privacy have been infringed or who were subject to defamation on the Internet, to request disclosure of relevant information on the sender of such infringing materials. Under this law, based on our current business activity as an Internet service provider that does not own or control website content posted by our customers, we generally are not liable for infringing content posted by our customers or other third parties, provided that we meet the requirements under this law.

 

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Although these statutes and case law in the United States have generally shielded us from liability for customer activities to date, court rulings in pending or future litigation may narrow the scope of protection afforded us under these laws. In addition, laws governing these activities are unsettled in many international jurisdictions, or may prove difficult or impossible for us to comply with in some international jurisdictions. Also, notwithstanding the exculpatory language of these bodies of law, we may become involved in complaints and lawsuits which, even if ultimately resolved in our favor, add cost to our doing business and may divert management’s time and attention. Finally, other existing bodies of law, including the criminal laws of various states, may be deemed to apply or new statutes or regulations may be adopted in the future, any of which could expose us to further liability and increase our costs of doing business.

 

The standards that private entities use to regulate the use of email have in the past interfered with, and may in the future interfere with, the effectiveness of our software and our ability to conduct business.

 

Our customers rely on email to communicate with their existing or prospective customers. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain “blacklists” of companies and individuals, and the websites, internet service providers and internet protocol addresses associated with those entities or individuals that do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity believes are appropriate. If a company’s internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any internet domain or internet address that subscribes to the blacklisting entity’s service or purchases its blacklist.

 

From time to time, some of our internet protocol addresses may become listed with one or more blacklisting entities due to the messaging practices of our customers. There can be no guarantee that we will be able to successfully remove ourselves from those lists. Blacklisting of this type could interfere with our ability to market our software and services and communicate with our customers and, because we fulfill email delivery on behalf of our customers, could undermine the effectiveness of our customers’ email marketing campaigns, all of which could have a material negative impact on our business and results of operations.

 

Existing federal, state and foreign laws regulate Internet tracking software, the senders of commercial emails and text messages, website owners and other activities, and could impact the use of our software and potentially subject us to regulatory enforcement or private litigation.

 

Certain aspects of how our customers utilize our software are subject to regulations in the United States, European Union and elsewhere. In recent years, U.S. and European lawmakers and regulators have expressed concern over the use of third-party cookies or web beacons for online behavioral advertising, and legislation adopted recently in the European Union requires informed consent for the placement of a cookie on a user’s device. Regulation of cookies and web beacons may lead to restrictions on our activities, such as efforts to understand users’ Internet usage. New and expanding “Do Not Track” regulations have recently been enacted or proposed that protect users’ right to choose whether or not to be tracked online. These regulations seek, among other things, to allow end users to have greater control over the use of private information collected online, to forbid the collection or use of online information, to demand a business to comply with their choice to opt out of such collection or use, and to place limits upon the disclosure of information to third party websites. These policies could have a significant impact on the operation of our software and could impair our attractiveness to customers, which would harm our business.

 

Many of our customers and potential customers in the healthcare, financial services and other industries are subject to substantial regulation regarding their collection, use and protection of data and may be the subject of further regulation in the future. Accordingly, these laws or significant new laws or regulations or changes in, or repeals of, existing laws, regulations or governmental policy may change the way these customers do business and may require us to implement additional features or offer additional contractual terms to satisfy customer and regulatory requirements, or could cause the demand for and sales of our software to decrease and adversely impact our financial results.

 

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In addition, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the “CAN-SPAM Act”) establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future commercial emails from the sender. The ability of our customers’ message recipients to opt out of receiving commercial emails may minimize the effectiveness of the email components of our software. In addition, certain states and foreign jurisdictions, such as Australia, Canada and the European Union, have enacted laws that regulate sending email, and some of these laws are more restrictive than U.S. laws. For example, some foreign laws prohibit sending unsolicited email unless the recipient has provided the sender advance consent to receipt of such email, or in other words has “opted-in” to receiving it. A requirement that recipients opt into, or the ability of recipients to opt out of, receiving commercial emails may minimize the effectiveness of our software.

 

While these laws and regulations generally govern our customers’ use of our software, we may be subject to certain laws as a data processor on behalf of, or as a business associate of, our customers. For example, laws and regulations governing the collection, use and disclosure of personal information include, in the United States, rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, the Gramm-Leach-Bliley Act of 1999 and state breach notification laws, and internationally, the Data Protection Directive in the European Union and the Federal Data Protection Act in Germany. If we were found to be in violation of any of these laws or regulations as a result of government enforcement or private litigation, we could be subjected to civil and criminal sanctions, including both monetary fines and injunctive action that could force us to change our business practices, all of which could adversely affect our financial performance and significantly harm our reputation and our business.

 

We are subject to governmental export controls and economic sanctions laws that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.

 

Our business activities are subject to various restrictions under U.S. export controls and trade and economic sanctions laws, including the U.S. Commerce Department’s Export Administration Regulations and economic and trade sanctions regulations maintained by the U.S. Treasury Department’s Office of Foreign Assets Control. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to civil or criminal penalties and reputational harm. Obtaining the necessary authorizations, including any required license, for a particular transaction may be time-consuming, is not guaranteed, and may result in the delay or loss of sales opportunities. Furthermore, U.S. export control laws and economic sanctions laws prohibit certain transactions with U.S. embargoed or sanctioned countries, governments, persons and entities. Although we take precautions to prevent transactions with U.S. sanction targets, the possibility exists that we could inadvertently provide our solutions to persons prohibited by U.S. sanctions. This could result in negative consequences to us, including government investigations, penalties and reputational harm.

 

Risks Related to Taxation

 

We may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales, which could harm our business.

 

State, local, and non-U.S. jurisdictions have differing rules and regulations governing sales, use, value added, Digital Services Tax, and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our software in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus are complex and vary significantly. As a result, we could face the possibility of tax assessments and audits, and our liability for these taxes and associated penalties could exceed our original estimates. A successful assertion that we should be collecting additional sales, use, value added or other taxes in those jurisdictions where we have not historically done so and do not accrue for such taxes could result in substantial tax liabilities and related penalties for past sales, discourage customers from purchasing our application or otherwise harm our business and operating results.

 

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Changes in tax laws or regulations that are applied adversely to us or our customers could increase the costs of our software and adversely impact our business.

 

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines and/or penalties and interest for past amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing and potential future customers may elect not to continue or purchase our software in the future. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as the costs of our software. Any or all of these events could adversely impact our business and financial performance. Furthermore, as our employees continue to work remotely from geographic locations across the United States and internationally due to the pandemic and other reasons, we may become subject to additional taxes and our compliance burdens with respect to the tax laws of additional jurisdictions may be increased.

 

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.

 

As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations.

 

Related to this Offering and Ownership of Our Common Stock

 

Once our common stock is listed on Nasdaq, there can be no assurance that we will be able to comply with Nasdaq’s continued listing standards.

 

Prior to this offering, there has been no public market for shares of our common stock. As a condition to consummating this offering, our common stock offered in this prospectus must be listed on Nasdaq or another national securities exchange. Accordingly, in connection with the filing of the registration statement of which this prospectus forms a part, we intend to apply to list our common stock on Nasdaq under the symbol “HTCR.” Assuming that our common stock is listed and after the consummation of this offering, there can be no assurance any broker will be interested in trading our stock. Therefore, it may be difficult to sell your shares of common stock if you desire or need to sell them. Our underwriters are not obligated to make a market in our common stock, and even if it makes a market, it can discontinue market making at any time without notice. Neither we nor the underwriters can provide any assurance that an active and liquid trading market in our common stock will develop or, if developed, that such market will continue.

 

Once our common stock is approved for listing on Nasdaq, there is no guarantee that we will be able to maintain such listing for any period of time by perpetually satisfying Nasdaq’s continued listing requirements. Our failure to continue to meet these requirements may result in our common stock being delisted from Nasdaq.

 

The market price of our common stock may be volatile, and you could lose all or part of your investment.

 

We cannot predict the prices at which our common stock will trade. The initial public offering price of our common stock will be determined by negotiations between us and the underwriters and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business and prospects, and the market price of our common stock following this offering may fluctuate substantially and may be lower than the initial public offering price. The market price of our common stock following this offering will depend on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. In addition, the limited public float of our common stock following this offering will tend to increase the volatility of the trading price of our common stock. These fluctuations could cause you to lose all or part of your investment in our common stock, since you might not be able to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of our common stock include, but are not limited to, the following:

 

  actual or anticipated changes or fluctuations in our results of operations;

 

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  the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;
     
  announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships, or capital commitments;
     
  industry or financial analyst or investor reaction to our press releases, other public announcements, and filings with the SEC;
     
  rumors and market speculation involving us or other companies in our industry;
     
  price and volume fluctuations in the overall stock market from time to time;
     
  changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
     
  the expiration of market stand-off or contractual lock-up agreements and sales of shares of our common stock by us or our stockholders;

 

  failure of industry or financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
     
  actual or anticipated developments in our business, or our competitors’ businesses, or the competitive landscape generally;
     
  litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;
     
  developments or disputes concerning our intellectual property rights, our products, or third-party proprietary rights;
     
  announced or completed acquisitions of businesses or technologies by us or our competitors;
     
  new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
     
  any major changes in our management or our board of directors, particularly with respect to Mr. Lai;
     
  general economic conditions and slow or negative growth of our markets; and
     
  other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

 

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market prices of a particular company’s securities, securities class action litigation has often been instituted against that company. Securities litigation, if instituted against us, could result in substantial costs and divert our management’s attention and resources from our business. This could materially adversely affect our business, financial condition, results of operations, and prospects.

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As a controlled company, we are not subject to all of the corporate governance rules of Nasdaq.

 

The “controlled company” exception to Nasdaq rules provides that a company of which more than 50% of the voting power is held by an individual, group or another company, a “controlled company,” need not comply with certain requirements of Nasdaq corporate governance rules. As of the date of this prospectus, Sumitaka Yamamoto, our Chief Executive Officer, beneficially owned an aggregate of 10,984,539 shares of our common stock, which represents 69.43% of the voting power of our outstanding common stock. Following this offering, Mr. Yamamoto will control approximately 59.96% of the voting power of our outstanding common stock if all the common stock being offered are sold. If we obtain listing on Nasdaq, we will be a “controlled company” within the meaning of the corporate governance rules of the Nasdaq. Controlled companies are exempt from Nasdaq’s corporate governance rules requiring that listed companies have (i) a majority of the board of directors consist of “independent” directors under the listing standards of Nasdaq, (ii) a nominating/corporate governance committee composed entirely of independent directors and a written nominating/corporate governance committee charter meeting the requirements of Nasdaq, and (iii) a compensation committee composed entirely of independent directors and a written compensation committee charter meeting the requirements of Nasdaq. We currently utilize and presently intend to continue to utilize these exemptions. As a result, we may not have a majority of independent directors, our nomination and corporate governance committee and compensation committee may not consist entirely of independent directors and such committees may not be subject to annual performance evaluations. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq. See “Management—Controlled Company and Director Independence”.

 

If the voting power of our capital stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.

 

Following the completion of this Offering, Sumitaka Yamamoto will control approximately 59.96% of the voting power of our outstanding common stock if all the common stock being offered is sold. As a result, Mr. Yamamoto will have majority voting power over all matters requiring stockholder votes, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution.

 

This concentration of voting power may delay, deter or prevent acts that would be favored by our other stockholders. The interests of Mr. Yamamoto may not always coincide with our interests or the interests of our other stockholders. This concentration of voting power may also have the effect of delaying, preventing or deterring a change in control of us. Also, Mr. Yamamoto may seek to cause us to take courses of action that, in his judgment, could enhance his investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this offering. As a result, the market price of our common stock could decline or stockholders might not receive a premium over then-current market price of our common stock upon a change in control. In addition, this concentration of voting power may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders. See “Executive Compensation” and “Description of Securities.”

 

Our management team will have immediate and broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree.

 

The net proceeds from this offering will be immediately available to our management to use at their discretion. We currently intend to use the net proceeds from this offering to fund the development of technology, acquisition of other companies, working capital and general corporate purposes. See “Use of Proceeds.” We have not allocated specific amounts of the net proceeds from this offering for any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us or our stockholders. The failure of our management to use such funds effectively could have a material adverse effect on our business, prospects, financial condition, and results of operation.

 

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You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.

 

You will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of 2,500,000 shares of common stock offered in this offering, at an assumed initial public offering price of $6.00 per share (the midpoint of the range set forth on the cover page of this prospectus), and after deducting the underwriters’ discounts and commissions and other estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $5.25 per share. See “Dilution.”

 

We have never paid dividends on our common stock and have no plans to do so in the future.

 

Holders of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any return investors in our common stock may have will be in the form of appreciation, if any, in the market value of their shares of common stock. See “Dividend Policy.”

 

Our common stock may be subject to the “penny stock” rules in the future. It may be more difficult to resell securities classified as “penny stock.”

 

Our common stock may be subject to “penny stock” rules (generally defined as non-exchange traded stock with a per-share price below $5.00) in the future. While our common stock will not be considered “penny stock” following this offering since they will be listed on Nasdaq, if we are unable to maintain that listing and our common stock is no longer listed on Nasdaq, unless we maintain a per-share price above $5.00, our common stock will become “penny stock.” These rules impose additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.” For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments in penny stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, disclose the compensation of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing the market value of each penny stock held in the customer’s account, provide a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s written agreement to the transaction.

 

Legal remedies available to an investor in “penny stocks” may include the following:

 

● If a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal or states securities laws, the investor may be able to cancel the purchase and receive a refund of the investment.

 

● If a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and firms that committed the fraud for damages.

 

These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.

 

Many brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not invest in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the increased financial risk generally associated with these investments.

 

For these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time, if ever, our common stock will not be classified as a “penny stock” in the future.

 

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If the benefits of any proposed acquisition do not meet the expectations of investors, stockholders or financial analysts, the market price of our common stock may decline.

 

If the benefits of any proposed acquisition do not meet the expectations of investors or securities analysts, the market price of our common stock prior to the closing of the proposed acquisition may decline. The market values of our common stock at the time of the proposed acquisition may vary significantly from their prices on the date the acquisition target was identified.

 

In addition, broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. The stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

 

As an “emerging growth company” under the JOBS Act, we are permitted to rely on exemptions from certain disclosure requirements.

 

We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

 

  have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
     
  comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditors’ report providing additional information about the audit and the consolidated financial statements (i.e., an auditor discussion and analysis);
     
  submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency”; and
     
  disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

 

In addition, Section 102 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our consolidated financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an emerging growth company until the earliest to occur of: (i) the end of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (ii) the end of the fiscal year in which the market value of our common shares that are held by non-affiliates is at least $700.0 million as of the last business day of our most recently completed second fiscal quarter; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and (iv) the end of the fiscal year during which the fifth anniversary of this offering occurs.

 

Until such time, however, we cannot predict if investors will find our securities less attractive because we may rely on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the price of our securities may be more volatile.

 

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If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and have an adverse effect on the value of our securities.

 

As a public company, we would be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Further, we will be required to report any changes in internal controls on a quarterly basis. In addition, we would be required to furnish a report by management on the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We will design, implement, and test the internal controls over financial reporting required to comply with these obligations. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of its internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the value of our securities could be negatively affected. We also could become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.

 

As an emerging growth company, our auditor will not be required to attest to the effectiveness of our internal controls.

 

Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting while we are an emerging growth company. This means that the effectiveness of our financial operations may differ from our peer companies in that they may be required to obtain independent registered public accounting firm attestations as to the effectiveness of their internal controls over financial reporting and we are not. While our management will be required to attest to internal control over financial reporting and we will be required to detail changes to our internal controls on a quarterly basis, we cannot provide assurance that the independent registered public accounting firm’s review process in assessing the effectiveness of our internal controls over financial reporting, if obtained, would not find one or more material weaknesses or significant deficiencies. Further, once we cease to be an emerging growth company and cease to be a smaller reporting company (as described below), we will be subject to independent registered public accounting firm attestation regarding the effectiveness of our internal controls over financial reporting. Even if management finds such controls to be effective, our independent registered public accounting firm may decline to attest to the effectiveness of such internal controls and issue a qualified report.

 

We believe we will be considered a smaller reporting company and will be exempt from certain disclosure requirements, which could make our common stock less attractive to potential investors.

 

Rule 12b-2 of the Exchange Act defines a “smaller reporting company” as an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:

 

  had a public float of less than $250 million as of the last business day of its most recently completed second fiscal quarter, computed by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity; or
     
  in the case of an initial registration statement under the Securities Act or the Exchange Act for shares of its common equity, had a public float of less than $250 million as of a date within 30 days of the date of the filing of the registration statement, computed by multiplying the aggregate worldwide number of such shares held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of such shares included in the registration statement by the estimated public offering price of the shares; or
     
  in the case of an issuer whose public float as calculated under paragraph (1) or (2) of this definition was zero or whose public float was less than $700 million, had annual revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are available.

 

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As a smaller reporting company, we will not be required and may not include a Compensation Discussion and Analysis section in our proxy statements; we will provide only two years of financial statements; and we need not provide the table of selected financial data. We also will have other “scaled” disclosure requirements that are less comprehensive than issuers that are not smaller reporting companies which could make our common stock less attractive to potential investors, which could make it more difficult for our stockholders to sell their shares.

 

Upon becoming a public company, we will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

Upon becoming a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act has imposed various requirements on public companies including requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting the later of our second annual report on Form 10-K or the first annual report on Form 10-K following the date on which we are no longer an emerging growth company or a smaller reporting company. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the value of our securities could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial systems, procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the Sarbanes-Oxley Act. This, in turn, could have an adverse impact on value of our securities, and could adversely affect our ability to access the capital markets.

 

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

 

The Company’s certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors. These provisions include:

 

  no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

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  the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
     
  the ability of our board of directors to determine whether to issue shares of our preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
     
  limiting the liability of, and providing indemnification to, our directors and officers;
     
  providing that a special meeting of the stockholders may only be called by a majority of the board of directors;
     
  providing that directors may be removed prior to the expiration of their terms by the affirmative vote of the holders of not less than two-thirds (2/3) of the voting power of the issued and outstanding stock entitled to vote; and
     
  advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.

 

These provisions, alone or together, could delay hostile takeovers and changes in control of the Company or changes in our board of directors and management.

 

Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our security holders to receive a premium for their securities and could also affect the price that some investors are willing to pay for our securities.

 

Cautionary Note Regarding Forward-Looking Statements

 

This prospectus contains forward-looking statements. Specifically, forward-looking statements may include statements relating to:

 

  our future financial performance;
     
  changes in the market for our products and services;
     
  our expansion plans and opportunities; and
     
  other statements preceded by, followed by or that include the words “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target”, “contemplate,” “continue,” “could,” “intend,” “may,” “potential,” “predict,” “should,” “will” or “would” or similar expressions.

 

These forward-looking statements are based on information available as of the date of this prospectus and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

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As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

  

  the level of demand for our products and services;
     
  competition in our markets;
     
  our ability to grow and manage growth profitably;
     
  our ability to acquire new customers and successfully engage new and existing customers;
     
  our growth strategies for our products;
     
  our ability to access additional capital;
     
  changes in applicable laws or regulations;
     
  our ability to attract and retain qualified personnel;
     
  the possibility that we may be adversely affected by other economic, business, and/or competitive factors; and
     
  other risks and uncertainties indicated in this prospectus, including those under “Risk Factors.”

 

USE OF PROCEEDS

 

We estimate that the net proceeds from the sale of the common stock we are offering will be approximately $13,299,975 (based upon an assumed initial public offering price of $6.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus). If the representative fully exercises the over-allotment option, the net proceeds of the common stock we sell will be $15,392,475. “net proceeds” is what we expect to receive after deducting the underwriting discount and commission and estimated offering expenses payable by us.

 

We intend to use the net proceeds of this offering primarily to fund development of technology, acquisition of other companies, working capital and general corporate purposes. The amounts that we actually spend for any specific purpose may vary significantly, and will depend on a number of factors including, but not limited to, market conditions. In addition, we may use a portion of any net proceeds to acquire complementary businesses; however, we do not have plans for any acquisitions at this time.

 

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. We may find it necessary or advisable to use the net proceeds from this offering for other purposes, and we will have broad discretion in the application of net proceeds from this offering. Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities. See “Risk Factors—Risk Related to this Offering and Ownership of our Common Stock—Our management team will have immediate and broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree.”

 

The intended use of proceeds in this section takes into account the potential impacts of COVID-19.

 

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DIVIDEND POLICY

 

We have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable future. The agreements into which we may enter in the future, including indebtedness, may impose limitations on our ability to pay dividends or make other distributions on our capital stock. Payment of future dividends on our common stock, if any, will be at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements and surplus, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. See “Risk Factors—Risk Related to this Offering and Ownership of our Common Stock—We have never paid dividends on our common stock and have no plans to do so in the future.”

 

CAPITALIZATION

 

The following table shows our capitalization as of September 30, 2021:

 

  on an actual basis;
     
  on a pro forma basis to give effect to the issuance of 304,000 shares of common stock at a purchase price of $2.50 per share (for an aggregate of $760,000 of proceeds) to accredited investors in a private placement under Rule 506(b) of Regulation D of the Securities Act during the period from October 27, 2021 through December 31, 2021; and
     
  on a pro forma as adjusted basis to reflect the sale of 2,500,000 shares by us in this offering at an assumed price to the public of $6.00 per share, which is the midpoint of the estimated offering range set forth on the cover page of this prospectus, resulting in net proceeds to us of $13,299,975 after deducting (i) underwriter commissions of $1,050,000 and (ii) our estimated other offering expenses of $650,025.

 

We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, our historical and unaudited pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    As of September 30, 2021  
    Actual     Pro forma     Pro forma as Adjusted (1)  
    (unaudited)              
Cash and cash equivalents   $ 3,090,782     $ 3,850,782     $ 17,150,757  
                         
Long-term debt   $ 2,050,895     $ 2,050,895     $ 2,050,895  
                         
Stockholders’ equity:                        
Common stock, $0.0001 par value; 200,000,000 shares authorized; 15,242,454 shares outstanding on an actual basis, 15,546,454 shares outstanding on a pro forma basis and 18,046,454 shares outstanding on a pro forma as adjusted basis     1,524       1,554       1,804  
Preferred stock, $0.0001 par value 20,000,000 shares authorized and 0 shares issued and outstanding on an actual and as adjusted basis     -       -       -  
Additional paid-in capital     2,735,315       3,495,285       16,795,010  
Accumulated deficit     (3,610,332 )     (3,610,332 )     (3,610,332 )
Accumulated other comprehensive loss     (70,336 )     (70,336 )     (70,336 )
Total HeartCore Enterprises, Inc.’s shareholders’ equity (deficit)     (943,829 )     (183,829 )     13,116,146  
Non-controlling interest     366,748       366,748       366,748  
Total shareholder’s equity (deficit)     (577,081 )     182,919       13,482,894  
Total capitalization   $ 1,107,066     $ 1,867,066     $ 15,167,041  

 

(1) The number of shares of common stock to be outstanding after the offering is based on 15,242,454, which is the number of shares outstanding on September 30, 2021, assumes no exercise by the underwriters of their option to purchase up to an additional 375,000 shares of common stock to cover over-allotments, if any, and excludes (i) 1,534,500 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.50 per share and (ii) 175,000 shares of common stock issuable upon exercise of the representative’s warrants to be issued upon completion of this offering.

 

Each $1.00 increase or decrease in the assumed offering price per share of $6.00, assuming no change in the number of shares to be sold, would increase or decrease the net proceeds that we receive in this offering and each of total stockholders’ equity and total capitalization by approximately $2,325,000 (or $2,673,750 if the underwriters exercise the over-allotment option in full), after deducting (i) estimated underwriter commissions and (ii) offering expenses, in each case, payable by us.

 

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DILUTION

 

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the assumed public offering price per share of common stock and the pro forma net tangible book value per share of our common stock immediately after this offering.

 

The net tangible book value of our common stock as of September 30, 2021 was $(577,081), or approximately $(0.04) per share. Net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of common stock.

 

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers in this offering and the pro forma net tangible book value per share of our common stock immediately after the completion of this offering. After giving effect to (i) our issuance and sale of 304,000 shares of common stock at a purchase price of $2.50 per share (for an aggregate of $760,000 of proceeds) to accredited investors in a private placement during the period from October 27, 2021 through December 31, 2021  and (ii) our issuance and sale of the common stock in this offering at the assumed public offering price of $6.00 per share (the midpoint of the range set forth on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of September 30, 2021 would have been $13,482,894, or approximately $0.75 per share. This represents an immediate increase in net tangible book value of $0.79 per share to existing stockholders and an immediate dilution in net tangible book value of $5.25 per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Assumed public offering price per share           $ 6.00  
Net tangible book value per share as of September 30, 2021   $ (0.04 )        
Increase in net tangible book value per share attributable to new investors   $

0.79

         
Less: pro forma net tangible book value per share after giving effect to the offering           $

0.75

 
Immediate dilution in net tangible book value per share to new investors           $

5.25

 

 

The following table sets forth, as of September 30, 2021, the assumed number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing common stock in this offering, after giving pro forma effect to the new investors in this offering at the assumed public offering price of $6.00 per share (the midpoint of the range set forth on the cover page of this prospectus), together with the total consideration paid an average price per share paid by each of these groups, before deducting underwriting discounts and commissions and estimated offering expenses.

 

    Shares Purchased     Total Consideration   Average
Price
 
    Number     Percent     Amount     Percent     per Share  
Existing stockholders     15,242,454       84.5 %   $ 2,736,839       14.8 %   $ 0.18  
Issuance of common stock for cash     304,000       1.7 %   $ 760,000       4.1 %   $ 2.50  
New investors     2,500,000       13.8 %   $ 15,000,000       81.1 %   $ 6.00  
Total     18,046,454       100.0 %   $ 18,496,839       100.0 %   $ 1.02  

 

If the underwriters’ over-allotment option is exercised in full for shares of common stock at the assumed offering price, the number of shares held by new investors will increase to 2,875,000, or approximately 15.6% of the total number of shares of common stock outstanding after this offering.

 

The foregoing discussion and tables above do not give effect to the dilution that would result from (i) 1,534,500 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.50 per share and (ii) 175,000 shares of common stock issuable upon exercise of the representative’s warrants to be issued upon completion of this offering.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity and cash flows of the Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”.

 

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 September 30, 2021, our sales and marketing organization was comprised of 14 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 September 30, 2021, our combined business units (customer experience management business unit and digital transformation business unit) had 819 total customers in Japan.

 

We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our majority-owned subsidiary, HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co”), which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009 and acquired by us in July 2021. HeartCore Co started out with helping companies effectively managing content with its powerful content management system. Since then, HeartCore Co has expanded offerings to help companies manage all forms of business processes.

 

The acquisition of HeartCore Co 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 subsidiaries 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.

 

For the fiscal years ended December 31, 2020 and 2019, we generated revenues of $9,026,463 and $7,208,964, respectively, and reported net income of $155,064 and net loss of $1,261,027, respectively, and cash flow from operating activities of $745,748 and cash flows used in operating activities of $685,803, respectively. For the nine months ended September 30, 2021 and 2020, we generated revenues of $8,446,011 and $6,664,487, respectively, and reported net income of $414,826 and $398,315, respectively, and cash flow from operating activities of $1,239,250 and $691,626, respectively. As noted in our consolidated financial statements, as of September 30, 2021, we had an accumulated deficit of $3,610,332.

 

Key Factors that Affect Our Results of Operations

 

We believe the following key factors may affect our financial condition and results of operations:

 

Our Ability to Strength Our Competitive Advantages

 

Our mission is to be at the forefront of innovation and thought leadership in enterprise business automation, analyzing enterprise users’ desktops and mission-critical systems, and creating end-to-end software that provides business automation based on the results of that analysis and further simulating the numbers. We create end-to-end software that provides business automation. Our customers use our software across their organizations so that they can run their operations in a more fully automated manner. Our ability to successfully implement the automation in our software greatly affects our profitability.

 

Our Ability to Expand International Market

 

We maintain a physical sales presence in the Japanese software market. Using our global go-to-market strategy we believe we have established a diversified revenue and customer base. We will continue to develop our global operation. International expansion over the long term represents a significant opportunity and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing efforts and leveraging channel and other ecosystem partners.

 

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Our Ability to Control Costs and Expenses and Improve Our Operating Efficiency

 

Our business growth is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, secure new contracts with customers and our ability to control costs and expenses to improve our operating efficiency. Our software costs (mostly including purchased software license, salaries and welfare, and outsourcing expenses) have a direct impact on our profitability. Our success is dependent, in part, on our ability to reduce our exposure to increase in those costs through a variety of ways, while maintaining and improving margins and market share. In addition, our staffing costs (including salaries and welfare) and administrative expenses also have a direct impact on our profitability. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability.

 

Our Ability to Manage and Retain Customer Renewals

 

Our ability to manage and retain customer renewals is vital to our expansion of renewals in our customer base and continuous and growing revenue. By achieving and maintaining high retention of customer renewals, we are able to cover most of our expenses from the revenue generated from such retained customer renewals. In order to achieve and maintain a high retention of customer renewals, we engage in the following actions: (i) we conduct annual surveys of existing customers; (ii) we conduct Net Promoter Scoring (NPS), whereby we measure customer loyalty and satisfaction by asking our customers how likely they are to recommend our product and service to others; and (iii) we have sales representatives visit important customers to increase customer retention. Our ability to expand within our customer base is demonstrated by our net retention rate, which represents the rate of net expansion of annualized renewal run-rate from existing customers over the last 12 months. Our net retention rate was 52% and 75% as of December 31, 2020 and 2019, respectively.

 

COVID-19 Affecting Our Results of Operations

 

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The pandemic has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses. 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. As of the date of this prospectus, the extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted.

 

A Severe or Prolonged Slowdown in the Global and Japan Economy Could Materially and Adversely Affect Our Business and Our Financial Condition

 

In recent years, the economic indicators in Japan have shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The current administration of Prime Minster Fumio Kishida and the former administration of Prime Minister Yoshihide Suga have introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. However, the long-term impact of these policy initiatives on Japan’s economy remains uncertain. The impact of Brexit on the Japanese economy and on the value of the Japanese yen against currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain. In addition, an increase in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also adversely impact the Japanese economy, potentially impacting consumer spending, and advertising spending by businesses. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices.

 

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Results of Operations

 

Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020

 

The following table summarizes our operating results as reflected in our statements of income during the nine months ended September 30, 2021 and 2020, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

    For the Nine Months ended September 30,  
    2021     2020     Variance  
          % of           % of              
    Amount     revenue     Amount     revenue     Amount     % of  
                                     
REVENUE   $ 8,446,011       100.0 %   $ 6,664,487       100.0 %   $ 1,781,524       26.7 %
COST OF REVENUE     4,369,144       51.7 %     3,616,972       54.3 %     752,172       20.8 %
GROSS PROFIT     4,076,867       48.3 %     3,047,515       45.7 %     1,029,352       33.8 %
                                                 
Operating expenses                                                
Selling expenses     226,903       2.7 %     85,706       1.3 %     141,197       164.7 %
General and administrative expenses     2,986,291       35.4 %     2,254,015       33.8 %     732,276       32.5 %
Research and development expenses     321,857       3.8 %     256,946       3.9 %     64,911       25.3 %
Total operating expenses     3,535,051       41.9 %     2,596,667       39.0 %     938,384       36.1 %
                                                 
Income from operations     541,816       6.4 %     450,848       6.7 %     90,968       20.2 %
                                                 
Other expenses     (29,553 )     -0.3 %     (11,994 )     -0.1 %     (17,559 )     146.4 %
                                                 
Income before income tax provision     512,263       6.1 %     438,854       6.6 %     73,409       16.7 %
                                                 
Income taxes expense     97,437       1.2 %     40,539       0.6 %     56,898       140.4 %
                                                 
Net income     414,826       4.9 %     398,315       6.0 %     16,511       4.1 %
                                                 
Less: net income attributable to non-controlling interest     11,112       0.1 %     10,555       0.2 %     557       5.3 %
                                                 
NET INCOME ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC.   $ 403,714       4.8 %   $ 387,760       5.8 %   $ 15,954       4.1 %

 

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    For the Nine Months ended September 30,  
    2021     2020     Variance  
          % of           % of              
    Amount     total
revenue
    Amount     total
revenue
    Amount     % of  
                                     
Revenue                                                
Revenue from on-premise software   $ 2,586,542       30.6 %   $ 1,408,815       21.1 %   $ 1,177,727       83.6 %
Revenue from maintenance and support services     2,842,407       33.7 %     2,819,569       42.3 %     22,838       0.8 %
Revenue from software as a service (“SaaS”)     615,356       7.3 %     343,343       5.2 %     272,013       79.2 %
Revenue from software development and other miscellaneous services     2,401,706       28.4 %     2,092,760       31.4 %     308,946       14.8 %
Total revenue     8,446,011       100.0 %     6,664,487       100.0 %     1,781,524       26.7 %
                                                 
Cost of Revenue                                                
Costs of on-premise software     905,705       10.7 %     902,811       13.6 %     2,894       0.3 %
Costs of maintenance and support services     979,743       11.6 %     932,661       14.0 %     47,082       5.0 %
Costs of software as a service (“SaaS”)     423,762       5.0 %     312,440       4.7 %     111,322       35.6 %
Costs of software development and other miscellaneous services     2,059,934       24.4 %     1,469,060       22.0 %     590,874       40.2 %
Total cost of revenue     4,369,144       51.7 %     3,616,972       54.3 %     752,172       20.8 %
                                                 
Gross Profit                                                
On-premise software     1,680,837       19.9 %     506,004       7.5 %     1,174,833       232.2 %
Maintenance and support services     1,862,664       22.1 %     1,886,908       28.3 %     (24,244 )     -1.3 %
Software as a service (“SaaS”)     191,594       2.3 %     30,903       0.5 %     160,691       520.0 %
Software development and other miscellaneous services     341,772       4.0 %     623,700       9.4 %     (281,928 )     -45.2 %
Total gross profit   $ 4,076,867       48.3 %   $ 3,047,515       45.7 %   $ 1,029,352       33.8 %

 

Revenue

 

Our total revenues increased by $1,781,524, or 26.7%, to $8,446,011 for the nine months ended September 30, 2021 from $6,664,487 for the nine months ended September 30, 2020. The increase in our revenues was attributable to the following reasons:

 

(i) the revenues from sales of on-premise software by $1,177,727, or 83.6%, to $2,586,542 for the nine months ended September 30, 2021 from $1,408,815 for the nine months ended September 30, 2020. In July 2021, an important customer renewed its CMS license for $1,171,351;
(ii) our revenue from maintenance and support services increased by $22,838, or 0.8%, to $2,842,407 for the nine months ended September 30, 2021 from $2,819,569 for the nine months ended September 30, 2020. In 2021, we obtained twenty-two new customers, which contributed $84,101 to our sales, offset by the fact that we lost some customers in the current period, as our customer retention rate approximates 95%;
(iii) our revenue from software as a service (“SaaS”) increased by $272,013, or 79.2%, to $615,356 for the nine months ended September 30, 2021 from $343,343 for the nine months ended September 30, 2020. While we retained most of the customers from prior year, we generated revenue of approximately $138,000 from new customers obtained in the nine months ended September 30, 2021;
(iv) our revenue from software development and other services increased by $308,946, or 14.8%, to $2,401,706 for the nine months ended September 30, 2021 from $2,092,760 for the nine months ended September 30, 2020, which was primarily attributed to a new important customer who contributed $866,384 to our revenue in the nine months ended September 30, 2021, offset by the fact that some projects were finished in the prior period and accordingly generated no revenue in the current period.

 

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Cost of Revenue

 

Our total costs of revenues increased by $752,172, or 20.8%, to $4,369,144 for the nine months ended September 30, 2021 from $3,616,972 for the nine months ended September 30, 2020. The increase in our costs was attributable to the following reasons: (i) the costs of software development and other miscellaneous services increased by $590,874, or 40.2%, to $2,059,934 for the nine months ended September 30, 2021 from $1,469,060 for the nine months ended September 30, 2020. As mentioned above, we incurred development costs for the services provided to the new customer; (ii) the costs of SaaS increased by $111,322, or 35.6%, to $423,762 for the nine months ended September 30, 2021 from $312,440 for the nine months ended September 30, 2020. While the fixed costs, such as labor costs for engineering employees and platform system usage fees used for SaaS have remained almost the same, the cost of purchasing licenses for the task mining product sold to the new customer increased in proportion to the sales.

 

Gross Profit

 

Our total gross profit increased by $1,029,352, or 33.8%, to $4,076,867 for the nine months ended September 30, 2021 from $3,047,515 for the nine months ended September 30, 2020. The increase in our gross profit was attributable to the gross profit from sales of on-premise software increased by $1,174,833, or 232.2% from $506,004 for the nine months ended September 30, 2020 to $1,680,837 for the nine months ended September 30, 2021. The reason for the slight increase in cost of goods sold while the sales increased significantly in 2021 is that the cost of the CMS license sales of $1,171,351 included only our CMS license fees paid to the vender which is fixed on a monthly basis.

 

For the reasons discussed above, our overall gross profit margin increased by 2.6% to 48.3% in the nine months ended September 30, 2021 from 45.7% in the nine months ended September 30, 2020.

 

Operating Expenses

 

The following table sets forth the breakdown of our operating expenses for the nine months ended September 30, 2021 and 2020:

 

    For the Nine Months ended September 30,  
    2021     2020     Variance  
          % of           % of              
    Amount     revenue     Amount     revenue     Amount     % of  
                                     
Total revenue   $ 8,446,011       100.0 %   $ 6,664,487       100.0 %   $ 1,781,524       26.7 %
Operating expenses                                                
Selling expenses     226,903       2.7 %     85,706       1.3 %     141,197       164.7 %
General and administrative expenses     2,986,291       35.4 %     2,254,015       33.8 %     732,276       32.5 %
Research and development expenses     321,857       3.8 %     256,946       3.9 %     64,911       25.3 %
Total operating expenses   $ 3,535,051       41.9 %   $ 2,596,667       39.0 %   $ 938,384       36.1 %

  

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Selling Expenses

 

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

 

    For the Nine Months ended September 30,  
    2021     2020     Variance  
    Amount     % of     Amount     % of     Amount     % of  
                                     
Selling Expenses                                                
Advertising expenses   $ 137,732       60.7 %   $ 39,023       45.5 %   $ 98,709       253.0 %
Sales commissions     88,447       39.0 %     45,056       52.6 %     43,391       96.3 %
Sales promotion expenses     724       0.3 %     1,627       1.9 %     (903 )     -55.5 %
Total selling expenses   $ 226,903       100.0 %   $ 85,706       100.0 %   $ 141,197       164,7 %

 

Our selling expenses increased by $141,197, or 164.7%, to $226,903 in the nine months ended September 30, 2021 from $85,706 in the nine months ended September 30, 2020, primarily attributable to (i) an increase in advertising expenses by $98,709, or 253.0%, to 137,732 in the nine months ended September 30, 2021 from $39,023 in the nine months ended September 30, 2020. The Japanese economy gradually resumed in 2021 as the COVID-19 pandemic became less severe. In order to attract customers, the company expensed $51,143 for seminars, and $19,187 for billboard; (ii) our sales commission increased by $43,391, or 96.3% from $45,056 in the nine months ended September 30, 2020 to $88,447 in the nine months ended September 30, 2021, primarily ascribable to the increased in sales.

 

These above-mentioned factors combined led to the increase in our selling expenses in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. As a percentage of revenues, our selling expenses accounted for 2.7% and 1.3% of our total revenue for the nine months ended September 30, 2021 and 2020, 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, bad debt expenses, and travel and entertainment expenses.

 

    For the Nine Months ended September 30,  
    2021     2020     Variance  
    Amount     % of     Amount     % of     Amount     % of  
                                     
General and Administrative Expenses                                                
Salaries and welfare   $ 1,669,011       55.9 %   $ 1,432,765       63.5 %   $ 236,246       16.5 %
Consulting and professional service fees     760,460       25.5 %     241,710       10.7 %     518,750       214.6 %
Depreciation expense     77,804       2.6 %     80,814       3.6 %     (3,010 )     -3.7 %
Rent expense     164,885       5.5 %     165,915       7.4 %     (1,030 )     -0.6 %
Office, utility and other expenses     223,406       7.5 %     285,567       12.7 %     (62,161 )     -21.8 %
Bad debt expense     5,910       0.2 %     8,620       0.4 %     (2,710 )     -31.4 %
Travel and entertainment expense     84,815       2.8 %     38,624       1.7 %     46,191       119.6 %
Total general and administrative expenses   $ 2,986,291       100.0 %   $ 2,254,015       100.0 %   $ 732,276       32.5 %

 

Our general and administrative expenses increased by $732,276 or 32.5%, to $2,986,291 in the nine months ended September 30, 2021 from $2,254,015 in the nine months ended September 30, 2020, primarily attributable to (i) our consulting and professional fees increased by $518,750 or 214.6%, to $760,460 in the nine months ended September 30, 2021 from $241,710 in the nine months ended September 30, 2020, primarily due to the increase in consulting and legal fees related to going public; (ii) an increase in travel and entertainment expenses by 46,191, or 119.6%, to $84,815 in the nine months ended September 30, 2021 from $38,624 in the nine months ended September 30, 2020. In the nine months ended September 30, 2021, our officers traveled to the US to meet our legal counsel, underwriter, and prospective investors to promote our stock and for the matter of going public; (iii) an increase in salaries and welfare by $236,246, or 16.5%, to $1,669,011 in the nine months ended September 30, 2021 from $1,432,765 in the nine months ended September 30, 2020. In addition to our average salary increased by 3% in the nine months ended September 30, 2021, we recruited 11 new employees to support the extension of business; offset by (iv) a decrease in bad debt expense by $2,710 or 31.4% in the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. In the current period we strengthen our credit policy and drop bad credit customers. In addition to thoroughly credit screening of clients, the sales staff immediately confirmed the details with the client in the event that a receivable was overdue, and made every effort to collect the debt.

 

68
 

 

The overall increase in our general and administrative expenses in nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 35.4% and 33.8% of our revenue for the nine months ended September 30, 2021 and 2020, respectively.

 

Research and development expenses

 

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

 

    For the Nine Months ended September 30,  
    2021     2020     Variance  
    Amount     % of     Amount     % of     Amount     % of  
                                     
Research and Development Expenses                                                
Salaries and welfare   $ 29,894       9.3 %   $ 82,994       32.3 %   $ (53,100 )     -64.0 %
Outsourcing expenses     291,963       90.7 %     173,952       67.7 %     118,011       67.8 %
Total research and development expenses   $ 321,857       100.0 %   $ 256,946       100.0 %   $ 64,911       25.3 %

 

Our research and development expenses increased by $64,911 or 25.3%, to $321,857 in the nine months ended September 30, 2021 from $256,946 in the nine months ended September 30, 2020, primarily attributable to (i) an increase in outsourcing expenses by $118,011, or 67.8%, to $291,963 in the nine months ended September 30, 2021 from $173,952 in the nine months ended September 30, 2020, as we outsourced certain development activities for more efficiency and experience; offset by (ii) a decrease in salary and welfare expenses by $53,100, or 64.0% to $29,894 in the nine months ended September 30, 2021 from $82,994 in the nine months ended September 30, 2020, as we reduced the number of research and development staffs, and focused on the core development activities which we felt competent.

 

The overall increase in our research and development expenses in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 3.8% and 3.9% of our revenue for the nine months ended September 30, 2021 and 2020, respectively.

 

Other Income (Expenses), net

 

Our other income (expenses) primarily includes interest income generated from bank deposits and loans to related-parties, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, increased by $17,559 or 146.4%, from $11,994 in the nine months ended September 30, 2020 to $29,553 in the nine months ended September 30, 2021, due to the following reason:

 

Our other expenses increased by $16,342 in the nine months ended September 30, 2021, as compared the nine months ended September 30, 2020, primarily attributable to the loss of $21,591 for foreign currency exchange transactions in the nine months ended September 30, 2021, as compared to $5,228 in the nine months ended September 30, 2020.

 

Provision for Income Taxes

 

Our provision for income taxes was $97,437 in the nine months ended September 30, 2021, an increase of $56,898, or 140.4% from $40,539 in the nine months ended September 30, 2020 due to our increased taxable income.

 

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Net Income

 

As a result of the foregoing, we reported a net income of $414,826 for the nine months ended September 30, 2021, representing a $16,511 or 4.1% increase from a net income of $398,315 for the nine months ended September 30, 2020.

 

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 September 30, 2021 and 2020. Accordingly, we recorded non-controlling interest income attributable to the non-controlling interest. The net income attributable to non-controlling interest increased $557 or 5.3% from a net income attributable to non-controlling interest of $10,555 in the nine months ended September 30, 2020 to a net income attributable to non-controlling interest of $11,112 in the nine months ended September 30, 2021.

 

Net income attributable to HeartCore Enterprises, Inc.

 

As a result of the foregoing, we reported a net income attributable to HeartCore Enterprises, Inc. of $403,714 for the nine months ended September 30, 2021, representing a $15,954 or 4.1% increase from a net income of $387,760 for the nine months ended September 30, 2020.

 

Comparison of Results of Operations for the Fiscal Years Ended December 31, 2020 and 2019

 

The following table summarizes our operating results as reflected in our statements of income during the fiscal years ended December 31, 2020 and 2019, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

    For the Years ended December 31,  
    2020     2019     Variance  
          % of           % of              
    Amount     revenue     Amount     revenue     Amount     % of  
                                     
REVENUE   $ 9,026,463       100.0 %   $ 7,208,964       100.0 %   $ 1,817,499       25.2 %
COST OF REVENUE     5,008,311       55.5 %     4,547,551       63.1 %     460,760       10.1 %
GROSS PROFIT     4,018,152       44.5 %     2,661,413       36.9 %     1,356,739       51.0 %
                                                 
Operating expenses                                                
Selling expenses     242,709       2.7 %     445,873       6.2 %     (203,164 )     -45.6 %
General and administrative expenses     3,205,689       35.5 %     3,149,711       43.7 %     55,978       1.8 %
Research and development expenses     311,049       3.4 %     332,701       4.6 %     (21,652 )     -6.5 %
Total operating expenses     3,759,447       41.6 %     3,928,285       54.5 %     (168,838 )     -4.3 %
                                                 
Income (loss) from operations     258,705       2.9 %     (1,266,872 )     -17.6 %     1,525,577       -120.4 %
                                                 
Other expenses     (31,424 )     -0.3 %     (50,212 )     -0.7 %     18,788       -37.4 %
                                                 
Income (loss) before income tax provision     227,281       2.5 %     (1,317,084 )     -18.3 %     1,544,365       -117.3 %
                                                 
Income taxes expense (benefit)     72,217       0.8 %     (56,057     -0.8 %     128,274       -228.8 %
                                                 
Net income (loss)     155,064       1.7 %     (1,261,027 )     -17.5 %     1,416,091       -112.3 %
                                                 
Less: net income (loss) attributable to non-controlling interest     4,109       0.046 %     (37,453 )     -0.5 %     41,562       -111.0 %
                                                 
NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC.   $ 150,955       1.7 %   $ (1,223,574 )     -17.0 %   $ 1,374,529       -112.3 %

 

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    For the Years ended December 31,  
    2020     2019     Variance  
          % of           % of              
    Amount    

total

revenue

    Amount    

total

revenue

    Amount     % of  
                                     
Revenue                                                
Revenue from on-premise software   $ 2,099,761       23.3 %   $ 1,815,970       25.2 %   $ 283,791       15.6 %
Revenue from maintenance and support services     3,493,316       38.7 %     3,241,145       45.0 %     252,171       7.8 %
Revenue from software as a service (“SaaS”)     484,716       5.4 %     376,111       5.2 %     108,605       28.9 %
Revenue from software development and other miscellaneous services     2,948,670       32.7 %     1,775,738       24.6 %     1,172,932       66.1 %
Total revenue     9,026,463       100.0 %     7,208,964       100.0 %     1,817,499       25.2 %
                                                 
Cost of Revenue                                                
Costs of on-premise software     1,143,099       12.7 %     1,498,769       20.8 %     (355,670 )     -23.7 %
Costs of maintenance and support services     1,336,703       14.8 %     1,326,418       18.4 %     10,285       0.8 %
Costs of software as a service (“SaaS”)     490,229       5.4 %     482,197       6.7 %     8,032       1.7 %
Costs of software development and other miscellaneous services     2,038,280       22.6 %     1,240,167       17.2 %     798,113       64.4 %
Total cost of revenue     5,008,311       55.5 %     4,547,551       63.1 %     460,760       10.1 %
                                                 
Gross Profit                                                
On-premise software     956,662       45.6 %     317,201       17.5 %     639,461       201.6 %
Maintenance and support services     2,156,613       61.7 %     1,914,727       59.1 %     241,886       12.6 %
Software as a service (“SaaS”)     (5,513 )     -1.1 %     (106,086 )     -28.2 %     100,573       -94.8 %
Software development and other miscellaneous services     910,390       30.9 %     535,571       30.2 %     374,819       70.0 %
Total gross profit   $ 4,018,152       44.5 %   $ 2,661,413       36.9 %   $ 1,356,739       51.0 %

 

Revenue

 

Our total revenues increased by $1,817,499, or 25.2%, to $9,026,463 for the year ended December 31, 2020 from $7,208,964 for the year ended December 31, 2019. The increase in our revenues was attributable to the following reasons:

 

(i) the revenues from sales of on-premise software by $283,791, or 15.6%, to $2,099,761 for the year ended December 31, 2020 from $1,815,970 for the year ended December 31, 2019. We launched new “process mining” software in 2019, and the sales increased by $208,589 in 2020, as compared to 2019, because the software was accepted by many major companies. Also, sales of CMS license increased by $153,014 from 2019 due to increased staffing and other sales structure enhancements;
(ii) our revenue from maintenance and support services increased by $252,171, or 7.8%, to $3,493,316 for the year ended December 31, 2020 from $3,241,145 for the year ended December 31, 2019. In addition to the existing CMS maintenance retention rate of 92%, the net increase in 2020 resulted in an increase of $187,840 from 2019, with an annual increase of around 6%. As process mining support is attached to the license, $42,464 is increased from 2019 due to increased license sales;

 

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(iii) our revenue from software as a service (“SaaS”) increased by $108,605, or 28.9%, to $484,716 for the year ended December 31, 2020 from $376,111 for the year ended December 31, 2019. SaaS service is a “stock-type business model”, and as a result, if there is no churn, the revenue will increase year by year. “stock-type business model” means accumulated loyal customers. In Japan, customers generally have good loyalty, and accordingly the Company assumes that it can keep the current customers in the following years. In addition, the Company assumes that it can retain new customers. Therefore, the accumulated loyal customers will increase each year, and so will the revenue in the future years;
(iv) our revenue from software development and other services increased by $1,172,932, or 66.1%, to $2,948,670 for the year ended December 31, 2020 from $1,775,738 for the year ended December 31, 2019. COVID-19 pandemic reformed work styles and the shift to “business DX” has developed rapidly, especially among major Japanese companies. As our process mining and task mining products are the most suitable products, orders for Proof of Concept (“POC”), mainly from major companies, increased significantly, alone contributing an increase of $862,329 from 2019. In addition, with the increase in CMS licenses, the accompanying development projects are also on the rise, with an increase of $245,425 over 2019. Furthermore, we also started a new business in 2020, VR360 (spatial 3D photography), which generated $102,763 in sales. “business DX” means “business digital transformation.”

 

Cost of Revenue

 

Our total costs of revenues increased by $460,760, or 10.1%, to $5,008,311 for the year ended December 31, 2020 from $4,547,551 for the year ended December 31, 2019. The increase in our costs was attributable to the following reasons: (i) the costs of software development and other miscellaneous services increased by $798,113, or 64.4%, to $2,038,280 for the year ended December 31, 2020 from $1,240,167 for the year ended December 31, 2019. As mentioned above, while the order of POC increased, the costs for developing such software increased as well. Also, while the sales of CMS licenses increased, the number of accompanying development projects increased, including some outsourcing expenses; offset by (ii) a decrease in the costs of on-premise software sold by $355,670, or 23.7%, to $1,143,099 for the year ended December 31, 2020 from $1,498,769 for the year ended December 31, 2019. We purchased certain software licenses from third parties and paid some non-refundable costs in 2019 pursuit to the purchase contacts. We recorded such costs as incurred due to the nature of not refundable.

 

Gross Profit

 

Our total gross profit increased by $1,356,739, or 51.0%, to $4,018,152 for the year ended December 31, 2020 from $2,661,413 for the year ended December 31, 2019. The increase in our gross profit was attributable to the following reasons: (i) the gross profit from sales of on-premise software increased by 639,461, or 201.6% form 317,201 for the ended December 31, 2019 to $956,662 for the year ended December 31, 2020. While the sales of on-premise software increased from 2019, the costs of software sold decreased, resulting the gross margin increased by 28.1% from 17.5% in 2019 to 45.6% in 2020; (ii) the gross profit from software development and other miscellaneous services increased by $374,819, or 70.0%, to 910,390 in the year ended December 31, 2020 from $535,571 in the year ended December 31, 2019, primally due to the increased sales of POC solution caused by the work style reform. Also, the newly introduced VR360 service contributed to the increases in gross profit as well.

 

For the reasons discussed above, our overall gross profit margin increased by 7.6% to 44.5% in the fiscal year 2020 from 36.9% in the fiscal year 2019.

 

Operating Expenses

 

The following table sets forth the breakdown of our operating expenses for the fiscal years ended December 31, 2020 and 2019:

 

    For the Years ended December 31,  
    2020     2019     Variance  
          % of           % of              
    Amount     revenue     Amount     revenue     Amount     % of  
                                     
Total revenue   $ 9,026,463       100.0 %    $ 7,208,964       100.0 %   $ 1,817,499       25.2 %
Operating expenses                                                
Selling expenses     242,709       2.7 %     445,873       6.2 %     (203,164 )     -45.6 %
General and administrative expenses     3,205,689       35.5 %     3,149,711       43.7 %     55,978       1.8 %
Research and development expenses     311,049       3.4 %     332,701       4.6 %     (21,652 )     -6.5 %
Total operating expenses   $ 3,759,447       41.6 %    $ 3,928,285       54.5 %   $ (168,838 )     -4.3 %

 

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Selling Expenses

 

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

 

    For the Years ended December 31,  
    2020     2019     Variance  
    Amount     % of     Amount     % of     Amount     % of  
                                     
Selling Expenses                                                
Advertising expenses   $ 97,944       40.4 %   $ 387,878       87.0 %   $ (289,934 )     -74.7 %
Sales commissions     141,621       58.4 %     34,271       7.7 %     107,350       313.2 %
Sales promotion expenses     3,144       1.2 %     23,724       5.3 %     (20,580 )     -86.7 %
Total selling expenses   $ 242,709       100.0 %   $ 445,873       100.0 %    $ (203,164 )     -45.6 %

 

Our selling expenses decreased by $203,164, or 45.6%, to $242,709 in the fiscal year 2020 from $445,873 in the fiscal year 2019, primarily attributable to (i) a decrease in advertising expenses by $289,934, or 74.7%, to 97,944 in the fiscal year 2020 from $387,878 in the fiscal year 2019. We postponed our exhibits and advertising activities due to COVID-19 pandemic, (ii) we increased the commission rate basing on the salesperson’s sales volume. Consequently, our sales commission increased by $107,350, or 313.2% from 34,271 in the fiscal year 2019 to $141,621 in the fiscal year 2020; (iii) because the COVID-19 pandemic caused lockdowns, quarantines, and travel bans, etc., we reduced our sales promotion activities, such as attending sales conference. Our sales promotion expenses decreased by $20,580, or 86.7%, to $3,144 in the fiscal year 2020 from $23,724 in the fiscal year 2019.

 

These above-mentioned factors combined led to the decrease in our selling expenses in the fiscal year 2020 as compared to the fiscal year 2019. As a percentage of revenues, our selling expenses accounted for 2.7% and 6.2% of our total revenue for the years ended December 31, 2020 and 2019, respectively.

 

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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, bad debt expenses, and travel and entertainment expenses.

 

    For the Years ended December 31,  
    2020     2019     Variance  
    Amount     % of     Amount     % of     Amount     % of  
                                     
General and Administrative Expenses                                                
Salaries and welfare   $ 1,985,048       61.9 %   $ 1,981,023       62.9 %   $ 4,025       0.2 %
Consulting and professional service fees     461,951       14.4 %     363,203       11.5 %     98,748       27.2 %
Depreciation expense     116,745       3.6 %     118,368       3.8 %     (1,623 )     -1.4 %
Rent expense     226,009       7.1 %     193,902       6.2 %     32,107       16.6 %
Office, utility and other expenses     355,301       11.1 %     266,954       8.4 %     88,347       33.1 %
Bad debt expense     8,684       0.3 %     50,743       1.6 %     (42,059 )     -82.9 %
Travel and entertainment expense     51,951       1.6 %     175,518       5.6 %     (123,567 )     -70.4 %
Total general and administrative expenses   $ 3,205,689       100.0 %   $ 3,149,711       100.0 %   $ 55,978       1.8 %

 

Our general and administrative expenses slightly increased by $55,978 or 1.8%, to $3,205,689 in the fiscal year 2020 from $3,149,711 in the fiscal year 2019, primarily attributable to (i) our consulting and professional fees increased by $98,748 or 27.2% in the fiscal year 2020 as compared to the fiscal year 2019, primarily due to the increase in consulting and legal fees related to reorganization of our company for going public; (ii) an increase in our rental expenses by $32,107, or 16.6%, to $226,009 in the fiscal year 2020 from $193,902 in the fiscal year 2019, because the rent increased when we renew the leases in November 2019; (iii) an increase in office, utility and other expenses by $88,347, or 33.1%, to $355,301 in the fiscal year 2020 from $266,954 in the fiscal year 2019, as we updated and replaced certain office equipment in the fiscal year 2020; offset by (iv) a decrease in travel and entertainment expenses by 123,567, or 70.4%, to $51,951 in the fiscal year ended December 31, 2020 from $175,518 in the fiscal year ended December 31, 2019. Because the COVID-19 pandemic caused lockdowns, quarantines, and travel bans, etc., we reduced our business trips; (v) a decrease in bad debt expense by $42,059 or 82.9%. We generally extend our customers a credit term of 30 days. Based on our management’s assessment of the collectability of our outstanding accounts receivable, we accrued more bad debt reserve in fiscal year 2019 than we did in fiscal year 2020, as in the current year we strengthen our credit policy and got rid of bad credit customers.

 

The overall increase in our general and administrative expenses in fiscal year 2020 as compared to fiscal year 2019 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 35.5% and 43.7% of our revenue for the fiscal years ended December 31, 2020 and 2019, respectively.

 

Research and development expenses

 

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

 

    For the Years ended December 31,  
    2020     2019     Variance  
    Amount     % of     Amount     % of     Amount     % of  
                                     
Research and Development Expenses                                                
Salaries and welfare   $ 50,164       16.1 %   $ 151,089       45.4 %   $ (100,925 )     -66.8 %
Outsourcing expenses     260,885       83.9 %     181,612       54.6 %     79,273       43.6 %
Total research and development expenses   $ 311,049       100.0 %    $ 332,701       100.0 %   (21,652 )     -6.5 %

 

Our research and development expenses decreased by $21,652, or 6.5%, to $311,049 in the year ended December 31, 2020 from $332,701 in the year ended December 31, 2019, primarily attributable to (i) a decrease in salary and welfare expenses by $100,925, or 66.8% to $50,164 in the year ended December 31, 2020 from $151,089 in the year ended December 31, 2019, as we reduced the number of research and development staffs, and focused on the core development activities which we felt competent; offset by (ii) an increase in outsourcing expenses by $79,273, or 43.6%, to $260,885 in the fiscal year ended December 31, 2020 from $181,612 in the fiscal year ended December 31, 2019, as we outsourced certain development activities for more efficiency and experience.

 

The overall decrease in our research and development expenses in fiscal year 2020 as compared to fiscal year 2019 reflected that we began the development of CXM cloud system in 2019, and completed the development in early 2020. As a percentage of revenues, research and development expenses were 3.4% and 4.6% of our revenue for the fiscal years ended December 31, 2020 and 2019, respectively.

 

Other Income (Expenses), net

 

Our other income (expenses) primarily includes interest income generated from bank deposits, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, decreased by $18,788 or 37.4%, from $50,212 in the fiscal year 2019 to $31,424 in the fiscal year 2020, due to the following reasons:

 

Interest income increased by $3,699 from $12 in fiscal year 2019 to $3,711 in the fiscal year 2020. The increase in our interest income was affected by the average balance of our bank deposit increased from $665,689 in the fiscal year ended December 31, 2019 to $1,795,655 in the fiscal year ended December 31, 2020. As of December 31, 2020, we carried a total of JPY 315,604,058 (approximately $3.06 million) outstanding bank deposit for working capital purpose.

 

Interest expenses increased slightly by $1,510, or 3.1%, from 48,689 for the fiscal year ended December 31, 2019 to $50,199 for the fiscal year ended December 31, 2020, primarily due to the increased interest expenses in bonds.

 

Provision for Income Taxes

 

Our provision for income taxes was $72,217 in the fiscal year 2020, an increase of $128,274, or 228.8% from an income tax benefit of $56,057 in fiscal year 2019 due to our increased taxable income.

 

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Net Income (Loss) 

 

As a result of the foregoing, we reported a net income of $155,064 for the fiscal year ended December 31, 2020, representing a $1,416,091 or 112.3% increase from a net loss of $1,261,027 for the fiscal year ended December 31, 2019.

 

Net income (loss) attributable to non-controlling interest

 

We own 97.35% and 97.03% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of December 31, 2020 and 2019, respectively. Accordingly, we recorded non-controlling interest income attributable to the non-controlling interest. The net income attributable to non-controlling interest increased $41,562 or 111.0% from a net loss attributable to non-controlling interest of $37,453 in the fiscal year 2019 to a net income attributable to non-controlling interest of $4,109 in the fiscal year 2020.

 

Net income attributable to HeartCore Enterprises, Inc.

 

As a result of the foregoing, we reported a net income attributable to HeartCore Enterprises, Inc. of $150,955 for the fiscal year ended December 31, 2020, representing a $1,374,529 or 112.3% increase from a net loss of $1,223,574 for the fiscal year ended December 31, 2019.

 

Liquidity and Capital Resources

 

As of September 30, 2021, we had $3,090,782 in cash as compared to $3,058,175 as of December 31, 2020. We also had $1,271,434 in accounts receivable as of September 30, 2021. Our accounts receivable primarily include balance due from customers for our on-premise software sold and services provided and accepted by customers.

 

As of September 30, 2021, our working capital deficit was $83,688. In assessing our liquidity, management monitors and analyzes our cash, our ability to generate sufficient revenue in the future, and our operating and capital expenditure commitments. We believe that our current cash and cash flows provided by operating activities will be sufficient to meet our working capital needs in the next 12 months from the date the audited financial statements were issued.

 

In the coming years, we will be looking for other sources, such as raising additional capital by issuing shares of stock, to meet our needs for cash. Even though we face uncertainties in regards to the size and timing of capital-raising, we are confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities and shareholder working capital funding, as necessary.

 

Cash Flows for the Nine Months Ended September 30, 2021 and 2020

 

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

 

    For the Nine Months Ended
September 30,
 
    2021     2020  
Net cash provided by operating activities   $ 1,239,250     $ 691,626  
Net cash used in investing activities     (151,065 )     (312,458 )
Net cash provided by (used in) financing activities     (816,155 )     1,241,433  
Effect of exchange rate changes     (239,423 )     43,874  
Net increase in cash and cash equivalents     32,607       1,664,475  
Cash and cash equivalents, beginning of the period     3,058,175       535,287  
Cash and cash equivalents, end of the period   $ 3,090,782     $ 2,199,762  

 

Operating Activities

 

Net cash provided by operating activities was $1,239,250 for the nine months ended September 30, 2021, primarily consisting of the following:

 

  Net income of $414,826 for the fiscal year.
  An increase in accounts receivable of $634,711. 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 $177,880, primarily due to the increase in the deferred listing expenses.
  An increased in accounts payable and accrued expense of $684,960, primarily attributable to the increase in the license fees payable to software venders.
  A decrease of operating lease liabilities of 265,984, primarily due to the rent payments made in the period.
  An increase in advance from customers of $639,643. We request upfront payment for service provided over a period of time. The deferred revenue increased as the sales increased.

 

Net cash used in operating activities was $691,626 for the nine months ended September 30, 2020, primarily consisting of the following:

 

  Net income of $398,315 for the fiscal year.
  A decrease in accounts receivable of $84,365. The decrease was primarily due to our effort to strengthen our credit policy and drop bad credit customers in the nine months ended September 30, 2020. 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 $131,553, primarily due to the increase in the prepayments to software venders.
  An increased in accounts payable and accrued expense of $117,035, primarily attributable to the increase in the license fees payable to software venders.
  A decrease of operating lease liabilities of 263,016, primarily due to the rent payments made in the period.
  An increase in advance from customers of $176,357. We request upfront payment for service provided over a period of time. The deferred revenue increased as the sales increased.

 

Investing Activities

 

Net cash used in investing activities amounted to $151,065 for the nine months ended September 30, 2021, and primarily included the purchase of fixed assets of $24,675, and the loans provided to related parties of $126,390.

 

Net cash used in investing activities amounted to $312,458 for the nine months ended September 30, 2020, and primarily included the purchase of fixed assets of $16,497, and the loans provided to related parties of $281,909.

 

Financing Activities

 

Net cash used in financing activities amounted to $816,155 for the nine months ended September 30, 2021, primarily consisting of repayment of long-term debts of $770,181 and payments for finance leases of $42,941.

 

Net cash provided by financing activities amounted to $1,241,433 for the nine months ended September 30, 2020, primarily consisting of proceeds from issuance of common shares of $932,278 and proceeds from long-term debts of $929,887, offset by repayment of long-term debts of $573,656 and payments for finance leases of $42,797.

 

Cash Flows for the Years Ended December 31, 2020 and 2019

 

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

 

    For the Years Ended
December 31,
 
    2020     2019  
Net cash provided by (used in) operating activities   $ 745,748     $ (685,803 )
Net cash used in investing activities     (401,150 )     (464,024 )
Net cash provided by financing activities     2,063,166       875,714  
Effect of exchange rate changes     115,124       11,446  
Net increase (decrease) in cash and cash equivalents     2,522,888       (262,667 )

Cash and cash equivalents, beginning of the year

    535,287       797,954  

Cash and cash equivalents, end of the year

  $ 3,058,175     $ 535,287  

 

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Operating Activities

 

Net cash provided by operating activities was $745,748 for the year ended December 31, 2020, primarily consisting of the following:

 

  Net income of $155,064 for the fiscal year.
  A decrease in accounts receivable of $237,574. The decrease was primarily due to our effort to strengthen our credit policy and get rid of bad credit customers in the current fiscal year. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.
  Depreciation expenses of $114,467.
  An increase in advance from customers of $163,188. We request upfront payment for service provided over a period of time. The deferred revenue increased as the sales increased.

 

Net cash used in operating activities was $685,803 for the year ended December 31, 2019, primarily consisting of the following:

 

  Net loss of $1,261,027 for the fiscal year.
  A decrease in accounts receivable of $144,998. The decrease was primarily due to our effort to strengthen our credit policy and get rid of bad credit customers in the current fiscal year. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary.
  Depreciation expenses of $124,414.
  A decrease in prepaid expenses of $193,674, primarily due to the decrease in the prepayments to the software venders;
  An increase in accrued payroll and other employee costs of $143,419, as the relevant expenses increased from the prior year.

 

Investing Activities

 

Net cash used in investing activities amounted to $401,150 for the year ended December 31, 2020, and primarily included the purchase of fixed assets of $27,170, and the loans provided to related parties of $359,928.

 

Net cash used in investing activities amounted to $464,024 for the year ended December 31, 2019, and primarily included the purchase of fixed assets of $30,822, and the loans provided to related parties of $405,684.

 

Financing Activities

 

Net cash provided by financing activities amounted to $2,063,166 for the fiscal year ended December 31, 2020, primarily consisting of proceeds from issuance of common shares of $932,278 and proceeds from long-term debts of $1,873,536, offset by repayment of long-term debts of $678,604 and repayment of finance lease obligations (principal) of $52,520.

 

Net cash provided by financing activities amounted to $875,714 for the fiscal year ended December 31, 2019, primarily consisting of proceeds from issuance of common shares of $456,736 and proceeds from long-term debts of $988,264, offset by repayment of long-term debts of $510,338 and repayment of finance lease obligations (principal) of $49,613.

 

Private Placement 

 

During the period from October 27, 2021 through December 31, 2021, the Company issued 304,000 shares of common stock at a purchase price of $2.50 per share (for an aggregate of $760,000 of proceeds) to accredited investors in a private placement under Rule 506(b) of Regulation D of the Securities Act.

 

Option Awards

 

On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to our 2021 Equity Incentive Plan 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 stock, subject to the terms and conditions of the 2021 Equity Incentive Plan and the option award agreements pursuant to which the options were awarded.

 

Contractual obligations

 

Lease commitment

 

The Company’s subsidiary, HeartCore Co., Ltd. entered into two leases for its office space and parking lot, which were classified as operating leases. HeartCore Co., Ltd. also entered into two leases for office equipment and a lease for a vehicle, and these leases were classified as finance leases.

 

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As of September 30, 2021, future minimum lease payments under the non-cancelable lease agreements are as follows:

 

Year ending December 31,   Finance lease     Operating lease  
Remaining of 2021   $ 13,474     $ 92,919  
2022     40,523       371,677  
2023     22,847       371,677  
2024     336       371,677  
2025     -       371,677  
Thereafter     -       2,273,695  
Total lease payments     77,180       3,853,322  
Less: imputed interest     (2,980 )     (259,416 )
Total lease liabilities     74,200       3,593,906  
Less: current portion     45,223       342,258  
Non-current lease liabilities   $ 28,977     $ 3,251,648  

 

Long Term Debt

 

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

 

As of September 30, 2021, future minimum loan payments are as follows:

 

Year ending December 31,   Loan  
    Payment  
Remaining of 2021   $ 124,154  
2022     881,092  
2023     746,956  
2024     428,818  
2025     269,866  
Thereafter     484,718  
Total   $ 2,935,604  

 

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COVID-19

 

In December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The pandemic, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours.

 

For example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions, closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. In March 2020, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all HeartCore Co employees were required to work from home for several months during the height of the pandemic. We cancelled or shifted our customer and industry events to virtual-only experiences. Although we have begun to slowly re-open our offices on a staggered, region-by-region basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. All of these changes may disrupt the way we operate our business. In addition, our management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic and seeking to minimize the risk of the virus and manage its effects on our business and workforce.

 

Although we were recently formed, our wholly owned operating subsidiary, HeartCore Co, has been operating through the pandemic. The operations of HeartCore Co have been impacted by a range of external factors related to the pandemic that are not within our control. As for existing customers, the pandemic has not affected their use our software. As for new customers in the travel, hotel, airline, railroad, and restaurant industry for the CX division, the pandemic has resulted in a reduction in new orders. However, as for new customers in the retail and finance industry for the CX division, orders have increased despite the pandemic, resulting in an overall increase in sales for the CX division of $1,908,847 for the nine months ended September 30, 2021 as compared to nine months ended September 30, 2020. As for the impact of the pandemic on the DX division, large companies were forced to change the way they operate, as employees were forced to work remotely, which increased the demand for our DX software, but due to the delay in the sales cycle by the pandemic, realization of sales were delayed resulting in reduction of sales of $(127,323), respectively, for the nine months ended September 30, 2021 as compared to nine months ended September 30, 2020.

 

The duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

 

To the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section, including, in particular, risks related to our dependence on customer renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions may harm our industry, business and results of operations.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements as of September 30, 2021 and 2020.

 

Critical Accounting Policies and Estimates 

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with 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. The most significant estimates and assumptions include the valuation of accounts receivable, advances to suppliers, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, and revenue recognition. We continue to evaluate these 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 in this prospectus reflect the more significant judgments and estimates used in preparation of our consolidated financial statements.

 

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The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:

 

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.

 

Accounts Receivable

 

Accounts receivable, net represent the amounts that the Company has an unconditional right to consideration, which are stated at the original amount less an allowance for doubtful receivables. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. The Company usually determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Delinquent account balances are written off against the allowance for doubtful accounts after management has determined that the likelihood of collection is remote. In circumstances in which the Company receives payment for accounts receivable that have previously been written off, the Company reverses the allowance and bad debt.

 

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.

 

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Lease-Lessee

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which is effective for annual reporting periods (including interim periods) beginning after December 15, 2018, and early adoption is permitted. The Company adopted the Topic 842 on January 1, 2019 using a modified retrospective approach. The Company elected the package of practical expedients permitted under the transition guidance, which allows the Company to carry forward the historical lease classification, the assessment whether a contract is or contains a lease and initial direct costs for any leases that exist prior to adoption of the new standard. The primary impact of the adoption is the initial recognition of approximately $4.7 million of lease liabilities and approximately $4.6 million of right-of-use assets on the Company’s consolidated balance sheet as of January 1, 2019, for leases classified as operating leases under Topic 840, as well as enhanced disclosure of the Company’s leasing arrangements. There is no cumulative effect to retained earnings or other components of equity recognized as of January 1, 2019.

 

The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. Lease terms of certain operating leases include the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain.

 

The Company leases office facilities, which are classified as operating leases and leases office equipment and furniture, and a vehicle, which are classified as a finance lease in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current, and operating lease liabilities, non-current, and finance leases are included in property and equipment, finance lease liabilities, current, and finance lease liabilities, non-current in the consolidated balance sheet.

 

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

 

The Company has elected the short-term lease exception, and therefore operating lease right-of-use assets and liabilities do not include leases with a lease term of twelve months or less.

 

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.

 

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$”), and the accompanying consolidated financial statements have been expressed in US$. 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 loss within the statements of changes shareholders’ deficit.

 

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Revenue Recognition

 

The Company recognize revenue under ASC 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 8% before October 1, 2019, and 10% afterwards 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 price (“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 1 to 3 years 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 recognized 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.

 

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. 

 

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 statement 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.

 

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CORPORATE HISTORY AND STRUCTURE

 

Overview

 

We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our 97.5%-owned subsidiary, HeartCore Co, a Japanese corporation, which was established in Japan by Sumitaka Yamamoto in 2009.

 

Share Exchange Agreement

 

On July 16, 2021, pursuant to the terms of a share exchange agreement among the Company, HeartCore Co, the shareholders of HeartCore Co (excluding Dentsu Digital Investment Limited) and Sumitaka Yamamoto, as the representative of the shareholders of HeartCore Co, we issued 15,999,994 shares of our common stock to the shareholders of HeartCore Co. in exchange for 10,706 shares HeartCore Co’s common stock, representing 97.5% of the issued and outstanding capital stock of HeartCore Co. As a result of this transaction, HeartCore Co became our 97.5%-owned subsidiary and the former shareholders of HeartCore Co became the owners of 100% of our outstanding common stock as of July 16, 2021.

 

Memorandum to Share Exchange Agreement - Information Services International-Dentsu Ltd.

 

On July 15, 2021, the Company, HeartCore Co and Mr. Yamamoto entered into a memorandum regarding share exchange agreement (the “Memorandum”) with Information Services International-Dentsu Ltd. (“ISI-Dentsu”), a shareholder of HeartCore Co, which became a stockholder of the Company pursuant to the share exchange agreement.

 

Pursuant to the Memorandum, the parties agreed on certain matters related to the operations of the Company and HeartCore Co, which would remain in place until the earlier of (1) the parties unanimous agreement to terminate the Memorandum; (2) if Dentsu ceases to be a stockholder of the Company; (3) if an application by the Company for the listing of its shares is approved by Nasdaq; or (4) upon the effectiveness of a registration statement filed by the Company under the Securities Act for an initial public offering of its stock (which will be satisfied when the registration statement of which this prospectus forms a part is declared effective by the SEC). Therefore, the Memorandum will not be in effect at the time of the closing of this offering.

 

Pursuant to the Memorandum, the Company and HeartCore Co agreed to give advance notice to Dentsu when decisions are made with respect to any of the following matters pertaining to the Company or HeartCore Co:

 

●           Changes to the certificate of incorporation or articles of incorporation, limited to the creation of class shares, changes in the features of common shares as class shares, establishment of or changes in share units, and other changes that may affect the position of common shareholders;

●           Dissolution, a petition for commencement of bankruptcy proceedings, civil rehabilitation proceedings or corporate reorganization proceedings filed by the Company, HeartCore Co or its directors;

●           Approval of demand for sale of the shares by Mr. Yamamoto;

●           Loans, capital investment or other investments;

●           Issuance of new shares, stock options, convertible bonds or debentures;

●           Capital reduction;

●           Acquisition, disposition or cancellation of treasury shares, acquisition, disposition or cancellation of treasury stock acquisition rights, or redemption, purchase, cancellation or acquisition of options or other rights;

●           Stock split or reverse stock split;

●           Merger, company split, share exchange, share transfer or share delivery;

●           Transfer, acquisition, suspension or abolition of all or a part of a business, consolidation of branch offices or commencement of new business;

●           Significant business alliances or their dissolution;

●           Approval of transfer of shares of the Company or HeartCore Co (including sales by the Company of HeartCore Co’s shares);

●           Acquisition or disposition of shares of any related party of the Company or HeartCore Co;

 

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●           Appointment and dismissal of directors, executive officers, auditors, managers and other important employees;

●           Any transaction between HeartCore Co and its director which requires approval by the board of directors under the Japanese Companies Act and any equivalent transaction between the Company and its director;

●           Execution or change of important contracts or other legally significant juridical acts;

●           Establishment of subsidiaries and affiliates; and

●           Any change of business plan.

 

Pursuant to the Memorandum, to the extent not in conflict with the laws of the United States or the State of Delaware or the rules and regulations of any securities exchange or securities market on which the Company’s securities are traded or listed for trading, Mr. Yamamoto agreed to notify Dentsu in advance when making a decision on the following matters pertaining to Mr. Yamamoto:

 

●           A petition for bankruptcy or commencement of civil rehabilitation proceedings filed by Mr. Yamamoto himself;

●           Transfer or acquisition of shares of HeartCore Co or its related parties;

●           Loans, debt guarantees or collateral;

●           The filing of a lawsuit, settlement or conclusion of a suit not based on a judicial decision by Mr. Yamamoto pertaining to a claim on property rights;

●           Conclusion or change of important contracts or other important juridical act; and

●           Offering of the shares held by Mr. Yamamoto in this offering.

 

To the extent not in conflict with the laws of the United States or the State of Delaware or the rules and regulations of any securities exchange or securities market on which the Company’s securities are traded or listed for trading, and provided that legal counsel to the Company does not advise the Company that any such notification is inadvisable due to such information being material non-public information or due to such disclosure being a breach of the fiduciary duties of the officers or Directors of the Company, the Company or HeartCore Co also agreed to provide to Dentsu a summary of the following matters pertaining to the Company or HeartCore Co:

 

●           Damage arising from disasters or operations;

●           Filing of a lawsuit by a third party which may affect its financial condition, or becoming subject to a judgment, or any order or award equivalent thereto which may affect its financial condition;

●           Petition for an injunction of the business or a provisional disposition order equivalent thereto, or conclusion of legal proceedings not based on an order or a judgement by the court;

●           Revocation of license, suspension of business or other equivalent dispositions by an administrative agency based on laws and regulations, or accusation by an administrative agency for violation of the laws;

●           Merger or other reorganization involving the Company, HeartCore Co, or any of their related parties;

●           Filing of a petition for commencement of bankruptcy proceedings, commencement of civil rehabilitation proceedings, commencement of corporate reorganization proceedings, commencement of special liquidation or enforcement of the corporate security interest by a third party, suspension of payments or dishonor of bills or checks with regard to HeartCore Co or the Company;

●           Commencement of bankruptcy proceedings, commencement of civil rehabilitation proceedings, commencement of corporate reorganization proceedings, commencement of special liquidation or petition for exercise of corporate security interest, suspension of payments or dishonor of bills or checks pertaining to the Company, HeartCore Co or any of its related parties;

●           Suspension of transactions with material customers, suppliers, distributors, agents, or other business partners;

●           The occurrence of risk of default by an obligor of the Company or HeartCore Co, or a principal obligor of a guarantee obligation of which the Company or HeartCore Co is a guarantor;

●           Cancellation of debts by creditors, reduction or extension of interest or assumption or repayment of debts by third parties;

 

In addition, to the extent permitted by applicable law, and provided that legal counsel to the Company does not advise the Company that any such notification is inadvisable due to such information being material non-public information or due to such disclosure being a breach of the fiduciary duties of the officers or Directors of the Company, if Sumitaka Yamamoto becomes aware of the occurrence of the following matters pertaining to himself and other matters that are important in terms of credit status, etc., he agreed to immediately report in writing the summary of the following matters that occurred to the investors:

 

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●           Filing of a lawsuit by a third party which may affect the financial condition of Mr. Yamamoto, or becoming subject to a judgement or any order or award equivalent thereto which may affect the financial condition of Mr. Yamamoto;

●           Petition for commencement of bankruptcy or civil rehabilitation proceedings, suspension of payment or dishonor of bill or check by a third party;

 

Pursuant to the Memorandum, Dentsu has the right to demand that Mr. Yamamoto purchase all or part of the shares held by it (including any other option rights to acquire shares), in the event that the Company, HeartCore Co or Mr. Yamamoto breaches any of its obligations under the Memorandum and fails to remedy such breach within 30 days, if the representations and warranties in the Memorandum are not true or accurate, or where it is subsequently found that the preconditions for the execution of the Memorandum were not been satisfied. Mr. Yamamoto may cause a third party to acquire such shares with the approval of Dentsu.

 

The per share-transfer price for the shares in this case shall be the purchase price paid by Dentsu for the acquisition of shares of HeartCore Co, subject to appropriate adjustments for stock splits, stock consolidations, and similar events involving the shares. In the event any withholding tax is imposed upon the transfer price of the shares the amount equivalent to such withholding tax will be borne by the purchaser and the purchaser is required to pay Dentsu the entire amount of the transfer amount so that the amount Dentsu receives after withholding is the transfer price set forth in the Memorandum.

 

The Company and HeartCore Co also agreed to hold regular business briefings at least once a quarter and to provide Dentsu with reports on the business execution of the Company and HeartCore Co and monthly trial balances of the Company and HeartCore Co (including balance sheets, profit and loss statements, and cash flow statements).

 

Mr. Yamamoto agreed that if he wished to transfer all or part of the shares of the Company that he held to a third party, he will notify Dentsu at least 40 business days prior to the scheduled date of payment of the transfer price of such shares, providing the details regarding the proposed sale. Dentsu then has the right to participate in the transfer under the same terms and conditions and to transfer all of the shares held by Dentsu to the buyer in the proposed transaction. If Dentsu makes such an election, Mr. Yamamoto agreed to negotiate with the buyer and take all necessary measures to transfer the shares that Dentsu desires to transfer.

 

The Memorandum also provides that in the event that Mr. Yamamoto voluntary resigns as a director of the Company or HeartCore Co or his term of office expires, the Company or HeartCore Co shall immediately add another person who shall be concurrently responsible for the obligations incurred by Mr. Yamamoto in connection with the Memorandum, upon approval of Dentsu.

 

The Memorandum contains customary representations and warranties by Mr. Yamamoto relating to the Company and HeartCore Co and customary confidentiality, indemnification and other miscellaneous provisions. The Memorandum is governed by and construed in accordance with the laws of Japan.

 

Stock Purchase Agreement – Dentsu Digital Investment Limited

 

On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”)”) entered into a Stock Purchase Agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Co from Dentsu Digital in accordance with certain terms and conditions in the Stock Purchase Agreement. In accordance with the terms of the Stock Purchase Agreement, the Company shall purchase the 278 shares of HeartCore Co from Dentsu Digital for Fifty Million Forty Thousand Japanese Yen (JP¥50,040,000) (US$434,008 as of January 3, 2022) 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 stock, filed by the Company with the SEC or (ii) December 20, 2022.

 

Historical Common Equity Transactions

 

On May 18, 2021, we issued five (5) shares of common stock to Sumitaka Yamamoto, Chief Executive Officer of the Company, for $1.00 per share for a total subscription of $5.00.

 

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On July 16, 2021, pursuant to the terms of a share exchange agreement among the Company, HeartCore Co, the shareholders of HeartCore Co (excluding Dentsu Digital Investment Limited) and Sumitaka Yamamoto, as the representative of the shareholders of HeartCore Co, we issued 15,999,994 shares of our common stock to the shareholders of HeartCore Co. in exchange for 10,706 shares HeartCore Co’s common stock, representing 97.5% of the issued and outstanding capital stock of HeartCore Co.

 

On November 3, 2021, the Company redeemed 484,056 shares of common stock held by Sumitaka Yamamoto, Chief Executive Officer of the Company, for $1.00.

 

During the period from October 27, 2021 through December 31, 2021, the Company issued 304,000 shares of common stock at a purchase price of $2.50 per share (for an aggregate of $760,000 of proceeds) to accredited investors in a private placement under Rule 506(b) of Regulation D of the Securities Act.

 

On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to our 2021 Equity Incentive Plan 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 stock, subject to the terms and conditions of the 2021 Equity Incentive Plan and the option award agreements pursuant to which the options were awarded.

 

The above issuances/sales were made pursuant to an exemption from registration as set forth in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.

 

Corporate Structure

 

The following chart depicts our organization structure before and after completion of this offering (assuming the full exercise of the underwriters’ over-allotment option).

 

 

 

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DESCRIPTION OF BUSINESS 

 

 

 

 

 

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 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 September 30, 2021, our sales and marketing organization was comprised of 14 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 September 30, 2021, our combined business units (customer experience management business unit and digital transformation business unit) had 819 total customers in Japan, of which 561, or 68.5%, were paying customers and 23 total customers outside Japan, of which one, or 4.3%, was a paying customer. Our 281 non-paying non-paying customers were originally paying customers that utilized our paid services but now use a free version of the CXM Platform. There is the potential for non-paying customers to become paying customers again if and when they start utilizing our paid services again.

 

Industry Overview

 

Customer Experience Management Business

 

Companies must manage a huge amount of content, collaborate with other kinds of business processes, and build infrastructure to fulfill customers’ needs. To make it happen, companies need a content management system that allows easy implementation of a wide range of features including content creation, analysis, search capability and access controls into their websites, and enables them to deliver and receive content at the best time responding market changes. A customer experience management system is also becoming essential for companies to manage customers and deliver personalized content based on the users’ behavior, device, location and context. A customer experience management system is also required to analyze big data to deliver even the subconscious wants and needs of customers. Furthermore, these capabilities are not supposed to be limited to general websites but also to various kinds of services such as E-commerce, smartphone sites, smartphone apps, social networking services, blogs, and digital signage. Content management systems and customer experience management systems need to provide rich features to fill the new generation of customers’ needs.

 

Digital Transformation Business

 

RPA is a technology that allows automation for a defined set of tasks. RPA robots can emulate most human-computer interactions to carry out error-free tasks at high volume and speed. Some common tasks RPA can do include: (i) invoice processing; (ii) process sales orders; (iii) account reconciliation; (iv) enterprise resource planning data entry for core processes such as finance, human resources, manufacturing, supply chain, services, and procurement; (v) employee onboarding; (vi) payroll; and (vii) data queries.

 

As companies have strived to automate, it has become more and more challenging to identify RPA opportunities. This has included uncovering processes that would be good candidates for automation and having fundamental metrics about those processes (via task mining and process mining technology) at their disposal – like utilization and the specific steps in the process if it is not already documented – to aid them in their decision.

 

Task mining is a technology that enables organizations to discover, understand, and analyze the tasks employees perform as they relate to completing larger processes. Task mining software works by monitoring the actions users take. A recorder is installed on an employee’s computer to capture their interactions in the different applications they use, recording data like keystrokes, clicks, data entry, etc., to uncover how tasks are completed within the organization. The purpose of using task mining software is to discover and understand the tasks employees are performing. The ultimate objective is to find ways to improve how those tasks are carried out or automate them to increase operational efficiency, reduce errors, and improve employee engagement.

 

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Process mining is a technology that investigates the mountains of data in enterprise event logs to discover and present end-to-end processes that the organization is performing to complete work. Event logs are essentially banks of data that store different information. The benefit of process mining software is that it presents the process it successfully mined, along with the process’ variants and suggestions on how to optimize and improve that process. Like task mining, the most common use case for adopting process mining technology is to improve processes, with the ideal goal of automating them for all the benefits and returns that come with automation, like improved customer and employee experiences.

 

Industry Characteristics

 

Explosive Growth of Cloud-Based Applications Creating a New Era of IT Complexity. Businesses around the world are spending hundreds of billions of dollars to adopt applications that help advance digital transformation and drive competitive advantages. With the proliferation of cloud technologies and SaaS, traditional software suites have been disaggregated into point solutions. For example, human capital management software has been segregated across recruiting, payroll, benefits administration, and other key business functions. As a result, enterprises have transitioned from managing a handful of multi-purpose, largely on-premises applications to managing hundreds and even thousands of specialized point solutions deployed across on-premises, cloud, and hybrid environments. According to the Wall Street Journal, in 2019 the number of software applications deployed by large firms across all industries worldwide had increased by approximately 70% over the previous four years. These applications, which were generally not designed for interoperability, run in tandem with long-running, legacy technologies. The increasing volume of applications has a compounding effect on the complexity of business processes and the IT environments that support them.

 

The Benefits of Digital Transformation Have Yet to Make Their Way to the Workforce. Modern enterprise applications enable deep and nuanced functionalities, such as conducting personalized marketing campaigns, predictive service delivery, and real time visibility of goods movement across the supply chain. However, despite massive functional advancement, the true promise and potential of digital transformation—reallocating human capital towards cognitive, higher-value activities—remains elusive, which is limiting improvements in productivity. For example, in the United States, non-farm real output per hour grew 31% during the decade ended December 31, 2009, but only 13% in the subsequent decade ended December 31, 2019.

 

Individual Business Processes Rely on Multiple Business Applications, and Workers to Orchestrate Them. While specialized applications deliver extensive functionality, they do not account for the full spectrum of how work gets done. The proliferation of specialized applications has resulted in humans being the connective tissue in an enterprise, working across a wide range of applications that individually are not built to address the needs of the actual processes they are supporting. As a result, activities performed by many workers today are still manual, mundane, and administrative tasks, limiting workers from focusing on higher-value activities that can directly improve business performance.

 

Automation is the New Frontier of Competitive Differentiation. Enterprises are demanding a new approach to unify, tailor, and run applications without significant IT resources or changes to existing infrastructure. Automation enables organizations to design and optimize business processes to improve productivity and business performance. Additionally, automation solutions that can accurately and consistently emulate human behavior can work within existing business processes in a way that traditional applications cannot. This allows businesses to harness the power of specialized applications in a differentiated manner. With the ability to emulate human behavior, this new approach to automation is disrupting traditional automation and transforming data-processing work by allowing customers to find efficiencies without materially changing business processes and supporting infrastructure.

 

Empowering Workers to Automate their Personal Workflows is Leading to a Democratization of Automation. The emerging workforce is graduating with increasingly advanced technical skills and training in automation. Individuals are entering the workforce with higher expectations related to job impact, satisfaction, and efficiency, and view software as a driving force in realizing those expectations. As a result, organizations are looking to empower workers with tools to optimize the more tedious parts of their jobs. The combination of technology that can emulate human behavior and a workforce with the knowledge and tools to create their own automations has enabled enterprises to begin to automate a significant number of use cases, from individual tasks to enterprise-wide processes.

 

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Cost of Skilled Human Capital is Accelerating the Evolution Towards the Fully Automated Enterprise. The cost of skilled human capital continues to rise due to growing demand. We believe it is increasingly imperative for enterprises to leverage automation to liberate workers from menial, repetitive, and less productive tasks and to better utilize the positive qualities that only humans have, such as abstract thinking, making connections, dealing with ambiguity, creativity, innovation, passion, and community engagement. We believe this will drive business value and greater employee engagement. According to a 2020 Gallup study, business units with highly engaged employees are more present and productive; more attuned to the needs of customers; and more observant of processes, standards, and systems. When taken together, the behaviors of highly engaged business units result in 21% greater profitability.

 

Limitations of Existing Offerings

 

A number of technology companies have attempted to address the automation needs of organizations through the application of business process management, application development software offerings, RPA tools, and AI point offerings, as well as other horizontal software applications. However, these existing offerings are challenged by a number of inherent limitations, including:

 

Lack of An End-to-End Software. Many existing automation software offerings are point technologies and cannot offer end-to-end automation capabilities on an integrated software.

 

Not Capable of Emulating Human Behavior, Relying too Heavily on APIs. Many existing offerings do not effectively integrate AI computer vision and machine learning (“ML”) capabilities needed to accurately identify and emulate human actions in conjunction with APIs. Without these capabilities, organizations are limited to pursuing automation only within the narrow pathways permitted by existing APIs. Even when applications have an API, the functionality provided often does not fully capture what is required to conduct the business process. As the scope of a task or process expands from a single, discrete action to a sequence of multiple steps and sub-processes, the limitation in scope and complexity of supported API actions becomes more of an impediment to fully emulating the process. This frequently prevents this work from being truly automated solely through APIs alone. Bringing APIs together with an emulative approach made possible by AI computer vision and machine learning greatly expands the use cases for automation.

 

Inability to Automate Across Applications. While business processes typically involve multiple applications, many existing automation capabilities are built into specific applications and are limited in their ability to automate business processes across multiple applications. Accordingly, we believe enterprises build inefficient business processes to compensate for limited cross-functional automation capabilities.

 

Difficult to Link AI Capabilities to Execution. AI and ML (“AI/ML”) capabilities are needed to automate cognitive, high-value tasks. In recent years, enterprises have made significant investments in developing AI/ML models. However, it is difficult to leverage these models as the environments for developing them, typically used by data scientists, are distinct from the environments where processes are carried out, typically by employees using enterprise applications. This separation of environments limits the ability of an organization to deploy models that are necessary to automate complex processes.

 

Need to Change an Enterprise’s Underlying Infrastructure. Existing offerings generally are unable to emulate the human’s role in executing a business process, requiring organizations to make significant changes either to their applications and infrastructure or to the business processes themselves. The costs associated with changing underlying infrastructure and business processes make it uneconomical to automate anything outside of narrowly defined, high-volume tasks.

 

Unable to Realize Full Value of Automation Throughout an Organization. Existing solutions do not typically make automations accessible to everyone within the organization as they are often built with non-intuitive user interfaces and code heavy technology stacks. These solutions are too technical for most knowledge workers, limiting their application to a small number of use cases and users with significant developer experience. Existing solutions also frequently require additional time and resources to enable the resulting automation to be used by non-technical workers or to adapt the automation to nonstandard circumstances and environments.

 

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Lack Governance Capabilities at Scale. Existing offerings do not typically offer centralized, secure governance capabilities to enforce, manage, and deploy organizational development standards.

 

Difficult to Deploy. We believe existing automation solutions generally require complicated, invasive implementation processes that, in turn, require extensive upfront and ongoing training and time commitment. This makes it difficult to build and maintain automations, resulting in the persistence of manual processes throughout enterprises.

 

Lack of Openness and Interoperability. Many existing solutions are not modular and lack the ability to integrate new, third-party technologies and operate with customized applications. Enterprises using these solutions are locked into a limited set of proprietary options not built for the future.

 

Lack of an Engaged Community of Automation Developers. Many existing automation vendors do not have open software and have not invested the time and resources required to cultivate a vibrant ecosystem of automation developers that freely exchange innovations and best practices.

 

Addressable Market

 

Our software addresses the market for intelligent process automation, which, in February 2021, International Data Corporation estimates to grow at a five-year compound annual growth rate of approximately 18.4% to $37.9 billion by the end of 2024. However, we believe that this does not fully encompass the opportunity associated with our vision of the fully automated enterprise.

 

According to an estimate by Bain & Company in the report Beyond Cost Savings: Reinventing Business Through Automation, the expansion of automation software by incorporating broader capabilities and technologies has increased the size of the addressable market for automation software to approximately $65 billion.

 

The size of our addressable market opportunity is underpinned by the substantial amount of business processes that could be improved through automation but are not currently automated. According to Forbes, there are more than 1 billion knowledge workers globally as of December 10, 2020. We expect our estimated global market opportunity will continue to expand as customers increase the size of their business units and hire additional employees, resulting in a greater number of users and processes that can benefit from automation throughout these enterprises. Additionally, we believe that we are unlocking a myriad of still unexplored automation possibilities as we continue to contribute to this market. We believe those possibilities represent a significant greenfield opportunity for us.

 

Organizations across the world are only beginning to understand the power of automation and we believe we are at the forefront of a revolution in the way that people do work. We believe that the opportunity that lies ahead of us is largely untapped and has the potential to be one of the largest ever in enterprise software.

 

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Our CXM Platform

 

Our CXM Platform includes marketing, sales, service and content management systems, as well as other tools and integrations, that enable companies to attract and engage customers throughout the customer experience. We also provide education, services and support to help customers be successful with our CXM Platform.

 

We focus on selling our CXM Platform to mid-market business-to-business companies, which we define as companies that have between 100 and 5,000 employees. We sell our CXM Platform on a subscription basis. As of September 30, 2021, our combined business units (customer experience management business unit and digital transformation business unit) had 819 total customers in Japan, of which 561, or 68.5%, were paying customers and 23 total customers outside Japan, of which one, or 4.3%, was a paying customer. Our 281 non-paying customers were originally paying customers that utilized our paid services but now use a free version of the CXM Platform. There is the potential for non-paying customers to become paying customers again if and when they start utilizing our paid services again.

 

Advantages of our CXM Platform

 

Our CXM Platform features a central database of lead and customer interactions and integrated applications designed to help businesses attract visitors to their websites, convert visitors into leads, close leads into customers, and fulfill the needs of customers so they become promoters of those businesses.

 

Designed to Help Companies Grow Better. Our CXM Platform was architected from the ground up to enable businesses to transform their marketing, sales, services, and content management playbook to meet the demands of customers today. Our CXM Platform includes both a system of record for maintaining a unified view of the customer experience and a system of engagement for efficiently engaging customers through search engine optimization, web content, social, blogging, email, marketing automation, messaging, support ticketing, knowledge base and more. And it is also easy to integrate with customer data platforms.

 

Ease of Use of a Single, Extensible Platform. We provide a set of integrated applications on a common platform, which offers businesses ease of use and simplicity. Our CXM Platform has one login, one user interface, one database, and one team for support. Our CXM Platform starts free and grows with our customers. It is designed to scale its power and technical sophistication without losing its ease-of-use. In addition to being a comprehensive suite itself, our CXM Platform seamlessly integrates with external applications, making it easy to extend the functionality of our CXM Platform and customize it for any business.

 

Power of a Unified Customer View. At the core of our CXM Platform is a single customer experience management database for each business that captures its lead and customer activity throughout the customer lifecycle. Our CXM Platform creates a unified timeline incorporating all the interactions with a particular customer. In contrast to many customer experience management system suites which are cobbled together, we have a set of core functionalities, including reporting, content, messaging, data, and automation, which runs across our product lines, which we refer to as functions.

 

Scalability. Our CXM Platform was designed and built to serve a large number of customers with demanding use cases. Our CXM Platform currently processes billions of data points each week, and we use leading global cloud infrastructure providers and our own automation technology to dynamically allocate capacity to handle processing workloads of all sizes. We have built our CXM Platform on modern, scalable distributed technologies. We built the infrastructure to support hundreds of microservices and can easily add new features and capabilities to the CXM Platform. We utilize a variety of open-source distributed systems including customer data platform and consent management platform to scale our data collection and processing. Our scalability gives us flexibility for future growth and enables us to service a large variety of businesses of different sizes across different industries.

 

Extensible and Open Architecture. Our CXM Platform features a variety of open APIs that allow easy integration of our platform with other applications. We enable our customers to connect our platform to their other applications, such as ecommerce, event management and videoconferencing applications. By connecting third-party applications, our customers can leverage our centralized inbound database to perform additional functions and analysis.

 

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CXM Platform Functions

 

Our CXM Platform features integrated applications and tools that enable companies to create a cohesive and adaptable customer experience. Each function can be used standalone or in conjunction with the other functions. Our functions are available in both free and paid tiers (i.e., Starter, Professional and Enterprise) with gradually increasing levels of functionality that support the needs of our customers as they see success with our tools and their businesses grow.

 

Customer Experience Management. The core of our CXM Platform is a single database of lead and customer information that allows businesses to track their interactions with contacts and customers, manage their sales activities, and report on their pipeline and sales. This allows a complete view of lead and customer interactions across all of our integrated functions, giving our CXM Platform substantial power. This integration makes it possible to personalize every aspect of the customer interaction across web content, social media engagement, and email messages across devices, including mobile. The integrated functions on our CXM Platform have a common user interface and are accessed through a single login. There is a free version of our CXM Platform that can be used standalone, or with any combination of content management systems function, marketing function, sales function, and/or service function.

 

Marketing Function. The marketing function is an all-in-one toolset for marketers to attract, engage, and nurture new leads towards sales readiness over the entire customer lifecycle. The marketing function is available in both free and paid tiers, and can be used standalone, with our customer experience management system, a third party customer experience management system, and/or any version of content management systems function, sales function or service function. Features include marketing automation and email, social media, search engine optimization, and reporting and analytics.

 

Sales Function. We designed the sales function to enhance the productivity and effectiveness of sales teams. Businesses can empower their teams with tools that deliver a personalized experience for prospects with less work for sales representatives. The sales function is available in both free and paid tiers, and can be used with our customer experience management system, a third party customer experience management system, and/or any version of marketing function, content management system function or service function. Features include email templates and tracking, conversations and live chat, meeting and call scheduling, lead and website visit alerts, sales automation, and lead scoring.

 

Service Function. The service function is our customer service software that is designed to help businesses manage and connect with customers. The service function is available in free and paid tiers, and can be used standalone, with our customer experience management system, a third party customer experience management system, and/or any version of marketing function, content management system function or sales function. Features include tickets and help desk, automation and routing, knowledge base, team emails, feedback and reporting tools, and set customer goals.

 

Content Management System Function. Our content management system function combines the power of customer experience management and a content management system into one integrated platform. Our content tools enable businesses to create new and edit existing web content while also personalizing their websites for different visitors and optimizing their websites to convert more visitors into leads and customers. Our content management system function can be purchased as a standalone product, with our customer experience management system, a third party customer experience management system, and/or with any version of marketing function, sales function, or service function. Features include manage website pages, business blogging, smart content, landing pages and forms, search engine optimization tools, forms and lead flow, web analytics reporting, calls-to-action, and digital asset management and product information management file manager.

 

Platform Application (“App”) Partners. Businesses that use software outside of our software can leverage our ecosystem of third-party integrations. We make it easy to find and install new or existing software solutions that complement our CXM Platform. Over 20 integrations and applications are available for our users, across a wide range of categories, including integrations with leading social media, email, sales, video, analytics, content and webinar tools.

 

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CXM Platform Services

 

We complement our product offerings with professional services, customer success and support, which we view as critical elements of ensuring the long-term retention of our customers. The majority of our services and support is offered over email, phone, chat applications and via web meeting technology rather than in-person, which is a more efficient business model for us and our customers.

 

Professional Services. We offer professional services to educate and train customers on how to leverage our CXM Platform to transform how their business attracts, engages and delights customers. Depending on which functions and services a customer purchases, they receive one-on-one training and guidance from one of our onboarding or technical specialists by web meeting and can purchase additional group training and education in online or in-person classes. Our professional services are also available to customers who need additional assistance on a one-time or ongoing basis for an additional fee.

 

Customer Success. Our customers have access to a customer success manager or customer success team which are responsible for our customers’ long term success, retention and growth on the CXM Platform. Our customer success managers and customer success teams address the unique needs and goals of our customers through a series of ongoing interactions and strategy calls on how to best engage and use our CXM Platform.

 

Support. In addition to assistance provided by our online articles and customer discussion forums, we offer phone and/or email and chat-based support, which is included in the cost of a subscription for our Hubs. Phone support is available starting at the Professional product level for all functions while email and chat-based support is available for Starter functions. We strive to maintain an exceptional quality of customer service. We continuously monitor key customer service metrics such as ticket resolution rates, and we monitor the customer satisfaction of our customer support interactions. We believe our customer support is an important reason why businesses choose our CXM Platform and recommend it to their colleagues.

 

CXM Platform Technology

 

Our customers have chosen us as their CXM Platform, which we architected and built to be secure, highly distributed and highly scalable. Since our founding, we have embraced rapid, iterative product development lifecycles, cloud automation and open-source technologies, including big data platforms, to power marketing, sales, service, and content management programs and provide insights not previously possible or available.

 

Our CXM Platform is a multi-tenant, single code-based, globally available software-as-a-service delivered through APIs, web browsers or mobile applications. Our commitment to a highly available, reliable, and scalable platform for businesses of all sizes is accomplished through the use of these technologies.

 

Platform Approach. We built our customer experience management system on a single platform with reusable and composable libraries, allowing us to rapidly address new feature areas and bring new products to market that have a consistent user experience and data model. We have built this platform with scale in mind, supporting thousands of components including hundreds of microservices.

 

Modern Database Architecture. We process billions of data points weekly across various channels, including social media, email, search engine optimization and website visits, and continue to drive nearly real-time analytics across these channels. This is possible because we built our database from the ground up using distributed big data technologies such as content delivery network, Edge computing and customer data platform to both process and analyze the large amounts of data we collect. We also utilize cloud environment to operate customer data at scale, allowing our engineers to choose the best datastore for each task.

 

Agility. Our infrastructure and development and software release processes allow us to update our platform for specific groups of customers or our entire customer base at any time. This means we can rapidly innovate and deliver new functionality frequently, without waiting for quarterly or annual release cycles. We typically make a significant number of customer data updates to our software platform in a single day, enabling us to gather immediate customer feedback and improve our product quickly and continuously.

 

Cost Leverage. Because our CXM Platform was built on an almost exclusive footprint of open-source software, own developed source code and designed to operate in cloud-based data centers, we have benefited from large-scale price reductions by these cloud computing service providers as they continue to innovate and compete for market share. As our processing volume continues to grow, we continue to receive larger volume discounts on a per-unit basis for costs such as storage, bandwidth and computing capacity. We also believe that our extensive use of open-source software will provide additional leverage as we scale our CXM Platform and infrastructure.

 

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Scalability. By leveraging leading cloud infrastructure providers along with our automated technology stack, we are able to scale workloads of varying sizes at any time. This allows us to handle customers of all sizes and demands without traditional operational limitations such as network bandwidth, computing cycles, or storage capacity as we can scale our platform on-demand.

 

Reliability. Customer data is distributed and processed across multiple data centers within a region to provide redundancy. We built our CXM Platform on a distributed computing architecture with reduced single points of failure and we operate across data center boundaries daily. In addition to datacenter level redundancy, this architecture supports multiple live copies of each data set along with snapshot capabilities for faster, point-in-time data recovery instead of traditional backup and restore methodologies.

 

Security. We leverage industry standard network and perimeter defense technologies, distributed denial-of-service, protection systems (including web application firewalls) and enterprise grade domain name system services across multiple vendors. Our data-center providers operate and certify to high industry compliance levels. Due to the broad footprint of our customer base, we regularly test and evaluate our platform with trusted third-party vendors to ensure the security and integrity of our services.

 

Digital Transformation Solutions

 

Our mission is to unlock human creativity and ingenuity by enabling the fully automated enterprise and empowering workers through automation.

 

The modern enterprise is complex as employees must navigate an ever-increasing number of systems and applications to perform their day-to-day work. This dynamic forces workers to constantly execute manual, time-consuming, and repetitive tasks to get their work done. The friction faced by workers often results in lost productivity that can have a direct impact on a company’s bottom line. Traditional automation solutions intended to reduce this friction have generally been designed to be used by developers and engineers, rather than the employees directly involved in executing the actual work being automated. As a result, employees are limited by the lack of flexibility of these traditional automation technologies causing employee productivity, innovation, and satisfaction to suffer.

 

Our software is designed to transform the way humans work. We provide our customers with a robust set of capabilities to discover automation opportunities and build, manage, run, engage, measure, and govern automations across departments within an organization. Our software leverages the power of AI based computer vision to enable our software robots to perform a vast array of actions as a human would when executing business processes. These actions include, but are not limited to, logging into applications, extracting information from documents, moving folders, filling in forms, and updating information fields and databases. Our robots’ ability to learn from and replicate workers’ steps in executing business processes drives continuous improvements in operational efficiencies and enables companies to deliver on key digital initiatives with greater speed, agility, and accuracy.

 

Our software is designed to interact with and automate processes across a company’s existing enterprise stack. As a result, our customers can leverage the power of our software with lower overall IT infrastructure cost. Our software enables employees to quickly build automations for both existing and new processes. Employees can seamlessly maintain and scale automations across multiple deployment options, constantly improve and evolve automations, and continuously track and measure the performance of automations, all without substantial technical experience.

 

At the core of our automation software is a set of capabilities that emulates human behavior, which provides our customers with the ability to automate both simple and complex use cases. Automations on our software can be built, consumed, managed, and governed by any employee who interacts with computers, resulting in the potential for broad applicability of our software across departments within an organization. Society is at a turning point in how organizations execute work, and we believe the ability to leverage software to enrich the employee experience will unlock tremendous value and efficiency opportunities. While we are still in the early days of a multi-year journey to the fully automated enterprise, momentum is growing as organizations across the world are only now beginning to understand the power of automation.

 

Many of our customers expand the scope and size of use cases of our software across their organizations as they quickly realize the power of our software. We believe that the success of our land-and-expand business model is centered on our ability to deliver significant value in a very short time. We grow with our customers as they identify and expand the number of business processes to automate, which increases the number of robots deployed and the number of users interacting with our robots. Our ability to expand within our customer base is demonstrated by our net retention rate, which represents the rate of net expansion of annualized renewal run-rate from existing customers over the last 12 months. Our net retention rate was 52% and 75% as of December 31, 2020 and 2019, respectively.

 

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Advantages of our Solutions

 

Our mission is to be at the forefront of innovation and thought leadership in enterprise business automation, analyzing enterprise users’ desktops and mission-critical systems, and creating end-to-end software that provides business automation based on the results of that analysis and further simulating the numbers. We create end-to-end software that provides business automation. Our software uses a combination of RPA, task mining, and process mining to remove pain points in business operations, allowing software robots to emulate human behavior and perform specific business processes, thereby eliminating the need for employees to perform specific manual or routine tasks. This allows employees to focus on higher value-added tasks, and also allows them to seamlessly automate business processes, from legacy IT systems and on-premise applications to new cloud-native infrastructure and applications, without making significant changes to the organization’s underlying technology infrastructure. It can seamlessly automate business processes. Our software enables you to automate legacy mission-critical systems as well as work without desktops, and automate across multiple applications where no APIs exist. It is also intended to be used by employees within an enterprise, and supports a variety of use cases, from simple tasks to complex business processes over time.

 

Key Benefits to Organizations

 

Our software is built to help companies run their operations in a fully automated manner. Our solutions are designed to remove the friction that exists between employees and departments by increasing operational transparency, fostering collaboration between departments, and allowing people to focus on the work that matters. In addition, companies can deploy highly customized robots to support agile and fast automation creation, while reducing the overall cost of their IT infrastructure. Our goal is to shorten the time to value creation, increase efficiency, and drive innovation. Our software delivers the following key benefits to enterprises:

 

Empower Customers to Achieve Digital Transformation. Our software makes it fast and easy to drive digital transformation, which is typically time-consuming. Companies use our solutions to continuously discover and automate both simple tasks and complex business processes to increase operational efficiency and digital transformation. Our software reduces the time it takes for people to complete tasks from days and hours to minutes and seconds, allowing employees to focus on more creative, mission-critical, and innovative work. As a result, our software helps companies accelerate innovation, improve productivity, create competitive differentiation, and enrich the employee and customer experience. We help companies achieve true digital transformation.

 

Build Business Resiliency and Agility into Digital Business Operations. Our software provides our customers with the flexibility they need to operate under ever-changing conditions. A company’s operations change over time. If companies have to modify their robots each time a change occurs, true efficiency will not be achieved. Our software robots are not only capable of performing tasks just like humans, but they can also keep changing as the business changes. Our robots can be deployed manned, unmanned, desktop, server-side, or hybrid, and can adjust seamlessly as conditions change. If necessary, they can also utilize spare resources in the enterprise (such as desktops at midnight) to perform time-consuming tasks and processes. Our software provides our customers with the ability to have a virtually unlimited digital workforce that operates 24/7, resulting in a more efficient and less error-prone digital workflow.

 

Fast Time-to-Value. We believe that our solutions provide companies with an immediate return on investment. Our software can be easily installed on any operating system, or company. It is also designed to be intuitive, minimizing the need for time-consuming and costly implementation and training. With automatic recording and playback capabilities, workers can create robots by simply performing routine tasks. Our simulation feature also allows us to verify the efficiency of the automation before it goes live and measure its effectiveness. By using our software, customers can reap significant benefits such as improved costs and increased worker productivity.

 

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Organization-Wide Automation. Powerful, easy-to-use software allows workers across an enterprise organization to automate their work. Our software is designed to automate any business process or task, from individual desktop tasks to complex mission-critical business processes for departments across the enterprise. It also provides development software that does not require technical skills, allowing any employee in the organization to spread the automation. This will help spread automation throughout the organization as employees across departments and job functions use our technology to improve their performance.

 

Inspect, improve, and analyze business execution. Our solutions provide visibility into how work is actually being done in the enterprise, enabling our customers to understand, identify, and execute automation opportunities on an ongoing basis. For example, if there is duplication of work between multiple departments, you can choose to automate one of them but not the other. This allows us to optimize the automation. Our solution leverages advanced process discovery techniques and ML models from actual log data to understand individual patterns for executing work and address bottlenecks and inefficiencies. It is a very powerful solution that can optimize the entire company.

 

Improve Employee Productivity, Experience, and Satisfaction. By using our solutions, companies can achieve true digital transformation and establish a better work environment for their workers. With our software, enterprise workers will be able to automate tasks that can be used and operated efficiently and automate time-consuming manual tasks. We believe that this will improve the overall experience of our customers’ employees and allow them to focus on developing higher value-added skill sets. As a result, our clients will be able to retain a high-value, engaged workforce that is capable of delivering optimal business results.

 

Improve Accuracy and Compliance with Speed. Operations automated by our software are designed to be performed consistently as designed, allowing companies to achieve greater accuracy. For example, a sudden change in the user interface of a website will not affect the execution of the robot. It is very highly adaptive and is designed to eliminate human errors and inconsistencies that are common to workers who do their work manually. The work performed by the robot generates a log that can be reviewed and monitored at any time, allowing administrators to better control and comply with the work.

 

Enhance Customer Experiences. Companies can use our robots to solve known problems faster and more efficiently. We can also identify potential problems and help solve them. Business is always changing, and our software allows employees to focus on addressing critical customer issues and concerns, rather than performing repetitive, routine, and low-value tasks. Our robots improve the overall speed, accuracy, and effectiveness of a company’s customer service, increasing customer retention and loyalty.

 

Key Benefits to Employees

 

Our software is designed to eliminate the need for employees to execute low-value, manual tasks, freeing up time to focus on more meaningful, strategic work. We believe that this, in turn, causes employees to feel empowered and be more valuable in contributing to broader organizational goals. “Robotics Engineer” is one of the fastest emerging job roles globally, with LinkedIn reporting a 40% compound annual growth rate in job postings from 2015 to 2019. According to a survey conducted by International Data Corporation, 53% of respondents indicated that AI and robotics would have a positive impact on jobs in their companies. Additionally, according to a survey published in UiPath, Inc.’s 2020 “State of the RPA Developer Report,” 84% of respondents believe that having RPA skills would positively impact their future career moves.

 

We believe the democratization of automation leads to the following benefits tied to an improved employee experience:

 

    greater professional fulfillment and job satisfaction;

 

    increased creativity and innovation;

 

    improved performance and accuracy;

 

    enhanced skillsets;

 

    increased autonomy and job opportunities; and

 

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    more collaboration and better human interactions.

 

Our Digital Transformation Software

 

Our software is purpose-built to advance the next generation of automation. By addressing the complete lifecycle of automation, including identifying specific tasks and processes to automate, building and managing automation software robots, deploying them to execute processes, and measuring their business impact, our software is intended to address a wide and diverse array of automation opportunities, including complex, long-running workflows. We believe our software delivers compelling ease-of-use and intuitive user experiences through our low-code development environment and seamlessly integrates with an ever-expanding ecosystem of third-party technologies and enterprise applications without changing the existing infrastructure of an organization. In doing all of this, we enable businesses to redefine the relationship between enterprise applications and business processes.

 

Our software encapsulates seven modular product pillars that together address the automation lifecycle within an enterprise:

 

    Robot Automation Portal. Our RPA and Robot Automation Portal products combine AI with desktop recording, back-end mining of both human activity and system logs, and intuitive visualization tools, enabling users to discover, analyze, and identify unique processes to automate in a centralized portal.

 

    Recorder. Our RPA products are low-code or no-code development environments with easy-to-use, drag-and-drop functionality that users in an organization can learn to use to create attended and unattended automations without any prior knowledge of coding.

 

    Object-Oriented. The products in our automation category offer centralized tools designed to securely and resiliently manage, test, and deploy automations and ML models across the entire enterprise, with seamless access, enterprise-grade security, and endless scalability of data.

 

    Orchestration. With our RPA products, an enterprise can deploy our robots in highly immersive attended experiences or in standalone, unattended modes behind the scenes, and can leverage hundreds of native connectors built for commonly used line-of-business applications.

 

    GUI and CUI interface. With our RPA products, there are multiple ways for users to remain connected and interact with robots, whether they are running in a data center, in the cloud, or right on their desktop. This capability allows our customers to manage long running processes that orchestrate work between robots and humans.

 

    Monitoring. Our RPA products enable users to track, measure, and forecast the performance of automation in their enterprise.

 

    Governance. We offer powerful, centralized governance capabilities designed to help businesses ensure compliance with business standards.

 

Our software is powered by the following key differentiating elements that are necessary for end-to-end automation within today’s enterprise:

 

    AI Computer Vision. Our robots are powered by a multi-pronged approach, combining proprietary computer vision technology that uses highly-trained AI with technical introspection of visual hierarchy to dynamically recognize and interact with constantly changing elements of on-screen documents, images, and applications.

 

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    Document Understanding. We combine our proprietary computer vision technology with optical character recognition, natural language processing, and a variety of ML technologies to classify and extract data from unstructured, semi-structured, and structured documents and images, handwriting, and scans.

 

    Low-Code Development Experiences. Our software is built to be intuitive and easy to use with low-code, drag-and-drop development tools, and interfaces that knowledge workers can understand.

 

    Widespread and Rich Human and Robot Interaction. Our software facilitates a broad array of interactions between humans and robots, allowing users to easily engage with robots when, where, and how they want.

 

    Enterprise-Grade Governance and Security. We deliver centralized governance and data security capabilities built for businesses to securely and resiliently deploy and manage automations at enterprise scale.

 

    Open and Extensible Software Architecture. Our software delivers both user interface automation and API integration on a single software. We offer hundreds of out-of-the-box, native integrations with a wide range of enterprise applications and productivity tools from our technology partners.

 

    Flexible Deployment. We have built our software to be multi-tenant and deployable across on-premises, private and public cloud, and hybrid environments to meet any level of scaling, availability, and infrastructure requirements.

 

HeartCore Community

 

We have created and cultivated a vibrant, global network of nearly several hundred thousand automation professionals who are building and sharing automations that are transforming work and their organizations.

 

Our Digital Transformation Products

 

Our software is built so that automation processes can be used throughout the enterprise. Customers can either adopt our products as a unified solution or use a subset of our products for each.

 

Discover

 

Process Mining. Process mining visualizes the event logs generated through various systems and applications by connecting them in chronological order and by pattern, by using process mining tools. This enables us to identify problems and their causes, such as exception processing that creates a burden for corrective actions, insufficient segregation of duties and rule deviations, inefficient business processing, bottlenecks, etc., so that we can improve our business effectively and speedily. In addition, if using the function to evaluate whether or not there is a problem by using the best practices of business processes as benchmarks, it becomes easier to examine the image of appropriate business processes. Furthermore, by updating the data to be captured and monitoring it continuously, it is possible to recognize the performance of business quality, changes, and anomalies in a timely manner, which can lead to improvements.

 

Currently, business process reforms are rapidly advancing, as exemplified by the automation of routine tasks through the introduction of RPA. In business process reform efforts, business processes have traditionally been visualized and evaluated in order to identify inefficient operations that need to be improved. However, these methods require a great deal of time and effort, such as interviewing the person in charge of the business, manually transcribing the contents of the business manual, which lacks accuracy and completeness, into a business flow, and repeatedly checking and revising the transcribed contents with various parties involved in the business. Furthermore, depending on the level of understanding and risk sensitivity of the interviewees, infrequent exceptions and so-called local rules were sometimes overlooked.

 

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One of the concepts that will drive and enhance digital transformation is digital twin technology. Digital twin technology reproduces what is happening in a factory in a computer, for example, by outputting logs of information on machine tools, manufacturing equipment, and products in production, and putting the logs into process mining. It is also called a digital twin organization, which is an organization model that makes it easier to understand and manage business processes in real time, and to plan for the future. Using a model that behaves like a twin of a real factory system, it is possible to test the effects of production conditions that are not possible in reality, to test processes for efficiency, and to predict fatigue when manufacturing equipment is kept running. This factory simulation environment can reproduce the same environment as in reality.

 

In the 5G era, local 5G will be able to collect even more detailed logs of the factory. This will increase the accuracy of the simulations and enable even more advanced operational efficiency. By recreating not only factories but also white-collar workplaces in a digital twin, it will be possible to identify problems, eliminate bottlenecks, change workflows, and reform work styles.

 

Task Mining. Task mining is a method of analyzing individual PC operations of staff engaged in various tasks, i.e., detailed PC operation log data such as “application launch,” “screen launch,” “file open,” “mouse click,” “text input,” “copy and paste,” etc., to discover issues and problems. Task mining can highlight task-level issues such as, for example, whether a series of tasks to convert paper documents into digital data by reading them with OCR is taking longer than expected (inefficient tasks), or copying and pasting from email body to Excel is repeated with high frequency (repetitive tasks).

 

The merit of task mining is that it can point out issues and problems related to tasks, i.e., the various tasks that individual staff members perform on their PCs, based on facts such as the actual time required and the number of tasks processed. Conventional business analysis based on interviews can only provide information based on the subjective and sensory perceptions of the workers themselves, and the accuracy and reliability of the analysis results are not always high. In addition, the on-site measurement work by a researcher with a stopwatch was not only time-consuming and costly, but also had the possibility of adversely affecting the work itself of the workers to be measured. On the other hand, in the case of task mining, since the analysis targets the PC operation logs automatically collected through the sensors (agents) installed on each PC, the flow of work based on the facts as they can be reproduced. Therefore, the analysis results are extremely accurate and reliable. Moreover, it does not place a burden on the person in charge in the field.

 

Using task mining, the time and cost of collecting detailed business data can be significantly reduced and because it is fact-based, highly accurate and reliable analysis results can be obtained.

 

Manage

 

Robot Automation Portal. Our Robot Automation Portal is a web portal that allows customers to monitor and manage automation with RPA over a TCP/IP network (Internet and/or Intranet). The Robot Automation Portal records the results generated from the time the robot machine is registered in the portal. Customers can manage and operate all RPA robots in their company, and also report the results and monitor their status. Our Robot Automation Portal also provides an orchestration function that allows customers to send a robot to a terminal where RPA is not installed, run it in free time, and return only the results. This allows our clients to make full use of their internal resources.

 

Orchestrator. Our Orchestrator can provision, deploy, trigger, monitor, measure, and track the successful operation of robots on any supported device, and when combined with the Robot Automation Portal, it does so through a GUI interface.

 

CUI interface. There are many cases where GUI is not available for servers such as Linux and UNIX, etc., so our RPA also has a CUI command interface.

 

All robots are provided as JAR files, so as long as customers have a Java environment, they can run the robots and automate their operations without installing RPA.

 

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Run

 

Development RPA. It is possible to create robots freely using flowcharts in a GUI interface, or to create robots by coding in the same way as Java development, using an interface similar to a Java IDE. It also comes with three types of OCR, making it suitable for creating a business robot that scans documents.

 

Execution RPA. The license is only for running the robot. Only one robot can be run simultaneously per license. The execution environment can be any device and any operating system. Although there is only one concurrent execution, there can be an unlimited number of installations.

 

Measure

 

When we start to automate with RPA robots, we tend to automate even tasks that would be more efficient without automation. This is an ironic result of automation becoming inefficient, but it is difficult to identify. Using our simulation and reporting functions, it is possible to identify inefficient automated tasks and change them to efficient operations. That may possibly be tasks that are performed by people, but the cost will vary greatly.

 

Govern

 

We offer powerful, centralized governance capabilities designed to ensure compliance with business standards. Our software balances compliance with empowerment through granular control of what can be automated, who can build and publish automations, and complete lifecycle management with role-based access control and enforcement. Governance capabilities are embedded across our software. The combination of our measurement and governance capabilities are critical as they are key to enterprise-scale automation programs and are a differentiated feature of our software.

 

Sales and Marketing

 

We have an efficient go-to-market model, which consists primarily of an enterprise field sales force supplemented by a high velocity inside sales team focused on small and mid-sized customers as well as a global strategic sales team focused on the largest global customers.

 

We have made significant investments in our sales and marketing efforts globally. As of September 30, 2021, our sales and marketing organization was comprised of 14 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. Our sales and marketing strategy is focused on driving growth through selling products to new customers and driving expansion within our existing customers. Our products officer, together with our sales, marketing, and executive teams, promote our brand by working to cultivate long-term relationships with current and prospective customers, expand our partnership network and foster our developer community.

 

We sell our solutions through a direct sales team and through channel partnerships. Our sales organization is segmented into three areas: enterprise sales, which sells to large businesses and public sector organizations; high-velocity inside-sales, which is focused on landing a high volume of new small and mid-sized customers; and a global strategic sales team focused on the largest strategic global accounts. Additionally, our sales team is supported by our renewals team that is focused on identifying upsell potential for our sales team and handling the operations behind the renewal. In collaboration with the sales team, they can also help execute on small upsells so that our field sellers can focus on the larger opportunities. Supplementing our direct sales organization are channel sales partnerships with system integrators, regional developers, business process outsourcing providers and distributors. Our channel partners enable us to extend our local and global reach, in particular with smaller customers and in geographies where we have less direct sales presence. Additionally, our customer success team on-boards new customers and accelerates expansion within our largest customers. Our enterprise and high velocity teams are organized regionally across Japan. In Japan, we maintain specialized vertical teams within our enterprise sales organization that concentrate their efforts on selling into banking and financial services, healthcare, and government entities. Our sales organization is supported by a team of pre-sales engineers and our professional services organization that offer technical expertise to help customers speed adoption and return on investment.

 

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We sell to organizations of all sizes across a broad range of industries, with a focus on enterprise customers. Our go-to-market strategy is focused on a model. Our ability to expand within our existing customer base is facilitated by the breadth of our software. Our customers frequently see rapid time to value with our products, and we are able to quickly expand sales within organizations as customers add features, expand use cases and increase the number of software robots beyond their initial deployment. The potential for broad applicability of our software enables us to sell across all levels of an organization, from the C-Suite to the IT department, and to sell into multiples departments within an enterprise, which reduces friction for expansion of our products across the enterprise.

 

Our marketing team drives brand awareness, cultivates a large and growing community, and drives demand through a combination of global and local campaigns. We employ a variety of marketing tactics to reach prospective customers, including community evangelism, in-person and digital events, content marketing, digital advertising, search optimization, partner marketing, social media, and public relations. We host and present at regional and global events, which both launched during the COVID-19 pandemic, to share customer success stories, developer breakthroughs, and analyst insights and to deepen customer relationships.

 

A key marketing objective is to have prospective customers try our software. We provide easy access to our software through our website and partner portal. This ‘try-before-you-buy’ strategy has been a key driver of developer education and future customer purchases of our products and software. To democratize automation, we offer a free Community Edition to small businesses, university students, and individuals. Our Enterprise Trial edition, which is a time-limited license, provides prospective customers with full functionality of our software to learn, build, and deploy automations. We nurture users through their trial license by providing training and certifications through our Academy, detailing best practices and use cases, and offering continuous support through our interactive forum or pre-sales organization.

 

Customers

 

We have a large and diversified customer base. No customer or channel partner accounted for more than 10% of our revenue for the year ended December 31, 2020 or nine months ended September 30, 2021. As of September 30, 2021, our combined business units (customer experience management business unit and digital transformation business unit) had 819 total customers of varying sizes. We pride ourselves in providing a best-in-class experience to every single customer and user of our software. Our customers span a variety of industries and across various departments within an organization and include:

 

     

Consumer and Retail

SONY
Panasonic

EPSON

CASIO

Bridgestone

Philips

 

Energy

Tohoku Electric Power Co
The Kansai Electric Power Co., Inc

Tokyo GAS

 

 

Financial Services

Bank of Japan
AEON Bank, Ltd

au Jibun Bank Corporation

Nomura Securities Co., Ltd
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

     

Healthcare / Pharmaceuticals

Takeda Pharmaceutical Company

GE Healthcare

Kobayashi Pharmaceutical

Sysmex Corporation,

 

Insurance

Aflac

Sumitomo Life Insurance

Tokio Marine Holdings, Inc.

The Dai-ichi Life Insurance

 

Manufacturing

Hitachi

Toshiba

FujiFilm

Richo

Nippon Steel Corporation

     

Technology

NTT Data

NEC

Roland

Canon

 

Telecommunications

NTT Docomo

Softbank

KDDI

 

Other

TOYOTA

HONDA

NNK

JAL

ANA

JR East

 

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Partnerships

 

We develop and maintain business and technology partnerships that help us seamlessly integrate the latest technology into our software and market and deliver our software to our customers around the world.

 

Our business partners include more than 5 global and regional system integrators, value-added resellers, and business consultants. We provide tiering recognition through Platinum, Gold, and Silver levels for partners that meet competency requirements and deliver and maintain a specified number of satisfied customers. These partnerships enhance our market presence and drive greater sales efficiencies.

 

Our technology partners bring specialized capabilities to our software. In collaboration with our technology partners, we develop integrations that simplify the interoperability of our software with their technology, resulting in faster time-to-value. These integrations give our customers more choices on how they integrate and offer a low-code option of traditional native integration.

 

We also maintain relationships with leading cloud vendors, such as Amazon Web Services Inc., Google Inc., and Microsoft Corporation, to simplify both the deployment of our software and to extend our software to offer customers the benefits of cloud-based AI capabilities.

 

Our partnerships with other leading technology companies power the significant extensibility of our software and offer our customers the ability to use the technologies of their choice on our software, driving increased customer affinity and product stickiness.

 

Competition

 

Customer Experience Management Business

 

Our market is evolving, highly competitive and fragmented, and we expect competition to increase in the future. We believe the principal competitive factors in our market are:

 

  vision for the market, product strategy and pace of innovation;
     
  inbound marketing focus and domain expertise;
     
  integrated all-in-one CXM Platform;
     
  breadth and depth of product functionality;
     
  ease of use;
     
  scalable, open architecture;
     
  time to value and total cost of ownership;
     
  integration with third-party applications and data sources;
     
  name recognition and brand reputation; and
     
  “free products to paid services” go-to-market motion.

 

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We believe we compete favorably with respect to all of these factors.

 

We face intense competition from other software companies that develop marketing, sales, service, and content management software. Our competitors offer various point applications that provide certain functions and features that we provide, including:

 

  cloud-based marketing automation providers;
     
  content management systems;
     
  email marketing software vendors;
     
  sales force automation and customer experience management software vendors;
     
  customer service platform vendors; and
     
  large-scale enterprise suites.

 

In addition, instead of using our CXM Platform, some prospective customers may elect to combine disparate point applications, such as content management, marketing automation, analytics, social media management, ticketing, and conversational bots. We expect that we will develop and introduce, or acquire, applications serving customer-facing and other front office functions.

 

Digital Transformation Business

 

The market for RPA is one of the fastest growing enterprise software markets and is increasingly competitive. We believe our competitors primarily exist across the across the following three categories:

 

  RPA software providers¸ which provide RPA software, but lack end-to-end automation capabilities.
     
  Automation lifecycle enhancing technology providers, such as low-code, iBPMS, iPaaS, process mining, and test automation vendors, which provide additional features that can be useful for automations. We have alliances and integrate with the key vendors in each category, but they often develop and market automation capabilities as extensions of their core software.
     
  Enterprise software vendors, which provide horizontal applications and productivity tools and are acquiring, building, or investing in RPA functionality or partnering with RPA providers.

 

Our Competitive Strengths

 

Customer Experience Management Business

 

We believe that our market leadership position is based on the following key strengths:

 

Leading Platform. We have designed and built a world-class CXM Platform. We believe our customers choose our CXM Platform over others because of its powerful, integrated, and easy-to-use applications. We built our customer experience management system on a single, unified, and intuitive platform, which we believe contrasts positively with many other customer experience management suites.

 

Market Leadership and Strong Brand. Our focus is to be a recognized thought leader in the cloud-based marketing, sales, customer service, and content management software industry with a leading brand. Our marketing, sales, service, and content management experience attracts, engages, and delights customers by being more relevant, more helpful, more personalized, and less interruptive than traditional marketing and sales tactics.

 

Large and Growing Solutions Partner Program. Our solutions partners promote our brand and offer our CXM Platform to their clients. Solutions partners and customers referred to us by our solutions partners represented approximately 58% of our total customers as of December 31, 2020, and approximately 43% of our total revenue for the year ended December 31, 2020. These solutions partners help us to promote the vision of the inbound experience, efficiently reach new mid-market businesses at scale, and provide our mutual customers with more diverse and higher-touch services.

 

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Premium Pricing Strategy. Our free model attracts customers who begin using our CXM Platform through our free products and then upgrade to our paid services. Through our free products, our customers are able to receive value from us before converting to a paid product or engaging with sales.

 

Mid-Market Focus. We believe we have significant competitive advantages reaching mid-market businesses and efficiently reach this market at scale as a result of our inbound methodology, premium pricing strategy, and our solutions partner channel.

 

Powerful Network Effects. We have built a large and growing ecosystem around our CXM Platform and company. Thousands of our customers integrate third-party applications with our CXM Platform. We believe this ecosystem drives more businesses and professionals to embrace the inbound playbook. As our engaged audience grows, more solutions partners collaborate with us, more third-party developers integrate their applications with our CXM Platform, and more professionals complete our certification programs, all of which help to drive more businesses to adopt our CXM Platform.

 

Digital Transformation Business

 

We believe that the following are key strengths of our digital transformation business:

 

Broad Set of Complementary Solutions. Our software combines OCR, AI, task mining, process mining, RPA, and process discovery capabilities to enable automation across multiple non-desktop systems, mission-critical system-to-system automation deployment environments, and cloud-to-cloud applications. We can help you automate multiple systems without desktops, automation deployment environments between mission-critical systems, and across cloud applications. We provide our customers with a comprehensive set of capabilities to discover, build, manage, execute, engage, measure, and control automation across departments and personas within an organization or agency. Our software can run on multiple operating systems, including Linux, Unix, Mac, AS-400, as well as Windows, allowing for automation across a variety of systems. Also, since it is coded in Java, any Java engineer can easily build add-on functions.

 

Open Architecture. Our software embraces an open ecosystem with hundreds of enterprise application integrations that have been built by us and our community of technology partners. Our solution includes a variety of pre-built activities and connectors so customers can quickly create and deploy robots that execute operations and seamlessly interact with third-party systems. Our open ecosystem is architecture agnostic, which allows organizations to automate existing infrastructure and accelerate digital innovation without the need to replace or make large investments in their existing infrastructure.

 

Built-In AI/ML Capabilities. We incorporate our own Java components into our products to drive continuous improvement in business automation. Our RPA is a system that allows the reuse of existing programming assets to address complex use cases. Users can incorporate their current Java applications, if any, into our RPA. Furthermore, it does not only automate that application, but also expands the scope of integration with other applications. The capabilities of our software are not limited to automating existing operations, but can also adapt to ever-changing variables, such as the application of new business models, to achieve automation capabilities that dramatically improve business results and increase the competitive advantage of our customers.

 

Human Emulation Enables Addressing Expansive Use Cases. Our RPA robots emulate human behavior and adapt to the ever-changing external variables of business. By having the robots emulate the usual business behavior of humans, companies can leverage our software to address a myriad of use cases, from simple to complex. We believe that the power of our software is only limited by the use cases that human users can come up with.

 

Built for Mid to Enterprise Deployment. Our software grows as our customers increase their automation operations across their organizations. Customers can deploy our software on desktops, on-premises, in public clouds, private clouds, or in hybrid environments. In addition, it can be deployed on multiple operating systems and across multiple devices. Our software is designed with security and governance at its core, allowing our customers to seamlessly expand the scope of automation while ensuring that IT departments have the security they need to automate.

 

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Adoption Across Workers and Functions. We make sure that workers across the organization have access to automation when they need it. Workers can interact with robots in the same way they interact with humans. For example, they can use manned robots on their desktops to get human work done faster, use unmanned robots in the background to run business processes, build applications that interact indirectly with robots, send email to robots, interact with chatbots, and so on. This will give them the freedom to choose whether to ask a robot or a human to do the work.

 

Simple, Intuitive, Quickly Deployed. Our software is easy to use, with an intuitive interface and low-code, drag-and-drop, desktop recording and playback capabilities, so that anyone working across the organization can easily take advantage of our automation features at their disposal. Automation features can be quickly and efficiently deployed throughout an organization to create immediate value. Our software can be easily learned and operated by employees with or without technical knowledge, without the need for large implementation costs or costly professional services.

 

Resilient Automations. Our software is capable of fully emulating the behavior of enterprise workers as they manipulate applications and systems to execute processes. Our robots can leverage our proprietary capabilities to fully emulate human behavior, interpreting a very wide variety of document types and adapting and responding to changes in the work environment. It can also adapt to changes in display resolution and scale, as well as user interface changes, by utilizing our proprietary OCR capabilities. For example, the process of scanning and importing postal invoices does not require the user to memorize the format of each invoice, and a single template can be used for all types of invoices. In addition, we have developed a variety of features to enable elasticity in the process and execution of automation. For example, when testing the user interface of a website, our software can create the same state as a human being browsing the site and perform operational validation tests. It also allows for management, reuse and reliability of user interface elements. Thanks to this feature, when changes are made to the application, the operation can continue without having to update the robot. With such flexibility, robots demonstrate their resilience in automating tasks and reducing the number of errors across the enterprise.

 

Integrated and Portable Object API Models. Our customers can reuse our object-oriented robots. This capability allows them to extend the capabilities of our software and improve automation results. Our software makes it easy to deploy, manage, and improve objects built by customers and third parties, allowing you to allocate more human resources to business problems and use cases. objects are designed to be deployed and customized once created.

 

Automation Performance and Business Outcome Analytics. Our software enables customers to gain powerful insights and generate key performance indicators with actionable metrics by tracking, measuring, and predicting automation performance through the use of a Robot Automation Portal. Out-of-the-box dashboards display execution metrics and allow users to measure performance and report on the value of their automation.

 

Built for Collaboration with Human and Robot. Our software is designed to allow humans and robots to work together, so that each can focus on the tasks they do best. Robots can perform time-consuming, repetitive, and routine tasks that make work less interesting and satisfying, while humans can focus on more creative thinking, innovation, solving complex problems, and improving the customer experience. Our software allows our customers to harness the power of automation to create fully automated, highly efficient enterprises where humans and robots work in harmony.

 

Accelerating the Adoption of Automation within the Enterprise. The adoption of our software will automate simple, duplicative, repetitive and time-consuming tasks in the organization that are not interesting to people, thus allowing them to focus on creative and rewarding tasks. Most of our clients use our solutions to find and automate all the tasks that can be automated in their companies. Our solution works with your employees to evaluate and score high-value automation possibilities. As employees become more comfortable with automation, they will more easily adopt and implement it, discover new processes to automate within a particular, and provide new automation ideas to RPA for development and deployment. After a few iterations of this kind of behavior, a phenomenon occurs in which certain employees build useful automation on their own, which is then deployed throughout the organization. This action is different from the automation that has been discovered so far and contributes to further operational efficiency. It helps to organically surface a number of automation ideas that could not be achieved with the traditional top-down approach.

 

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Our Growth Strategies

 

Customer Experience Management Business

 

The key elements to our growth strategy for our customer experience management business are:

 

Grow Our Customer Base. The market for our CXM Platform is large and underserved. Mid-market businesses are particularly underserved by existing point application vendors and often lack sufficient resources to implement complex solutions. Our all-in-one CXM Platform allows mid-market businesses to efficiently adopt and execute an effective inbound marketing, sales, customer service, and content management strategy to help them expand and grow. We will continue to leverage our inbound go-to-market approach, freemium pricing strategy and our network of solutions partners to keep growing our business.

 

Increase Revenue from Existing Customers. With 819 total customers from our combined business units in Japan, we believe we have a significant opportunity to increase revenue from our existing customers. We plan to increase revenue from our existing customers by expanding their use of our CXM Platform by upselling additional offerings and features, adding additional users, and cross-selling our marketing, sales, service, and content management products to existing customers through touchless or low touch in-product purchases. Our scalable pricing model allows us to capture more spend as our customers grow, increase the number of their customers and prospects managed on our CXM Platform, and offer additional functionality available from our higher price tiers and add-ons, providing us with a substantial opportunity to increase the lifetime value of our customer relationships.

 

Keep Expanding Internationally. We intend to grow our presence in international market through additional investments in local sales, marketing and professional service capabilities, as well as by leveraging our solutions partner network. We plan to open international offices. We have significant website traffic from regions outside the United States, and we believe that markets outside the United States represent a significant growth opportunity.

 

Continue to Innovate and Expand Our CXM Platform. Mid-market businesses are increasingly realizing the value of having an integrated marketing, sales, customer service, and content management platform. We believe we are well positioned to capitalize on this opportunity by introducing new products and applications to extend the functionality of our CXM Platform.

 

Selectively Pursue Acquisitions. We plan to selectively pursue acquisitions of complementary businesses, technologies and teams that would allow us to add new features and functionalities to our platform and accelerate the pace of our innovation.

 

Digital Transformation Business

 

For our digital transformation business, we are pursuing a large market opportunity with growth strategies that include:

 

Acquire New Customers. Our market is rapidly growing. We believe that as more organizations adopt our automation software and experience quantifiable competitive advantages, other organizations will also adopt automation as a necessary tool to compete. While we sell to organizations of all sizes and across a broad range of industries, our go-to-market team’s key focus is on the largest organizations, including large enterprises and governments. We also use an inside sales team focused on small and mid-sized businesses. We plan to continue to invest in our go-to-market team to grow our customer base both domestically and internationally.

 

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Expand Within Our Existing Customer Base. Our customer base represents a significant opportunity for us to become a strategic partner to our customers in their automation journeys and drive further sales expansion through the following vectors:

 

  deploy more software robots across different departments;
     
  provide more employees with their own robot assistants;
     
  increase adoption of software products; and
     
  expand use cases for automation in the organization.

 

Over time, we seek to deploy our solution where every employee interacts with multiple robots. We believe we will be able to accomplish this through our continued democratization of automation and enablement of citizen developers. The power of our strategy is evidenced by our net retention rate, which was 52% and 75% as of December 31, 2019 and 2020, respectively.

 

Grow and Cultivate Our Partner and Channel Network. We are focused on maintaining and growing our ecosystem of partners that build, train, and certify skills on our technology as well as deploy our technology on behalf of their customers. We have built a global partner ecosystem of more than 40 systems integrators, value-added resellers, business consultants, technology partners, and public cloud vendors. Our partner network includes, among others, content management systems, customer experience management systems, Heartcore Robo (RPA), Apromore, myInvenio and Controlio. We intend to continue to expand and enhance our partner relationships to grow our market presence and drive greater sales efficiencies.

 

Extend Our Technology Leadership Through Continued Innovation and Investment in Our Software. We believe that we have built a differentiated automation software and intend to continually increase the value we provide to our customers by investing in extending the capabilities of our software. For example, we have introduced over 4 new products and multiple new features over the last 24 months. We have made and will continue to make significant investments in research and development to bolster our existing technology and enhance usability to improve our customers’ productivity.

 

Foster the Next Generation of Workers and Grow Our Community. We have built an extensive ecosystem focused on training and supporting individuals on working with our software. We have created forums addressing automation in the workplace and learning plans for all the important roles in automation. We believe automation will be a foundation of the future of work and, as individuals build out their skillsets, this will drive greater adoption of our software.

 

Continue to Invest in Major Markets. Since inception, we have invested in developing an infrastructure that would allow us to scale globally. We continue seeing adoption of our products across all geographies in which we operate and believe we have a significant runway ahead of us. We believe there is a significant opportunity to expand use of our software in the top 25 countries as measured by gross domestic product. As of December 31, 2020, sales to customers located in such countries represented 100% of our total annualized renewal run-rate. We intend to continue to make significant investments to expand our sales and drive adoption of our software throughout those markets. In particular, we believe that North America represents a significant opportunity for us, and we intend on continuing to expand our sales and drive adoption of our software across the region. As of December 31, 2020, customers located in the United States represented 2% of our total annualized renewal run-rate.

 

Opportunistically Pursue Strategic Acquisitions. We will evaluate acquisition opportunities that we believe will be complementary to our existing software, enhance our technology, and increase the value proposition we deliver to our customers.

 

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Intellectual Property

 

Intellectual property rights are important to the success of our business. We rely on a combination of patent, copyright, trademark, and trade secret laws in the United States and other jurisdictions, as well as license agreements, confidentiality procedures, non-disclosure agreements with third parties, and other contractual protections, to protect our intellectual property rights, including our proprietary technology, software, know-how, and brand.

 

As of December 31, 2020, we held two issued patents in Japan. Our issued patents are scheduled to expire between October 2028 and January 2030. As of December 31, 2020, we held one pending U.S. trademark application, and more than two active foreign trademark filings. As of December 31, 2020, we held two domain names in the United States and in foreign jurisdictions. We continually review our development efforts to assess and identify the existence and patentability of new intellectual property.

 

The terms of individual patents extend for varying periods of time, depending upon the date of filing of the patent application, the date of patent issuance, and the legal term of patents in the countries in which they are obtained. Generally, patents issued for applications filed in the United States are effective for 20 years from the earliest effective filing date of a non-provisional patent application. The duration of patents outside of the United States varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective filing date. However, the actual protection afforded by a patent varies on a country-to-country basis and depends upon many factors, including the type of patent, the scope of its coverage, the availability of legal remedies in a particular country, and the validity and enforceability of the patent.

 

Although we rely on intellectual property rights, including patents, copyrights, trademarks, and trade secrets, as well as contractual protections to establish and protect our proprietary rights, we believe that factors such as the technological and creative skills of our personnel, development of new services, features, and functionality, and frequent enhancements to our software are equally essential to establishing and maintaining our technology leadership position.

 

We control access to and use of our proprietary technology and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers, and partners. We require our employees, consultants, and other third parties to enter into confidentiality and proprietary rights agreements and we control and monitor access to our software, documentation, proprietary technology, and other confidential information. Our policy is to require all employees and independent contractors to sign agreements assigning to us any inventions, trade secrets, works of authorship, developments, processes, and other intellectual property generated by them on our behalf and under which they agree to protect our confidential information. In addition, we generally enter into confidentiality agreements with our customers and partners.

 

Despite our efforts to protect our intellectual property, unauthorized parties may still copy or otherwise obtain and use our technology. In addition, we intend to continue to expand our international operations, and effective intellectual property, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries. Any significant impairment of our intellectual property rights could harm our business or our ability to compete.

 

Impact of the COVID-19 Pandemic

 

In December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The pandemic, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours.

 

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For example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions, closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. In March 2020, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all HeartCore Co employees were required to work from home for several months during the height of the pandemic. We cancelled or shifted our customer and industry events to virtual-only experiences. Although we have begun to slowly re-open our offices on a staggered, region-by-region basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. All of these changes may disrupt the way we operate our business. In addition, our management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic and seeking to minimize the risk of the virus and manage its effects on our business and workforce.

 

Although we were recently formed, our wholly owned operating subsidiary, HeartCore Co, has been operating through the pandemic. The operations of HeartCore Co have been impacted by a range of external factors related to the pandemic that are not within our control. As for existing customers, the pandemic has not affected their use our software. As for new customers in the travel, hotel, airline, railroad, and restaurant industry for the CX division, the pandemic has resulted in a reduction in new orders. However, as for new customers in the retail and finance industry for the CX division, orders have increased despite the pandemic, resulting in an overall increase in sales for the CX division of $1,908,847 for the nine months ended September 30, 2021 as compared to nine months ended September 30, 2020. As for the impact of the pandemic on the DX division, large companies were forced to change the way they operate, as employees were forced to work remotely, which increased the demand for our DX software, but due to the delay in the sales cycle by the pandemic, realization of sales were delayed resulting in reduction of sales of $(127,323) for the nine months ended September 30, 2021 as compared to nine months ended September 30, 2020.

 

The duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

 

To the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section, including, in particular, risks related to our dependence on customer renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions may harm our industry, business and results of operations.

 

Recent Developments

 

Affiliated Loan

 

As of the filing date, the Company has a due from balance of approximately $385,500 (JP¥44,462,162 as of January 3, 2022) from Heartcore Technology Inc., a company controlled by the CEO of the Company.

 

Stock Purchase

 

On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”)”) entered into a Stock Purchase Agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Co from Dentsu Digital in accordance with certain terms and conditions in the Stock Purchase Agreement. In accordance with the terms of the Stock Purchase Agreement, the Company shall purchase the 278 shares of HeartCore Co from Dentsu Digital for Fifty Million Forty Thousand Japanese Yen (JP¥50,040,000) (US$434,008 as of January 3, 2022) 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 stock, filed by the Company with the SEC or (ii) December 20, 2022.

 

Redemption

 

On November 3, 2021, the Company redeemed 484,056 shares issued of HeartCore Enterprises, Inc. from the CEO of the Company for $1 in total for the shares related to the early exercise of stock options the CEO held on behalf of the Company. 

 

Private Placement

 

During the period from October 27, 2021 through December 31, 2021, the Company issued 304,000 shares of common stock at a purchase price of $2.50 per share (for an aggregate of $760,000 of proceeds) to accredited investors in a private placement under Rule 506(b) of Regulation D of the Securities Act.

 

Option Awards

 

On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to our 2021 Equity Incentive Plan 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 stock, subject to the terms and conditions of the 2021 Equity Incentive Plan and the option award agreements pursuant to which the options were awarded.

 

Facilities

 

Our corporate headquarters are located at 1-2-33, Higashigotanda, Shinagawa-ku, Tokyo, Japan, where we lease approximately 7,863 rentable square feet of office space from an unaffiliated third party. This lease has an original term ending on September, 2023 with automatic two-year renewal option. Terms of the office lease provide for a base rent payment of $32,942 per month and a share of sales taxes of $3,294 per month. We also have an office at 2-4-35, Mekaru, Naha-city, Okinawa, Japan, where we lease approximately 890 rentable square feet of office space from an unaffiliated third party. This lease has an original term ending on June, 2022 with automatic annual renewal option. Terms of the Okinawa office lease provide for a base rent payment of $1,816 per month and a share of sales taxes of $181 per month.

 

Human Capital Management

 

Helping millions of organizations grow better requires a truly remarkable team. We are passionate about building a company culture where people can do their best work. Our company culture and our people are not just human resources priorities but critical business priorities. As a result, we consistently focus on how we can continue to help employees grow, both personally and professionally.

 

Since 2009, we have expanded beyond our Japanese headquarters to several offices globally and have built a large remote community. Currently, we are operating only from our office in Japan. As of September 30, 2021, we had 43 full-time employees.

 

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  Culture and Values. Our culture is built on the firm belief that personal and professional growth is just as important as business growth. We believe the best people do not only fit our culture, they further it.
     
  Diversity, Inclusion, and Belonging. We have launched various initiatives to further our goal of being a more diverse, inclusive, and equitable workplace. We have a team dedicated to diversity, inclusion, and belonging initiatives, including but not limited to: hiring goals focused on increasing black, indigenous and people of color representation company-wide, anti-racism training for employees and managers, key external partnerships, and our annual diversity report.
     
  Compensation and Benefits. We provide competitive compensation and benefits for our employees globally. Our compensation packages may include base salary, commission or semi-annual bonuses, and stock-based compensation. We evaluate both compensation and benefit offerings on an annual basis to ensure competitiveness of both programs and we make adjustments as needed.
     
  Workplace awards. We are proud to be named a Best Place to Work in 2020 and 2021 by Ministry of Economy, Trade and Industry Japan.
     
  Hybrid Culture and COVID-19. Like other companies, we have learned to adapt during the pandemic. We have prioritized employee safety and transparency during the pandemic and continue to do so, ensuring all employees are set up to work remotely and providing clarity on office closures and evolving guidelines, where possible. In the third quarter of 2020, we made the decision to permanently move to a hybrid workplace model, which means that as of January 1, 2021, our employees have the option to be fully remote, work full-time from one of our offices, or have the flexibility to work between office and remotely. This move provides our employees with continued flexibility, following the pandemic, to work in person, remotely, or in a hybrid model. This will enable us to grow better in serving our customers.

 

Government Regulation

 

Our business is and will continue to be subject to extensive U.S. federal and state and foreign laws and regulations, including laws and regulations involving privacy, data protection, security, intellectual property, competition, taxation, anti-corruption, anti-bribery, anti-money laundering, and other similar laws. Many of these laws and regulations are still evolving and are likely to remain uncertain for the foreseeable future, and these laws and regulations can vary significantly from jurisdiction to jurisdiction. The costs of complying with these laws and regulations are high and likely to increase in the future. Further, the impact of these laws and regulations may disproportionately affect our business in comparison to our competitors that have greater resources.

 

In the United States, we are subject to data security and privacy rules and regulations promulgated under the authority of the Federal Trade Commission, the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the California Consumer Privacy Act of 2018 (the “CCPA”), and other state and federal laws relating to privacy and data security. The CCPA requires covered businesses to provide new disclosures to California residents and to provide them new ways to opt-out of the sale of personal information, and provides a private right of action and statutory damages for data breaches. Other jurisdictions in the United States are beginning to propose laws similar to the CCPA.

 

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As a result of our international operations, we must comply with a multitude of data security and privacy laws that may vary significantly from jurisdiction to jurisdiction. Virtually every jurisdiction in which we operate has established or is in the process of establishing data security and privacy legal frameworks with which we or our customers must comply. Our failure to comply with the laws of each jurisdiction may subject us to significant penalties. For example, the data protection landscape in Europe, including with respect to cross-border data transfers, is currently unstable and other countries outside of Europe have enacted or are considering enacting cross-border data transfer restrictions and laws requiring local data residency.

 

Legal Proceedings

 

From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

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MANAGEMENT

 

Directors and Executive Officers

 

Set forth below is information regarding our directors and executive officers as of the date of this prospectus.

 

Name   Age   Positions
Sumitaka Yamamoto   56   Chairman of Board, Chief Executive Officer, President and Director
Kimio Hosaka   53   Chief Operating Officer and Director
Hidekazu Miyata   50   Chief Technical Officer
Qizhi Gao   40   Chief Financial Officer
Keisuke Kuno   46   CX Division Vice President
Yoshitomo Yamano   51   Director
Yuki Tan   47   Director
Takeshi Omoto   43   Director
Yuta Katai   36   Director

 

Biographical information concerning our directors and executive officers listed above is set forth below.

 

Sumitaka Yamamoto. Mr. Yamamoto has served as our Chairman of the Board of Directors since August 16, 2021 and served as our Chief Executive Officer and President and been a member of our Board of Directors since May 18, 2021. Mr. Yamamoto is also the founder of HeartCore Co and has served as the Chief Executive Officer and member of the Board of Directors of HeartCore Co since June 2009. Mr. Yamamoto is a seasoned information technology software programmer. Mr. Yamamoto graduated with a bachelor’s degree in Spanish from Kansai Gaidai University, Tokyo, Japan. Mr. Yamamoto does not hold, and has not previously held, any directorships in any reporting companies. We believe that Mr. Yamamoto is qualified to serve on our Board of Directors due to his experience in all aspects of our business and his ability to provide an insider’s perspective in board discussions about the business and strategic direction of the Company. We believe that his experience gives him unique insights into our opportunities, challenges and operations.

 

Kimio Hosaka. Mr. Hosaka has served as our Chief Operating Officer and been a member of our Board of Directors since May 18, 2021. Mr. Hosaka has served as the Chief Operating Officer and member of the Board of Managers of HeartCore Co since August 2015. Mr. Hosaka graduated with a bachelor’s degree in physics from Chuo University, Tokyo, Japan. Mr. Hosaka does not hold, and has not previously held, any directorships in any reporting companies. We believe that Mr. Hosaka is qualified to serve on our Board of Directors due to his experience in business and operations matters.

 

Hidekazu Miyata. Mr. Miyata has served as our Chief Technical Officer since May 18, 2021. Mr. Miyata has also served as the head of the DX division of HeartCore Co since June 2009. Mr. Miyata graduated with a bachelor’s degree in economics from Doshisha University, Japan. Mr. Miyata does not hold, and has not previously held, any directorships in any reporting companies.

 

Qizhi Gao. Mr. Gao has served as our Chief Financial Officer since May 18, 2021. Mr. Gao has also served as the Chief Financial Officer of HeartCore Co since May 2017. From December 2007 through April 2017, Mr. Gao served as the Group Leader, Finance & Accounting Department at Marubishi Corporation in Tokyo, Japan. Mr. Gao graduated with a bachelor’s degree in computer accounting from Chuo College of Information and Accounting, Japan. Mr. Gao does not hold, and has not previously held, any directorships in any reporting companies.

 

Keisuke Kuno. Mr. Kuno has served as our CX division Vice President since May 18, 2021. Since March 2010, Mr. Kuno has also served as the head of the CX division and member of the Board of Directors of HeartCore Co. Mr. Kuno graduated with a bachelor’s degree in business administration from Hosei University, Tokyo, Japan. Mr. Kuno does not hold, and has not previously held, any directorships in any reporting companies.

 

Yoshitomo Yamano. Mr. Yamano has been an independent member of our Board of Directors since May 18, 2021. Mr. Yamano was also an independent member of the Board of Directors of HeartCore Co from August 2018 through March 2021. Since April 2016, Mr. Yamano has served as the Chief Executive Officer of Yamano Holdings Corporation. Mr. Yamano graduated with a bachelor’s degree in commerce from Meiji University, Tokyo, Japan. Mr. Yamano does not hold, and has not previously held, any directorships in any reporting companies. We believe that Mr. Yamano is qualified to serve on our Board of Directors due to his expertise in business and operations matters.

 

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Yuki Tan. Mr. Tan has been an independent member of our Board of Directors since September 1, 2021. Since April 2015, Mr. Tan has served as the Chief Executive Officer of Daitan Group, a company known for its Fuji Soba noodles. Mr. Tan graduated from Keio University in Tokyo with a bachelor’s degree in economics. Mr. Tan does not hold, nor has he ever held, a directorship in any of the reporting companies. We believe that Mr. Tan is qualified to serve on our Board of Directors due to his expertise in business and operations matters.

 

Takeshi Omoto. Mr. Omoto has been an independent member of our Board of Directors since September 1, 2021. Since July 2012, Mr. Omoto has served as a partner at Ambitious Tokyo Law Office. Mr. Omoto graduated with a Law Degree from Chuo University, Tokyo, Japan. Mr. Omoto does not hold, and has not previously held, any directorships in any reporting companies. We believe that Mr. Omoto is qualified to serve on our Board of Directors due to his expertise in corporate governance and legal matters.

 

Yuta Katai. Mr. Katai has been an independent member of our Board of Directors since September 1, 2021. Since June 2018, Mr. Katai has served as an accounting advisor at Katai Accounting Firm. From December 2008 through December 2017, he served as auditor at KPMG AZSA, LLC. Mr. Katai graduated with a bachelor’s degree in faculty of commerce from Doshisha University, Kyoto, Japan. Mr. Katia does not hold, and has not previously held, any directorships in any reporting companies. We believe that Mr. Katia is qualified to serve on our Board of Directors due to his expertise in accounting and financial services matters.

 

Our Board of Directors elects our executive officers annually by majority vote. Each director’s term continues until his or her successor is elected or qualified at the next annual meeting, unless such director earlier resigns or is removed.

 

Family Relationships

 

There are no family relationships among any of our directors or executive officers.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

 

  been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
     
  had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
     
  been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
     
  been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
     
  been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
     
  been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

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Board Leadership Structure and Board’s Role in Risk Oversight

 

We have not separated the positions of Chairman of the Board and Chief Executive Officer. Sumitaka Yamamoto has served as our Chairman of the Board of Directors since August 16, 2021 and Chief Executive Officer since May 18, 2021. We believe that combining the positions of Chairman and Chief Executive Officer allows for focused leadership of our organization which benefits us in our relationships with investors, customers, suppliers, employees and other constituencies. We believe that consolidating the leadership of the Company under Mr. Yamamoto is the appropriate leadership structure for our Company and that any risks inherent in that structure are balanced by the oversight of our other independent directors on our Board. However, no single leadership model is right for all companies and at all times. The Board recognizes that depending on the circumstances, other leadership models, such as the appointment of a lead independent director, might be appropriate. Accordingly, the Board may periodically review its leadership structure. In addition, following the completion of the offering, the Board will hold executive sessions in which only independent directors are present.

 

Our Board is generally responsible for the oversight of corporate risk in its review and deliberations relating to our activities. Our principal source of risk falls into two categories, financial and product commercialization. The audit committee oversees management of financial risks, and our Board regularly reviews information regarding our cash position, liquidity and operations, as well as the risks associated with each. The Board regularly reviews plans, results and potential risks related to our business. The Board is also expected to oversee risk management as it relates to our compensation plans, policies and practices for all employees including executives and directors, particularly whether our compensation programs may create incentives for our employees to take excessive or inappropriate risks which could have a material adverse effect on the Company.

 

Controlled Company and Director Independence

 

The “controlled company” exception to Nasdaq’s rules provide that a company of which more than 50% of the voting power is held by an individual, group or another company, a “controlled company,” need not comply with certain requirements of Nasdaq’s corporate governance rules. As stated above, Sumitaka Yamamoto, the Chief Executive Officer of the Company, beneficially owns 10,984,539 shares of our common stock, which represent approximately 69.43% of the voting power of our outstanding capital stock. Following this offering, Mr. Yamamoto will control approximately 59.96% of the voting power of our outstanding capital stock if all the common stock being offered are sold. As a result, the Company is a “controlled company” under Nasdaq corporate governance standards. As a controlled company, the Company does not have to comply with certain corporate governance requirements under Nasdaq rules, including the requirements that:

 

  a majority of the Company’s Board of Directors to consist of “independent directors” as defined by the applicable rules and regulations of Nasdaq;
     
  the compensation of the Company’s executive officers to be determined, or recommended to the Board of Directors for determination, by independent directors constituting a majority of the independent directors of the Board in a vote in which only independent directors participate or by a Compensation Committee comprised solely of independent directors; and
     
  that director nominees to be selected, or recommended to the Board of Directors for selection, by independent directors constituting a majority of the independent directors of the Board in a vote in which only independent directors participate or by a nomination committee comprised solely of independent directors.

 

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The Company intends to avail itself of certain of these exemptions. More specifically, the Company will not have a compensation committee or a nominating and corporate governance committee. Therefore, for as long as the Company remains a “controlled company,” the Company will not have the same protections afforded to shareholders of companies that are subject to all of these corporate governance requirements. If at any time the Company ceases to be a “controlled company” under the rules of Nasdaq, the Company’s Board of Directors will take all action necessary to comply with the corporate governance rules of Nasdaq, including establishing certain committees composed entirely of independent directors, subject to a permitted “phase-in” period.

 

Notwithstanding the Company’s status as a controlled company, the Company will remain subject to the corporate governance standard of Nasdaq that requires the Company to have an audit committee with at least three independent directors as well as composed entirely of independent directors.

 

The Company’s Board of Directors has affirmatively determined that four of its six directors, including Yoshitomo Yamano, Yuki Tan, Takeshi Omoto, and Yuta Katai are independent directors of the Company within the meaning of Nasdaq’s rules. Therefore, a majority of the members of the Board of Director consists of independent directors.

 

Committees of the Board of Directors

 

Audit Committee

 

We have established an audit committee, which consists of four independent directors, Yoshitomo Yamano, Yuki Tan, Takeshi Omoto, and Yuta Katai. Mrs. Katai is the chair of the audit committee. Mrs. Katai qualifies as an “audit committee financial expert” under SEC rules. Our audit committee adopted a written charter, a copy of which is posted on the Corporate Governance section of our website, at www.heartcore.co.jp.

 

Our audit committee is authorized to:

 

  approve and retain the independent auditors to conduct the annual audit of our financial statements;
  review the proposed scope and results of the audit;
  review and pre-approve audit and non-audit fees and services;
  review accounting and financial controls with the independent auditors and our financial and accounting staff;
  review and approve transactions between us and our directors, officers and affiliates;
  recognize and prevent prohibited non-audit services;
  establish procedures for complaints received by us regarding accounting matters; and
  oversee internal audit functions, if any.

 

Compensation Committee

 

Because we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq, we will not be required to, and do not currently expect to, have a compensation committee. If and when we are no longer a “controlled company”, we will be required to establish a compensation committee. We anticipate that such a compensation committee would consist of three directors who will be “independent” under the rules of the SEC, subject to the permitted “phase-in” period pursuant to the rules of Nasdaq. Upon formation of a compensation committee, we would expect to adopt a compensation committee charter defining the committee’s primary duties in a manner consistent with the rules of the SEC and Nasdaq standards.

 

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Nominating and Corporate Governance Committee

 

Because we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq, we will not be required to, and do not currently expect to, have a nominating and corporate governance committee. If and when we are no longer a “controlled company”, we will be required to establish a nominating and corporate governance committee. We anticipate that such a nominating and corporate governance committee would consist of three directors who will be “independent” under the rules of the SEC, subject to the permitted “phase-in” period pursuant to the rules of Nasdaq. Upon formation of a nominating and corporate governance committee, we would expect to adopt a nominating and corporate governance committee charter defining the committee’s primary duties in a manner consistent with the rules of the SEC and Nasdaq standards.

 

A stockholder may nominate one or more persons for election as a director at an annual meeting of stockholders if the stockholder complies with the notice and information provisions contained in our bylaws. Such notice must be in writing to our company not less than 90 days and not more than 120 days prior to the anniversary date of the preceding year’s annual meeting of stockholders or as otherwise required by requirements of the Exchange Act. In addition, stockholders furnishing such notice must be a holder of record on both (i) the date of delivering such notice and (ii) the record date for the determination of stockholders entitled to vote at such meeting.

 

Code of Ethics

 

The Company has adopted a Code of Ethics and Business Conduct that applies to all of its directors, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, and any person performing similar functions) and employees. The Code of Ethics and Business Conduct is available on our website at www.heartcore.co.jp.

 

We are required to disclose any amendment to, or waiver from, a provision of our code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. We intend to use our website as a method of disseminating this disclosure, as permitted by applicable SEC rules. Any such disclosure will be posted to our website within four (4) business days following the date of any such amendment to, or waiver from, a provision of our code of ethics.

 

Limitation on Liability and Indemnification of Officers and Directors

 

Our certificate of incorporation provides that our officers and directors will be indemnified by us to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended. In addition, our certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, except to the extent such exemption from liability or limitation thereof is not permitted by the General Corporation Law of the State of Delaware.

 

We intend to enter into separate indemnification agreements with our directors and officers. Each indemnification agreement will provide, among other things, for indemnification to the fullest extent permitted by law and our amended and restated certificate of incorporation and bylaws against any and all expenses, judgments, fines, penalties and amounts paid in settlement of any claim. The indemnification agreements will provide for the advancement or payment of all expenses to the indemnitee and for reimbursement to us if it is found that such indemnitee is not entitled to such indemnification under applicable law and our certificate of incorporation and bylaws.

 

Our certificate of incorporation also permits us to maintain insurance on behalf of any officer, director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit such indemnification. We intend to purchase a policy of directors’ and officers’ liability insurance  that insures our officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to indemnify our officers and directors.

 

These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against officers and directors, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant to these indemnification provisions.

 

We believe that these provisions and the insurance are necessary to attract and retain talented and experienced officers and directors.

 

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Any repeal or amendment of provisions of our certificate of incorporation affecting indemnification rights, whether by our board of directors, stockholders or by changes in applicable law, or the adoption of any other provisions inconsistent therewith, will (unless otherwise required by law) be prospective only, except to the extent such amendment or change in law permits us to provide broader indemnification rights on a retroactive basis, and will not in any way diminish or adversely affect any right or protection existing thereunder with respect to any act or omission occurring prior to such repeal or amendment or adoption of such inconsistent provision.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the provisions described above, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table provides information regarding the compensation we paid during fiscal years ended December 31, 2021 and 2020 to Sumitaka Yamamoto, our chief executive officer (principal executive officer), and Keisuke Kuno, Vice President of our CX Division. We refer to these individuals as our “named executive officers.” No other executive officers received total compensation in excess of $100,000.  

 

Name and Position   Year    

Salary

($)

   

Bonus

($)

   

Total

($)

 
Sumitaka Yamamoto     2021       387,025       -       387,025  
Chief Executive Officer     2020       340,984       -       340,984  
Keisuke Kuno     2021       130,946               130,946  
CX DIV. Vice President     2020       78,025       63,235       141,260  

 

Employment Agreements

 

Executive Employment Agreement with Sumitaka Yamamoto

 

We intend to enter into an Executive Employment Agreement with Sumitaka Yamamoto. Mr. Yamamoto’s agreement provides that he will serve as the Chief Executive Officer of HeartCore Enterprises, Inc. and of our subsidiary, HeartCore Co., Ltd. Mr. Yamamoto’s agreement provides that he will be paid an annual salary of $381,000, and will be issued 45,720 shares of our common stock pursuant to an Award Agreement and the Company’s 2021 Equity Incentive Plan, which is described below. The shares of restricted stock vest in four tranches, with 25% of the awarded shares vesting at the end of each year of the term of the employment agreement, subject to earlier vesting or forfeiture as set forth below. Mr. Yamamoto’s agreement provides that he is eligible to be paid bonuses as may be determined by the Board of Directors of the Company. Mr. Yamamoto’s agreement also has the terms and conditions which are described below in the section entitled “Provisions Applicable to All Executive Employment Agreements”.

 

Executive Employment Agreement with Qizhi Gao

 

We intend to enter into an Executive Employment Agreement with Qizhi Gao. Mr. Gao’s agreement provides that he will serve as the Chief Financial Officer of Director HeartCore Enterprises, Inc. and of our subsidiary, HeartCore Co., Ltd. Mr. Gao’s agreement provides that he will be paid an annual salary of $54,012, and will be issued 6,481 shares of our common stock pursuant to an Award Agreement and the Company’s 2021 Equity Incentive Plan, which is described below. The shares of restricted stock vest in four tranches, with 25% of the awarded shares vesting at the end of each year of the term of the employment agreement, subject to earlier vesting or forfeiture as set forth below. Mr. Gao’s agreement provides that he will be paid an annual bonus of $11,655 and will also be eligible to be paid bonuses as may be determined by the Board of Directors of the Company. Mr. Gao’s agreement also has the terms and conditions which are described below in the section entitled “Provisions Applicable to All Executive Employment Agreements”.

 

Executive Employment Agreement with Kimio Hosaka

 

We intend to enter into an Executive Employment Agreement with Kimio Hosaka. Mr. Hosaka’s agreement provides that he will serve as the Chief Operating Officer of Director HeartCore Enterprises, Inc. and of our subsidiary, HeartCore Co., Ltd. Mr. Hosaka’s agreement provides that he will be paid an annual salary of $95,459, and will be issued 11,455 shares of our common stock pursuant to an Award Agreement and the Company’s 2021 Equity Incentive Plan, which is described below. The shares of restricted stock vest in four tranches, with 25% of the awarded shares vesting at the end of each year of the term of the employment agreement, subject to earlier vesting or forfeiture as set forth below. Mr. Hosaka’s agreement provides that he is eligible to be paid bonuses as may be determined by the Board of Directors of the Company. Mr. Hosaka’s agreement also has the terms and conditions which are described below in the section entitled “Provisions Applicable to All Executive Employment Agreements”.

 

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Executive Employment Agreement with Hidekazu Miyata

 

We intend to enter into an Executive Employment Agreement with Hidekazu Miyata. Mr. Miyata’s agreement provides that he will serve as the Chief Information Officer of Director HeartCore Enterprises, Inc. and of our subsidiary, HeartCore Co., Ltd. Mr. Miyata’s agreement provides that he will be paid an annual salary of $75,600, and will be issued 9,072 shares of our common stock pursuant to an Award Agreement and the Company’s 2021 Equity Incentive Plan, which is described below. The shares of restricted stock vest in four tranches, with 25% of the awarded shares vesting at the end of each year of the term of the employment agreement, subject to earlier vesting or forfeiture as set forth below. Mr. Miyata’s agreement provides that he is eligible to be paid bonuses as may be determined by the Board of Directors of the Company. Mr. Miyata’s agreement also has the terms and conditions which are described below in the section entitled “Provisions Applicable to All Executive Employment Agreements”.

 

Executive Employment Agreement with Keisuke Kuno

 

We intend to enter into an Executive Employment Agreement with Keisuke Kuno. Mr. Kuno’s agreement provides that he will serve as the Sales Director of HeartCore Enterprises, Inc. and of our subsidiary, HeartCore Co., Ltd. Mr. Kuno’s agreement provides that he will be paid an annual salary of $109,000, and will be issued 13,092 shares of our common stock pursuant to an Award Agreement and the Company’s 2021 Equity Incentive Plan, which is described below. The shares of restricted stock vest in four tranches, with 25% of the awarded shares vesting at the end of each year of the term of the employment agreement, subject to earlier vesting or forfeiture as set forth below. Mr. Kuno’s agreement provides that he is eligible to be paid bonuses as may be determined by the Board of Directors of the Company. Mr. Kuno’s agreement also has the terms and conditions which are described below in the section entitled “Provisions Applicable to All Executive Employment Agreements”.

 

Provisions Applicable to All Executive Employment Agreements

 

Each of the Executive Employment Agreements as described above, has an initial term of 1 year, provided that the term of each agreement will automatically be extended for one or more additional terms of one year each unless either the Company or applicable executive provides notice to the other of their desire to not so renew the initial term or renewal term (as applicable) at least 30 days prior to the expiration of then-current initial term or renewal term (as applicable). Each of the agreements provide that the applicable executive’s employment with the Company shall be “at will,” meaning that either applicable executive or the Company may terminate the applicable executive’s employment at any time and for any reason, subject to the other provisions of the agreement.

 

Each of the agreements may be terminated by the Company, either with or without “Cause”, or by the applicable executive, either with or without “Good Reason”.

 

For purposes of each agreement, “Cause” means:

 

  a violation of any material written rule or policy of the Company for which violation any employee may be terminated pursuant to the written policies of the Company reasonably applicable to an executive employee;
     
  misconduct by the applicable executive to the material detriment of the Company;
     
  the applicable executive’s conviction (by a court of competent jurisdiction, not subject to further appeal) of, or pleading guilty to, a felony;
     
  the applicable executive’s gross negligence in the performance of the applicable executive’s duties and responsibilities to the Company as described in this Agreement; or
     
  the applicable executive’s material failure to perform the applicable executive’s duties and responsibilities to the Company as described in the agreement (other than any such failure resulting from the applicable executive’s incapacity due to physical or mental illness or any such failure subsequent to the applicable executive being delivered a notice of termination without Cause by the Company or delivering a notice of termination for Good Reason to the Company), in either case after written notice from the Board to the applicable executive of the specific nature of such material failure and the applicable executive’s failure to cure such material failure within 10 days following receipt of such notice.

 

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For purposes of each agreement, “Good Reason” means:

 

  at any time following a Change of Control (as defined below), a material diminution by the Company of compensation and benefits (taken as a whole) provided to the applicable executive immediately prior to a Change of Control;
     
  a reduction in base salary or target or maximum bonus, other than as part of an across-the-board reduction in salaries of management personnel;
     
  the relocation of the applicable executive’s principal executive office to a location more than 50 miles further from the applicable executive’s principal executive office immediately prior to such relocation; or
     
  a material breach by the Company of any of the terms and conditions of the agreement which the Company fails to correct within 10 days after the Company receives written notice from the applicable executive of such violation.

 

For purposes of each agreement a “Change of Control” of the Company will be deemed to have occurred if, after the effective date of the applicable agreement, (i) the beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of securities representing more than 50% of the combined voting power of the Company is acquired by any “person” as defined in sections 13(d) and 14(d) of the Exchange Act (other than the Company, any subsidiary of the Company, or any trustee or other fiduciary holding securities under an employee benefit plan of the Company), (ii) the merger or consolidation of the Company with or into another corporation where the shareholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, shares representing in the aggregate 50% or more of the combined voting power of the securities of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any) in substantially the same proportion as their ownership of the Company immediately prior to such merger or consolidation, or (iii) the sale or other disposition of all or substantially all of the Company’s assets to an entity, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned directly or indirectly by shareholders of the Company, immediately prior to the sale or disposition, in substantially the same proportion as their ownership of the Company immediately prior to such sale or disposition.

 

In the event that the Company terminates the term of the applicable agreement or the applicable executive’s employment with Cause, or if the applicable executive terminates their agreement without good reason, then, subject to any other agreements between the company with respect to other equity grants made to such executive:

 

  the Company will pay to the applicable executive any unpaid base salary and benefits then owed or accrued, and any unreimbursed expenses;
     
  any unvested portion of any equity granted to the applicable executive under the applicable agreement or any other agreements with the Company will immediately be forfeited; and
     
  all of the parties’ rights and obligations under the agreement will cease, other than those rights or obligations which arose prior to the termination date or in connection with such termination, and subject to the survival provisions of the agreements.

 

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In the event that the Company terminates the term of the applicable agreement or the applicable executive’s employment without Cause, or if the applicable executive terminates their agreement with good reason, then, subject to any other agreements between the company with respect to other equity grants made to such executive:

 

  the Company will pay to the applicable executive any base salary, bonuses, and benefits then owed or accrued, and any unreimbursed expenses;
     
  the Company will pay to the applicable executive, in one lump sum, an amount equal to the base salary that would have been paid to the applicable executive for the remainder of the initial term of the applicable agreement (if the termination occurs during the initial term of the applicable agreement) or renewal term of the applicable agreement (if the termination occurs during a renewal term of the applicable agreement);
     
  any unvested portion of any equity granted to the applicable executive under the applicable agreement or any other agreements with the Company will, to the extent not already vested, be deemed automatically vested; and
     
  all of the parties’ rights and obligations under the agreement will cease, other than those rights or obligations which arose prior to the termination date or in connection with such termination, and subject to the survival provisions of the agreements.

 

In the event of the applicable executive’s death or total disability during the term of the applicable agreement, the term of the applicable agreement and the applicable executive’s employment shall terminate on the date of death or total disability. In the event of such termination, the Company’s sole obligations hereunder to the applicable executive (or the applicable executive’s estate) shall be for unpaid base salary, accrued but unpaid bonus and benefits (then owed or accrued and owed in the future), a pro-rata bonus for the year of termination based on the applicable executive’s target bonus for such year and the portion of such year in which the applicable executive was employed, and reimbursement of expenses pursuant to the terms hereon through the effective date of termination, and any unvested portion of any equity granted to the applicable executive under the applicable agreement or any other agreements with the Company will immediately be forfeited as of the termination date.

 

In the event that the term of the applicable agreement is not renewed by either party, any unvested portion of any equity granted to the applicable executive under the applicable agreement or any other agreements with the Company will immediately be forfeited as of the expiration of the term of the applicable agreement without any further action of the parties.

 

If it is determined that any payment provided to the applicable executive under the applicable agreement or otherwise, whether or not in connection with a Change of Control (a “Payment”), would constitute an “excess parachute payment” within the meaning of section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), such that the Payment would be subject to an excise tax under section 4999 of the Code (the “Excise Tax”), the Company will pay to the applicable executive an additional amount (the “Gross-Up Payment”) such that the net amount of the Gross-Up Payment retained by the applicable executive after the payment of any Excise Tax and any federal, state and local income and employment tax on the Gross-Up Payment, shall be equal to the Excise Tax due on the Payment and any interest and penalties in respect of such Excise Tax.

 

During the term of the applicable agreement, the applicable executive is entitled to fringe benefits consistent with the practices of the Company, and to the extent the Company provides similar benefits to the Company’s executive officers, and is entitled to reimbursement for all reasonable and necessary out-of-pocket business, entertainment and travel expenses incurred by the applicable executive in connection with the performance of the applicable executive’s duties hereunder and in accordance with the Company’s expense reimbursement policies and procedures.

 

Each of the agreements provides that, during the term of the applicable agreement, the applicable executive will be entitled to indemnification and insurance coverage for officers’ liability, fiduciary liability and other liabilities arising out of the applicable executive’s position with the Company in any capacity, in an amount not less than the highest amount available to any other executive, and such coverage and protections, with respect to the various liabilities as to which the applicable executive has been customarily indemnified prior to termination of employment, shall continue for at least six years following the end of the term of the applicable agreement. Any indemnification agreement entered into between the Company and the applicable executive shall continue in full force and effect in accordance with its terms following the termination of the applicable.

 

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Each of the employment agreements contains customary confidentiality provisions, and customary provisions related to Company ownership of intellectual property conceived or made by the applicable executive in connection with the performance of their duties under the applicable agreement (i.e., a “work-made-for-hire” provision).

 

Each of the agreements contains a non-compete provision which provides that, for the term of the applicable agreement and for a period of 2 years thereafter, the applicable executive shall not, directly or indirectly: (i) engage in any other business, association or relationship of any kind with any business which provides, in whole or in part, the same or similar services and/or products offered by the which directly or indirectly competes with Company; nor (ii) solicit or accept, or induce any person or entity to reduce goods or services to Company, or in any manner assist others in the solicitation, acceptance, or inducement of, any business transactions with Company’s existing and prospective clients, accounts, suppliers and/or other persons or entities with whom the Company has had business relationships (or whom Company had specifically identified for a prospective business relationship). These restrictions extend to the geographic area in which Company actively conducted business immediately prior to termination of the applicable agreement.

 

Each of the agreements also contains a customary non-solicitation provision, in which the applicable executive agrees that, for the term of the applicable agreement and for a period of 3 years thereafter, the applicable executive will not, directly or indirectly solicit or discuss with any employee of Company the employment of such Company employee by any other commercial enterprise other than Company, nor recruit, attempt to recruit, hire or attempt to hire any such Company employee on behalf of any commercial enterprise other than Company, provided that this provision does not prohibit the applicable executive from undertaking a general recruitment advertisement provided that the foregoing is not targeted towards any person or entity identified above, or from hiring, employing or engaging any such person or entity who responds to such general recruitment advertisement.

 

Due to the application of various States’ laws, there is no assurance that the non-compete provisions or the non-solicitation provisions as set forth in each of the agreements will be enforced. Each of the agreements contains a “blue pencil” provision that, in the event that a court determines that any of these restrictions are unenforceable, the parties to the agreement agreed that it is their desire that the court substitute an enforceable restriction in place of any restriction deemed unenforceable, and that the substitute restriction be deemed incorporated in the agreement and enforceable against the applicable executive.

 

Each of the agreements contains customary representations and warranties by the applicable executive, relating to the agreement, and any securities of the Company that may be issued to the executive, and contains other customary miscellaneous provisions relating to waivers, assignments, third party rights, survival of provisions following termination, severability, notices, waiver of jury trials and other provisions.

 

Each of the agreements is governed by and construed and enforced in accordance with the internal laws of the State of Delaware, and for all purposes shall be construed in accordance with the laws of such state, without giving effect to the choice of law provisions of such state. Each of the agreements provide that all legal proceedings concerning the applicable agreement will be in the state and federal courts sitting in Santa Clara County, California, provided that each agreement also includes a provision relating to any disputes being settled by arbitration.

 

Award Agreements

 

As noted above, each of the executives for whom an employment agreement was executed was issued a number of shares of restricted stock pursuant to the Company’s 2021 Equity Incentive Plan. These awards were made on the same date as the execution of the applicable employment agreement, and were made pursuant to the form of restricted award agreement which is attached to the 2021 Equity Incentive Plan. As noted above, each of the award agreements provided that the shares will vest 25% a year, on each annual anniversary of the date of the employment agreement, subject to earlier vesting and forfeiture as described in the employment agreements (as described above).

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information on outstanding options and stock awards held by the named executive officers as of December 31, 2021.

 

    Option Awards     Stock Awards  
Name   Number of Securities Underlying Unexercised Options (#) Exercisable     Number of Securities Underlying Unexercised Options (#) Unexercisable     Option Exercise Price ($)     Option Expiration Date     Number of Shares or Units Of Stock that Have Not Vested (#) (1)     Market Value Of Shares Or Units of Stock That Have Not
Vested ($) (1)
 
Sumitaka Yamamoto               $                 $  
                                                 
Keisuke Kuno           75,000     $ 2.50       12/25/2031           $  

 

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Additional Narrative Disclosure

 

Retirement Benefits

 

We have not maintained, and do not currently maintain, a defined benefit pension plan, nonqualified deferred compensation plan, 401(k) plan or other retirement benefits.

 

Potential Payments Upon Termination or Change in Control

 

As described under “— Employment Agreements” above, each of the executives with whom the Company has entered into employment agreements are entitled severance if their employment is terminated by the Company without “Cause” or is terminated by the applicable executive with “Good Reason”, in each case as described above.

 

Director Compensation

 

Other than as set forth in the table and described more fully below, we did not pay any compensation or make any equity awards or non-equity awards to any of our non-employee directors during fiscal year 2021. Directors may be reimbursed for travel and other expenses directly related to their activities as directors. Directors who also serve as employees receive no additional compensation for their service as directors. During fiscal year 2021, Sumitaka Yamamoto and our Chief Executive Officer, Kimio Hosaka, our Chief Operating Officer were each a member of our board of directors, as well as an employee, and received no additional compensation for their services as a director. See the section titled “Executive Compensation” for more information about the compensation for these individuals for fiscal year 2021.

 

The following table presents the total compensation for each person who served as a non-employee director of the Company during fiscal year 2021.

 

Name  

Fees Earned or Paid in Cash

($)

    All Other Compensation ($)     Total
($)
 
Takeshi Omoto     12,804       -       12,804  
Yoshitomo Yamano     10,993       -       10,993  
Yuki Tan     10,993               10,993  
Yuta Katai     16,490               16,490  

 

Prior to the effectiveness of the registration statement of which this prospectus forms a part, we did not have a formal policy to compensate our non-employee directors. Immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, we intend to implement a formal policy pursuant to which our non-employee directors will be eligible to receive the following cash retainers and equity awards.

 

Our policy will provide (as codified in the independent director agreements) that each non-employee director elected to our board of directors after the effectiveness of this registration statement of which this prospectus forms a part, upon initial election to our board of directors, will be compensated as follows:

 

  Each director will be paid the sum of $50,000 annually for director’s service as a director of the Company, to be paid $12,500 each calendar quarter, payable within 5 business days of the end of each calendar quarter, and with such amount for any partial calendar quarter being appropriately prorated.
     
  Each director shall be paid $4,000 annually for service as a member of the Audit Committee and an additional sum of $3,000 annually for service as the Chairman of the Audit Committee, with each of these payments to be paid quarterly in equal portions, within 5 business days of the end of each calendar quarter, and with any amount for any partial calendar quarter being appropriately prorated.

 

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During the term of the applicable independent director agreement, the Company will reimburse the applicable director for all reasonable out-of-pocket expenses incurred by the applicable director in attending any in-person meetings, provided that the applicable director complies with the generally applicable policies, practices and procedures of the Company for submission of expense reports, receipts or similar documentation of such expenses. Any reimbursements for allocated expenses (as compared to out-of-pocket expenses of the applicable director in excess of $500.00) must be approved in advance by the Company.

 

Each of the agreements contains customary confidentiality provisions, and customary provisions related to Company ownership of intellectual property conceived or made by the applicable director in connection with the performance of their duties under the applicable agreement (i.e., a “work-made-for-hire” provision).

 

Each of the agreement provide that, during the term (which continues as long as the applicable director is serving as a director of the Company), the applicable director is be entitled to indemnification and insurance coverage for officers’ liability, fiduciary liability and other liabilities arising out of the applicable director’s position with the Company in any capacity, in an amount not less than the highest amount available to any other director, and such coverage and protections, with respect to the various liabilities as to which the applicable director has been customarily indemnified prior to termination of employment, shall continue for at least six years following the end of the term. Any indemnification agreement entered into between the Company and the applicable director will continue in full force and effect in accordance with its terms following the termination of the applicable agreement.

 

Each of the agreements contains customary representations and warranties by the applicable director, relating to the agreement, and contains other customary miscellaneous provisions relating to waivers, assignments, third party rights, survival of provisions following termination, severability, notices, waiver of jury trials and other provisions.

 

Each of the agreements is governed by and construed and enforced in accordance with the internal laws of the State of Delaware, and for all purposes shall be construed in accordance with the laws of such state, without giving effect to the choice of law provisions of such state. Each of the agreements provide that all legal proceedings concerning the applicable agreement will be in the state and federal courts sitting in Santa Clara County, California, provided that each agreement also includes a provision relating to any disputes being settled by arbitration.

 

2021 Equity Incentive Plan

 

Overview

 

The Board of Directors and stockholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Plan”) on August 6, 2021. Under the 2021 Plan, 2,400,000 shares of common stock are authorized for issuance to employees, directors and independent contractors (except those performing services in connection with the offer or sale of the Company’s securities in a capital raising transaction, or promoting or maintaining a market for the Company’s securities) of the Company or its subsidiaries. The 2021 Plan authorizes equity-based and cash-based incentives for participants.

 

On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to the 2021 Plan 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 stock, subject to the terms and conditions of the 2021 Plan and the option award agreements pursuant to which the options were awarded. There were 865,500 shares available for award as of January 3, 2022 under the 2021 Plan.

 

The purpose of 2021 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees and other eligible persons. The Board may, at any time, terminate or, from time to time, amend, modify or suspend this 2021 Plan, in whole or in part. To the extent then required by applicable law or any applicable stock exchange or required under the Internal Revenue Code of 1986, as amended (the “Code”), to preserve the intended tax consequences of the 2021 Plan, or deemed necessary or advisable by the Board, the 2021 Plan and any amendment to the 2021 Plan shall be subject to stockholder approval. Unless earlier terminated by the Board, the 2021 Plan will terminate ten years from the date of adoption.

 

Authorized Shares

 

A total of 2,400,000 shares of the Company’s common stock are authorized for issuance pursuant to the 2021 Plan. Subject to adjustment as provided in the 2021 Plan, the maximum aggregate number of shares that may be issued under the 2021 Plan will be cumulatively increased on January 1, 2022 and on each subsequent January 1, by a number of shares equal to the smaller of (i) 3% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (ii) an amount determined by the Board.

 

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Additionally, if any award issued pursuant to the 2021 Plan expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange program, as provided in the 2021 Plan, or, with respect to restricted stock, restricted stock units (“RSUs”), performance units or performance shares, is forfeited to or repurchased by the Company due to the failure to vest, the unpurchased shares (or for awards other than stock options or stock appreciation rights the forfeited or repurchased shares) which were subject thereto will become available for future grant or sale under the 2021 Plan (unless the 2021 Plan has terminated). With respect to stock appreciation rights, only shares actually issued pursuant to a stock appreciation right will cease to be available under the 2021 Plan; all remaining shares under stock appreciation rights will remain available for future grant or sale under the 2021 Plan (unless the 2021 Plan has terminated). Shares that have actually been issued under the 2021 Plan under any award will not be returned to the 2021 Plan and will not become available for future distribution under the 2021 Plan; provided, however, that if shares issued pursuant to awards of restricted stock, restricted stock units, performance shares or performance units are repurchased by the Company or are forfeited to the Company due to the failure to vest, such shares will become available for future grant under the 2021 Plan. Shares used to pay the exercise price of an award or to satisfy the tax withholdings related to an award will become available for future grant or sale under the 2021 Plan. To the extent an award under the 2021 Plan is paid out in cash rather than shares, such cash payment will not result in reducing the number of shares available for issuance under the 2021 Plan.

 

Notwithstanding the foregoing and, subject to adjustment as provided in the 2021 Plan, the maximum number of shares that may be issued upon the exercise of incentive stock options will equal the aggregate share number stated above, plus, to the extent allowable under Section 422 of the Code and regulations promulgated thereunder, any shares that become available for issuance under the 2021 Plan in accordance with the foregoing.

 

Plan Administration

 

The Board or one or more committees appointed by the Board will administer the 2021 Plan. In addition, if the Company determines it is desirable to qualify transactions under the 2021 Plan as exempt under Rule 16b-3 of the Exchange Act, such transactions will be structured with the intent that they satisfy the requirements for exemption under Rule 16b-3. Subject to the provisions of the 2021 Plan, the administrator has the power to administer the 2021 Plan and make all determinations deemed necessary or advisable for administering the 2021 Plan, including the power to determine the fair market value of the Company’s common stock, select the service providers to whom awards may be granted, determine the number of shares covered by each award, approve forms of award agreements for use under the 2021 Plan, determine the terms and conditions of awards (including the exercise price, the time or times at which the awards may be exercised, any vesting acceleration or waiver or forfeiture restrictions and any restriction or limitation regarding any award or the shares relating thereto), construe and interpret the terms of the 2021 Plan and awards granted under it, prescribe, amend and rescind rules relating to the 2021 Plan, including creating sub-plans and modify or amend each award, including the discretionary authority to extend the post-termination exercisability period of awards (provided that no option or stock appreciation right will be extended past its original maximum term), and to allow a participant to defer the receipt of payment of cash or the delivery of shares that would otherwise be due to such participant under an award. The administrator also has the authority to allow participants the opportunity to transfer outstanding awards to a financial institution or other person or entity selected by the administrator and to institute an exchange program by which outstanding awards may be surrendered or cancelled in exchange for awards of the same type which may have a higher or lower exercise price or different terms, awards of a different type or cash, or by which the exercise price of an outstanding award is increased or reduced. The administrator’s decisions, interpretations and other actions are final and binding on all participants.

 

Eligibility

 

Awards under the 2021 Plan, other than incentive stock options, may be granted to employees (including officers) of the Company or a subsidiary, members of the Company’s Board, or consultants engaged to render bona fide services to the Company or a subsidiary. Incentive stock options may be granted only to employees of the Company or a subsidiary.

 

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Stock Options

 

Stock options may be granted under the 2021 Plan. The exercise price of options granted under the 2021 Plan generally must at least be equal to the fair market value of the Company’s common stock on the date of grant. The term of each option will be as stated in the applicable award agreement; provided, however, that the term may be no more than 10 years from the date of grant. The administrator will determine the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law. After the termination of service of an employee, director or consultant, they may exercise their option for the period of time stated in their option agreement. In the absence of a specified time in an award agreement, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, in the absence of a specified time in an award agreement, the option will remain exercisable for three months following the termination of service. An option may not be exercised later than the expiration of its term. Subject to the provisions of the 2021 Plan, the administrator determines the other terms of options.

 

Stock Appreciation Rights

 

Stock appreciation rights may be granted under the 2021 Plan. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of the Company’s common stock between the exercise date and the date of grant. Stock appreciation rights may not have a term exceeding 10 years. After the termination of service of an employee, director or consultant, they may exercise their stock appreciation right for the period of time stated in their stock appreciation right agreement. In the absence of a specified time in an award agreement, if termination is due to death or disability, the stock appreciation rights will remain exercisable for 12 months. In all other cases, in the absence of a specified time in an award agreement, the stock appreciation rights will remain exercisable for three months following the termination of service. However, in no event may a stock appreciation right be exercised later than the expiration of its term. Subject to the provisions of the 2021 Plan, the administrator determines the other terms of stock appreciation rights, including when such rights become exercisable and whether to pay any increased appreciation in cash or with shares of the Company’s common stock, or a combination thereof, except that the per share exercise price for the shares to be issued pursuant to the exercise of a stock appreciation right will be no less than 100% of the fair market value per share on the date of grant.

 

Restricted Stock

 

Restricted stock may be granted under the 2021 Plan. Restricted stock awards are grants of shares of the Company’s common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the number of shares of restricted stock granted to any employee, director or consultant and, subject to the provisions of the 2021 Plan, will determine the terms and conditions of such awards. The administrator may impose whatever conditions to vesting it determines to be appropriate (for example, the administrator may set restrictions based on the achievement of specific performance goals or continued service to the Company); provided, however, that the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed. Recipients of restricted stock awards generally will have voting and dividend rights with respect to such shares upon grant without regard to vesting, unless the administrator provides otherwise. Shares of restricted stock that do not vest are subject to the Company’s right of repurchase or forfeiture.

 

Restricted Stock Units

 

RSUs may be granted under the 2021 Plan. RSUs are bookkeeping entries representing an amount equal to the fair market value of one share of the Company’s common stock. Subject to the provisions of the 2021 Plan, the administrator determines the terms and conditions of RSUs, including the vesting criteria and the form and timing of payment. The administrator may set vesting criteria based upon the achievement of Company-wide, divisional, business unit or individual goals (including continued employment or service), applicable federal or state securities laws or any other basis determined by the administrator in its discretion. The administrator, in its sole discretion, may pay earned RSUs in the form of cash, in shares of the Company’s common stock or in some combination thereof. Notwithstanding the foregoing, the administrator, in its sole discretion, may accelerate the time at which any vesting requirements will be deemed satisfied.

 

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Performance Units and Performance Shares

 

Performance units and performance shares may be granted under the 2021 Plan. Performance units and performance shares are awards that will result in a payment to a participant only if performance goals established by the administrator are achieved or the awards otherwise vest. The administrator will establish performance objectives or other vesting criteria in its discretion, which, depending on the extent to which they are met, will determine the number or the value of performance units and performance shares to be paid out to participants. The administrator may set performance objectives based on the achievement of Company-wide, divisional, business unit or individual goals (including continued employment or service), applicable federal or state securities laws or any other basis determined by the administrator in its discretion. After the grant of a performance unit or performance share, the administrator, in its sole discretion, may reduce or waive any performance criteria or other vesting provisions for such performance units or performance shares. Performance units shall have an initial dollar value established by the administrator on or prior to the grant date. Performance shares shall have an initial value equal to the fair market value of the Company’s common stock on the grant date. The administrator, in its sole discretion, may pay earned performance units or performance shares in the form of cash, in shares or in some combination thereof.

 

Non-Employee Directors

 

The 2021 Plan provides that all non-employee directors will be eligible to receive all types of awards (except for incentive stock options) under the 2021 Plan. The 2021 Plan includes a maximum limit of $750,000 of equity awards that may be granted to a non-employee director in any fiscal year, increased to $1,500,000 in connection with his or her initial service. For purposes of this limitation, the value of equity awards is based on the grant date fair value (determined in accordance with accounting principles generally accepted in the United States). Any equity awards granted to a person for their services as an employee, or for their services as a consultant (other than as a non-employee director), will not count for purposes of the limitation. The maximum limit does not reflect the intended size of any potential compensation or equity awards to the Company’s non-employee directors.

 

Non-transferability of Awards

 

Unless the administrator provides otherwise, the 2021 Plan generally does not allow for the transfer of awards and only the recipient of an award may exercise an award during their lifetime. If the administrator makes an award transferrable, such award will contain such additional terms and conditions as the administrator deems appropriate.

 

Certain Adjustments

 

In the event of certain changes in the Company’s capitalization, to prevent diminution or enlargement of the benefits or potential benefits available under the 2021 Plan, the administrator will adjust the number and class of shares that may be delivered under the 2021 Plan or the number, and price of shares covered by each outstanding award and the numerical share limits set forth in the 2021 Plan.

 

Dissolution or Liquidation

 

In the event of the Company’s proposed liquidation or dissolution, the administrator will notify participants as soon as practicable and all awards will terminate immediately prior to the consummation of such proposed transaction.

 

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Merger or Change in Control

 

The 2021 Plan provides that in the event of the Company’s merger with or into another corporation or entity or a “change in control” (as defined in the 2021 Plan), each outstanding award will be treated as the administrator determines, including, without limitation, that (i) awards will be assumed, or substantially equivalent awards will be substituted, by the acquiring or succeeding corporation (or an affiliate thereof) with appropriate adjustments as to the number and kind of shares and prices; (ii) upon written notice to a participant, that the participant’s awards will terminate upon or immediately prior to the consummation of such merger or change in control; (iii) outstanding awards will vest and become exercisable, realizable or payable, or restrictions applicable to an award will lapse, in whole or in part, prior to or upon consummation of such merger or change in control and, to the extent the administrator determines, terminate upon or immediately prior to the effectiveness of such merger or change in control; (iv) (A) the termination of an award in exchange for an amount of cash or property, if any, equal to the amount that would have been attained upon the exercise of such award or realization of the participant’s rights as of the date of the occurrence of the transaction (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction the administrator determines in good faith that no amount would have been attained upon the exercise of such award or realization of the participant’s rights, then such award may be terminated by the Company without payment) or (B) the replacement of such award with other rights or property selected by the administrator in its sole discretion; or (v) any combination of the foregoing. The administrator will not be obligated to treat all awards, all awards a participant holds, or all awards of the same type, similarly. In the event that awards (or portion thereof) are not assumed or substituted for in the event of a merger or change in control, the participant will fully vest in and have the right to exercise all of their outstanding options and stock appreciation rights, including shares as to which such awards would not otherwise be vested or exercisable, all restrictions on restricted stock and RSUs will lapse and, with respect to awards with performance-based vesting, all performance goals or other vesting criteria will be deemed achieved at 100% of target levels and all other terms and conditions met, in all cases, unless specifically provided otherwise under the applicable award agreement or other written agreement between the participant and the Company or any of the Company’s subsidiaries or parents, as applicable. If an option or stock appreciation right is not assumed or substituted in the event of a merger or change in control, the administrator will notify the participant in writing or electronically that the option or stock appreciation right will be exercisable for a period of time determined by the administrator in its sole discretion and the vested option or stock appreciation right will terminate upon the expiration of such period.

 

For awards granted to an outside director, the outside director will fully vest in and have the right to exercise all of their outstanding options and stock appreciation rights, all restrictions on restricted stock and RSUs will lapse and, for awards with performance-based vesting, unless specifically provided for in the award agreement, all performance goals or other vesting criteria will be deemed achieved at 100% of target levels and all other terms and conditions met.

 

Clawback

 

Awards will be subject to any Company clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable laws. The administrator also may specify in an award agreement that the participant’s rights, payments or benefits with respect to an award will be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events. The Board may require a participant to forfeit, return or reimburse the Company all or a portion of the award or shares issued under the award, any amounts paid under the award and any payments or proceeds paid or provided upon disposition of the shares issued under the award in order to comply with such clawback policy or applicable laws.

 

Amendment and Termination

 

The administrator has the authority to amend, suspend or terminate the 2021 Plan provided such action does not impair the existing rights of any participant. The 2021 Plan automatically will terminate on August 6, 2031, unless it is terminated sooner.

 

Equity Compensation Plan Information

 

The table below sets forth information as of December 31, 2021.

 

Plan Category   Number of securities to be issued upon exercise of outstanding options, warrants and rights     Weighted-average exercise price of outstanding options, warrants and rights     Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))  
      (a)       (b)       (c)  
Equity compensation plans approved by security holders     1,534,500       2.50       865,500 (1)
Equity compensation plans not approved by security holders                  
Total     1,534,500       2.50       865,500  

 

(1) This represents 865,500 shares of common stock issuable pursuant to the 2021 Equity Incentive Plan (the “2021 Plan”).

 

The Board of Directors and stockholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Plan”) on August 6, 2021. Under the 2021 Plan, 2,400,000 shares of common stock are authorized for issuance to employees, directors and independent contractors (except those performing services in connection with the offer or sale of the Company’s securities in a capital raising transaction, or promoting or maintaining a market for the Company’s securities) of the Company or its subsidiaries. The 2021 Plan authorizes equity-based and cash-based incentives for participants.

 

On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to the 2021 Plan 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 stock, subject to the terms and conditions of the 2021 Plan and the option award agreements pursuant to which the options were awarded. There were 865,500 shares available for award as of December 31, 2021 under the 2021 Plan.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth the number of shares of and percent of the Company’s common stock beneficially owned as of January 3, 2022 by all directors, our named executive officers, our directors and executive officers as a group, and persons or groups known by us to own beneficially 5% or more of our common stock, immediately prior to this offering, and immediately after the closing of this offering, as adjusted to reflect the sale of 2,875,000 shares of our common stock in this offering, which assumes the underwriters exercise their over-allotment option in-full to purchase additional shares of our common stock.

 

Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Unless we have indicated otherwise, each person named in the table has sole voting power and sole investment power for the shares listed opposite such person’s name. For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person or any member of such group has the right to acquire within sixty (60) days of January 3, 2022. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within sixty (60) days of January 3, 2022 are deemed to be outstanding for such person, but not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership by any person. The share ownership numbers after the offering for the beneficial owners indicated below exclude any potential purchases that may be made by such persons in this offering. The business address of each of the beneficial owners listed below is c/o HeartCore Enterprises, Inc., 1-2-33, Higashigotanda, Shinagawa-ku, Tokyo, Japan.

 

    Common Stock Beneficially Owned Prior to this Offering(1)     Common Stock Beneficially Owned After this Offering(2)  
Name of Beneficial Owner   Shares     Percent     Shares     Percent  
Directors and Executive Officers                                
Sumitaka Yamamoto     10,984,539       69.43 %     10,984,539       58.76 %
Keisuke Kuno     43,338       * %     43,338       * %
Kimio Hosaka     89,669       * %     89,669       * %
Yoshitomo Yamano     -       - %     -       - %
Yuki Tan     -       - %     -       - %
Takeshi Omoto     -       - %     -       - %
Yuta Katai     -       - %     -       - %
                                 
All directors and officers as a group (9 persons) (3)     11,177,326       70.65 %     11,177,326       59.79 %
Principal Shareholders (more than 5%):                                
Daishin Yasui     2,325,425       14.70 %     2,325,425       12.44 %

 

* less than 1%.

 

    (1) Based on 15,819,943 shares of our common stock outstanding as of January 3, 2022.
       
    (2) Based on 18,694,943 shares of common stock issued and outstanding after this offering, which assumes the underwriters exercise their over-allotment option in-full to purchase additional shares of our common stock.
       
    (3) Includes the directors and named executive officers listed above, as well as (i) 59,780 shares beneficially owned by Hidekazu Miyata, our Chief Technical Officer and (ii) no shares beneficially owned by Qizhi Gao, Chief Financial Officer.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 

 

Transactions with Related Persons

 

The following includes a summary of transactions since the beginning of our 2019 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.

 

Affiliated Loans

 

As of December 31, 2020 and 2019, the Company had a due from related party balance $23,926 and $8,342, respectively, from Sumitaka Yamamoto, the CEO and major shareholder of the Company. The due from related party represents funds advanced to the related party to pay off the Company’s expenses. The balance is unsecured, non-interest bearing and due on demand. During the years ended December 31, 2020 and 2019, the Company advanced $73,997 and $319,638, respectively, to this related party, and the related party paid expenses of $59,345 and $317,459, respectively, on behalf of the Company. As of December 31, 2020 and 2019, Sumitaka Yamamoto held 467,622 and 386,946 shares, respectively, issued with repurchase provision in relation to the stock options the Company granted in May 2016 that he repurchased on behalf of the Company (also see Note 11).

 

As of December 31, 2020 and 2019, the Company has a loan receivable balance of $386,516 and $86,371, 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 years ended December 31, 2020 and 2019, the Company loaned $285,931 and $86,046, respectively, to this related party.

 

In June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. During the year ended December 31, 2020, the Company has revenue from this related party of $411,823 from software sales and incurred cost with this related party of $453,600 for software development services provided. As of December 31, 2020, the Company has deferred revenue with this related party of $49,967. 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. 

 

Director Independence

 

The Company’s Board of Directors has affirmatively determined that four of its six directors, including Yoshitomo Yamano, Yuki Tan, Takeshi Omoto, and Yuta Katai are independent directors of the Company within the meaning of Nasdaq’s rules. We are a “controlled company” under Nasdaq rules and are not required to have a majority of independent directors on the Board. See “Management—Controlled Company and Director Independence” for additional information.

 

Promoters and Certain Control Persons

 

Each of [●], may be deemed a “promoter” as defined by Rule 405 of the Securities Act. For information regarding compensation, including items of value, that have been provided or that may be provided to these individuals, please refer to “Executive Compensation” above.

 

DESCRIPTION OF SECURITIES 

 

The following description of our capital stock is based upon our certificate of incorporation, as amended, our bylaws and applicable provisions of law, in each case as currently in effect. This discussion does not purport to be complete and is qualified in its entirety by reference to our certificate of incorporation, as amended, and our bylaws, copies of which are filed with the SEC as exhibits to the registration statement of which this prospectus is a part.

 

Authorized Capital Stock

 

We are authorized to issue 200,000,000 shares of common stock, par value $0.0001 per share, and 20,000,000 shares of preferred stock, par value $0.0001 per share.

 

At January 3, 2022, we had 15,819,943 shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding. As of such date, there were 37 holders of record of our common stock and no holders of record of our preferred stock.

 

Common Stock

 

The holders of our common stock are entitled to one vote for each share held on all matters to be voted on by the Company’s stockholders. There shall be no cumulative voting.

 

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Subject to the rights of holders of preferred stock, the holders of shares of our common stock are entitled to dividends when and as declared by the Board from funds legally available therefor if, as and when determined by the Board of Directors of the Company in their sole discretion, subject to provisions of law, and any provision of the Company’s certificate of incorporation, as amended from time to time. In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, the holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of or provision for all of our debts and other liabilities. There are no preemptive, conversion or redemption privileges, nor sinking fund provisions with respect to the common stock.

 

All outstanding shares of common stock are, and the common stock to be outstanding upon completion of this offering will be, duly authorized, validly issued, fully paid and non-assessable.

 

Preferred Stock

 

Our certificate of incorporation authorizes our Board to issue up to 20,000,000 shares of preferred stock in one or more series, to determine the designations and the powers, preferences and rights and the qualifications, limitations and restrictions thereof, including the dividend rights, conversion or exchange rights, voting rights (including the number of votes per share), redemption rights and terms, liquidation preferences, sinking fund provisions and the number of shares constituting the series. Our Board of Directors could, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of common stock and which could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock.

 

Options

 

As of the date of this prospectus, 2,400,000 shares of common stock are authorized for issuance pursuant to the 2021 Plan There are currently no options outstanding under the 2021 Plan.

 

Exclusive Forum Provision

 

Section 21 of our certificate of incorporation and Section 7.4 of our bylaws provide that “[u]nless the corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located in the county in which the principal office of the corporation in the State of Delaware is established, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. Notwithstanding the foregoing, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange of 1934, as amended, the Securities Act of 1933, as amended, or any claim for which the federal courts have exclusive or concurrent jurisdiction.”

 

This choice of forum provision may limit a bondholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, a court could find these provisions of our certificate of incorporation and our bylaws to be inapplicable or unenforceable in respect of one or more of the specified types of actions or proceedings, which may require us to incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

 

Fee Shifting Provision

 

Section 7.4 of our bylaws provides that “[i]f any action is brought by any party against another party, relating to or arising out of these Bylaws, or the enforcement hereof, the prevailing party shall be entitled to recover from the other party reasonable attorneys’ fees, costs and expenses incurred in connection with the prosecution or defense of such action.”

 

Our bylaws provide that for this section, the term “attorneys’ fees” or “attorneys’ fees and costs” means the fees and expenses of counsel to the Company and any other parties asserting a claim subject to Section 7.4 of the bylaws, which may include printing, photocopying, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals and other persons not admitted to the bar but performing services under the supervision of an attorney, and the costs and fees incurred in connection with the enforcement or collection of any judgment obtained in any such proceeding.

 

We adopted the fee-shifting provision to eliminate or decrease nuisance and frivolous litigation. We intend to apply the fee-shifting provision broadly to all actions except for claims brought under the Exchange Act and Securities Act.

 

There is no set level of recovery required to be met by a plaintiff to avoid payment under this provision. Instead, whoever is the prevailing party is entitled to recover the reasonable attorneys’ fees, costs and expenses incurred in connection with the prosecution or defense of such action. Any party who brings an action, and the party against whom such action is brought under Section 7.4 of our bylaws, which could include, but is not limited to former and current shareholders, Company directors, officers, affiliates, legal counsel, expert witnesses, and other parties, are subject to this provision. Additionally, any party who brings an action, and the party against whom such action is brought under Section 7.4 of our bylaws, which could include, but is not limited to former and current shareholders, Company directors, officers, affiliates, legal counsel, expert witnesses, and other parties, would be able to recover fees under this provision.

 

In the event you initiate or assert a claims against us, in accordance with the dispute resolution provisions contained in our amended and restated bylaws, and you do not, in a judgment prevail, you will be obligated to reimburse us for all reasonable costs and expenses incurred in connection with such claim, including, but not limited to, reasonable attorney’s fees and expenses and costs of appeal, if any. Additionally, this provision in Section 7.4 of our bylaws could discourage shareholder lawsuits that might otherwise benefit the Company and its shareholders.

 

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THE FEE SHIFTING PROVISION CONTAINED IN THE BYLAWS IS NOT INTENDED TO BE DEEMED A WAIVER BY ANY HOLDER OF WORTHY COMMUNITY BONDS OF THE COMPANY’S COMPLIANCE WITH THE U.S. FEDERAL SECURITIES LAWS AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. THE FEE SHIFTING PROVISION CONTAINED IN THE BYLAWS DO NOT APPLY TO CLAIMS BROUGHT UNDER THE EXCHANGE ACT AND SECURITIES ACT.

 

Anti-Takeover Effects of Certain Provisions of Our Certificate of Incorporation, as Amended, and Our Bylaws

 

Provisions of our certificate of incorporation and our bylaws could make it more difficult to acquire us by means of a merger, tender offer, proxy contest, open market purchases, removal of incumbent directors and otherwise. These provisions, which are summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because negotiation of these proposals could result in an improvement of their terms.

 

Removal of Directors. Our certificate of incorporation and bylaws provide that directors may be removed prior to the expiration of their terms by the affirmative vote of the holders of not less than two-thirds (2/3) of the voting power of the issued and outstanding stock entitled to vote.

 

Vacancies. Our certificate of incorporation and bylaws provide the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors

 

Preferred Stock. Our certificate of incorporation authorizes the issuance of up to 20,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our Board of Directors in their sole discretion. Our Board of Directors may, without stockholder approval, issue series of preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.

 

Amendment of Bylaws. The certificate of incorporation and bylaws provide that the bylaws may be altered, amended or repealed by the Board of Directors by an affirmative vote of a majority of the Board of Directors at any regular meeting of the Board of Directors.

 

Limitation of Liability. The certificate of incorporation provides for the limitation of liability of, and providing indemnification to, our directors and officers.

 

Special Stockholders Meeting. The certificate of incorporation provides that a special meeting of the stockholders may only be called by a majority of the board of directors.

 

Nominations of Directors. The bylaws provide for advance notice procedures that stockholders must comply with in order to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.

 

Transfer Agent

 

The transfer agent and registrar for our common stock is Transhare Corporation The transfer agent and registrar’s address is Bayside Center 1, 17755 US Highway 19 N, Suite 140, Clearwater, Florida 33764 and its telephone number is (303) 662-1112.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Before this offering, there has not been a public market for shares of our common stock. Future sales of substantial amounts of shares of our common stock, including shares issued upon the conversion of convertible notes, the exercise of outstanding options and warrants, in the public market after this offering, or the possibility of these sales occurring, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future.

 

Immediately following the closing of this offering, we will have 18,319,943 shares of common stock issued and outstanding. In the event the underwriters exercise the over-allotment option in full, we will have 18,694,943 shares of common stock issued and outstanding. The common stock sold in this offering will be freely tradable without restriction or further registration or qualification under the Securities Act.

 

Previously issued shares of common stock that were not offered and sold in this offering, as well as shares issuable upon the exercise of warrants and subject to employee stock options, are or will be upon issuance, “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if such public resale is registered under the Securities Act or if the resale qualifies for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.

 

Rule 144

 

In general, a person who has beneficially owned restricted shares of our common stock for at least twelve months, or at least six months in the event we have been a reporting company under the Exchange Act for at least ninety (90) days before the sale, would be entitled to sell such securities, provided that such person is not deemed to be an affiliate of ours at the time of sale or to have been an affiliate of ours at any time during the ninety (90) days preceding the sale. A person who is an affiliate of ours at such time would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of shares that does not exceed the greater of the following:

 

  1% of the number of shares of our common stock then outstanding; or
  1% of the average weekly trading volume of our common stock during the four calendar weeks preceding the filing by such person of a notice on Form 144 with respect to the sale;

 

provided that, in each case, we are subject to the periodic reporting requirements of the Exchange Act for at least 90 days before the sale. Rule 144 trades must also comply with the manner of sale, notice and other provisions of Rule 144, to the extent applicable.

 

Rule 701

 

In general, Rule 701 allows a stockholder who purchased shares of our capital stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of ours during the immediately preceding 90 days to sell those shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares, however, are required to wait until ninety (90) days after the date of this prospectus before selling shares pursuant to Rule 701.

 

Lock-Up Agreements

 

We, all of our directors and executive officers, and holders of five percent (5%) or more of our outstanding securities (or securities convertible into shares of our common stock) have agreed not to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible into common stock without the prior written consent of the representative for a period of twelve (12) months from the consummation of the offering, subject to certain limited exceptions. See “Underwriting—Lock-Up Agreements.”

 

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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF COMMON STOCK

 

The following is a summary of certain material U.S. federal income and estate tax consequences to a non-U.S. holder (as defined below) of the purchase, ownership and disposition of our common stock as of the date hereof. Except where noted, this summary deals only with common stock that is held as a capital asset.

 

A “non-U.S. holder” means a beneficial owner of our common stock (other than an entity treated as a partnership for U.S. federal income tax purposes) that is not, for U.S. federal income tax purposes, any of the following:

 

➢ an individual citizen or resident of the United States;

 

➢ a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

➢ an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

➢ a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

This summary is based upon provisions of the Code, and the Treasury Regulations promulgated thereunder, rulings and judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in U.S. federal income and estate tax consequences different from those summarized below. We cannot assure you that such a change in law will not alter significantly the U.S. federal income and estate tax considerations we describe in this summary. This summary does not address all aspects of U.S. federal income and estate taxes and does not deal with foreign, state, local or other tax considerations that may be relevant to non-U.S. holders in light of their particular circumstances. In addition, it does not represent a detailed description of the U.S. federal income and estate tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws (including if you are a U.S. expatriate, foreign pension fund, financial institution, insurance company, tax-exempt organization, trader, broker or dealer in securities “controlled foreign corporation,” “passive foreign investment company,” a partnership or other pass-through entity for U.S. federal income tax purposes (or an investor in such a pass-through entity), a person who acquired shares of our common stock as compensation or otherwise in connection with the performance of services, or a person who has acquired shares of our common stock as part of a straddle, hedge, conversion transaction or other integrated investment).

 

If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common stock, you should consult your tax advisors.

 

If you are considering the purchase of our common stock, you should consult your own tax advisors concerning the particular U.S. federal income and estate tax consequences to you of the purchase, ownership and disposition of our common stock, as well as the consequences to you arising under other U.S. federal tax laws and the laws of any other taxing jurisdiction.

 

Distributions

 

As discussed above under “Dividend Policy”, we do not currently anticipate paying cash dividends on shares of our common stock in the foreseeable future. If we make distributions of cash or other property (other than certain pro rata distributions of our stock) in respect of our common stock, the distribution will generally be treated as a dividend for U.S. federal income tax purposes to the extent it is paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Any portion of a distribution that exceeds our current and accumulated earnings and profits generally will be treated first as a tax-free return of capital to the extent of the non-U.S. holder’s adjusted tax basis in our common stock, causing a reduction in the adjusted tax basis of a non-U.S. holder’s common stock, but not below zero. To the extent the amount of the distribution exceeds our current and accumulated earnings and profits and a non-U.S. holder’s adjusted basis in our common stock, the excess will be treated as described below under “— Gain on Disposition of Common Stock.”

 

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Dividends paid to a non-U.S. holder of our common stock generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States (and, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment of the non-U.S. holder) are not subject to such withholding tax, provided certain certification and disclosure requirements are satisfied. Instead, such dividends are subject to U.S. federal income tax on a net income basis in the same manner as if the non-U.S. holder were a “United States person” as defined under the Code. Any such effectively connected dividends received by a foreign corporation may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

 

A non-U.S. holder of our common stock who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will be required (a) to provide the applicable withholding agent with a properly executed Internal Revenue Service Form W-8BEN or Form W-8BEN-E (or other applicable form) certifying under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits or (b) if our common stock is held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable U.S. Treasury regulations. Special certification and other requirements apply to certain non-U.S. holders that are pass-through entities rather than corporations or individuals.

 

A non-U.S. holder of our common stock eligible for a reduced rate of U.S. federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the Internal Revenue Service. Non-U.S. holders are urged to consult their own tax advisors regarding their entitlement to the benefits under any applicable income tax treaty.

 

Gain on Disposition of Common Stock

 

Subject to the discussion of backup withholding below, any gain realized by a non-U.S. holder on the sale or other taxable disposition of our common stock generally will not be subject to U.S. federal income tax unless:

 

➢ the gain is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment of the non-U.S. holder);

 

➢ the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition, and certain other conditions are met; or

 

➢ we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes and certain other conditions are met.

 

A non-U.S. holder described in the first bullet point immediately above will be subject to tax on the gain derived from the sale under regular graduated U.S. federal income tax rates. In addition, if any non-U.S. holder described in the first bullet point immediately above is a foreign corporation, the gain realized by such non-U.S. holder may be subject to the branch profits tax at a 30% rate (or such lower rate as may be specified by an applicable income tax treaty). An individual non-U.S. holder described in the second bullet point immediately above will be subject to a tax equal to 30% (or such lower rate as may be specified by an applicable income tax treaty) on the gain derived from the sale, which may be offset by U.S. source capital losses, even though the individual is not considered a resident of the United States, provided that the individual has timely filed U.S. federal income tax returns with respect to such losses.

 

We believe we are not, and have not been at any time since formation, and do not anticipate becoming a “United States real property holding corporation” for U.S. federal income tax purposes.

 

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Federal Estate Tax

 

Common stock held by an individual non-U.S. holder at the time of death will be included in such holder’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

 

Information Reporting and Backup Withholding

 

We must report annually to the Internal Revenue Service and to each non-U.S. holder the amount of distributions paid to such holder and the tax withheld with respect to such distributions, regardless of whether withholding was required. Copies of the information returns reporting such distributions and any withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty.

 

A non-U.S. holder will not be subject to backup withholding on dividends received if such holder certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that such holder is a U.S. person as defined under the Code), or such holder otherwise establishes an exemption.

 

Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a sale or other disposition of our common stock made within the United States or conducted through certain U.S.-related financial intermediaries, unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a U.S. person as defined under the Code), or such owner otherwise establishes an exemption.

 

Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

 

Additional Withholding Requirements

 

Under Sections 1471 through 1474 of the Code (such Sections commonly referred to as “FATCA”), a 30% U.S. federal withholding tax may apply to any dividends paid on our common stock to (i) a “foreign financial institution” (as specifically defined in the Code) which does not provide sufficient documentation, typically on IRS Form W-8BEN-E, evidencing either (x) an exemption from FATCA, or (y) its compliance (or deemed compliance) with FATCA (which may alternatively be in the form of compliance with an intergovernmental agreement with the United States) in a manner which avoids withholding, or (ii) a “non-financial foreign entity” (as specifically defined in the Code) which does not provide sufficient documentation, typically on IRS Form W-8BEN-E, evidencing either (x) an exemption from FATCA, or (y) adequate information regarding certain substantial U.S. beneficial owners of such entity (if any). If a dividend payment is both subject to withholding under FATCA and subject to the withholding tax discussed above under “— Distributions,” the withholding under FATCA may be credited against, and therefore reduce, such other withholding tax. While withholding under FATCA would have also applied to payments of gross proceeds from the sale or other disposition of our common stock on or after January 1, 2019, recently proposed Treasury Regulations eliminate such withholding on payments of gross proceeds entirely. Taxpayers generally may rely on these proposed Treasury Regulations until final Treasury Regulations are issued. You should consult your own tax advisors regarding these requirements and whether they may be relevant to your ownership and disposition of our common stock.

 

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UNDERWRITING

 

In connection with this offering, we expect to enter an underwriting agreement with Boustead Securities, LLC, as the representative of the underwriters named in this prospectus, with respect to the common stock in this offering. Under the terms and subject to the conditions contained in the underwriting agreement, the representative will agree to purchase from us on a firm commitment basis the respective number of shares of common stock at the public price less the underwriting discounts set forth on the cover page of this prospectus, and each of the underwriters has severally and not jointly agreed to purchase, and we have agreed to sell to the underwriters, at the public offering price per shares less the underwriting discounts set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:

 

Name of Underwriter  

Number of

Shares

 
Boustead Securities, LLC     [●]  
         
      [●]  

 

The shares of common stock sold by the underwriters to the public will initially be offered at the public offering price set forth on the cover page of this prospectus. Any shares of common stock sold by the underwriters to securities dealers may be sold at a discount from the initial public offering price not to exceed $[●] per share. If all of the shares are not sold at the initial offering price, the representative may change the offering price and the other selling terms. The representative has advised us that the underwriters do not intend to make sales to discretionary accounts. The underwriting agreement will provide that the obligations of the underwriters to pay for and accept delivery of the shares of common stock are subject to the passing upon certain legal matters by counsel and certain conditions such as confirmation of the accuracy of representations and warranties by us about our financial condition and operations and other matters. The obligation of the underwriters to purchase the shares of common stock is conditioned upon our receiving approval to list the shares of common stock on Nasdaq.

 

Over-Allotment Option

 

If the underwriters sell more shares of common stock than the total number set forth in the table above, we have granted to the representative an option, exercisable one or more times in whole or in part, not later than 45 days after the date of this prospectus, to purchase from us up to an additional 375,000 shares of common stock (15% of the shares of common stock sold in this offering), at the public offering price less the underwriting discounts and commissions set forth on the cover of this prospectus. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, in connection with this offering. Any shares of common stock issued or sold under the option will be issued and sold on the same terms and conditions as the other shares of common stock that are the subject of this offering.

 

Discounts and Commissions; Expenses

 

The underwriting discounts and commissions are a cash fee equal to seven percent (7%) of gross proceeds from the sale of securities in this offering. We have been advised by the representative that the underwriters propose to offer the common stock to the public at the public offering price set forth on the cover of this prospectus and to dealers at a price that represents a concession not in excess of $[●] per share under the public offering price. After the offering, the representative may change the public offering price and other selling terms

 

The following table summarizes the public offering price and underwriting discounts and commissions payable to the underwriters assuming both no exercise and full exercise of the underwriter’s option to purchase additional shares of common stock.

 

    Per Share     Total Without
Over-Allotment
Option
    Total With Full
Over-Allotment
Option
 
Public offering price   $ [●]     $ [●]     $ [●]  
Underwriting discounts and commission   $ [●]     $ [●]     $ [●]  
Non-accountable expense allowance   $ [●]     $ [●]     $ [●]  
Proceeds, before expenses, to us   $ [●]     $ [●]     $ [●]  

 

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We have agreed to pay a non-accountable expense allowance to the representative equal to 1% of the gross proceeds received at the closing of the offering.

 

We have agreed to reimburse the representative for reasonable out-of-pocket expenses incurred relating to the offering, regardless of whether the offering is consummated, the aggregate amount of out-of-pocket expenses being limited as follows: (i) payment of up to $125,000 for reimbursement of the representative’s legal counsel fees (payable $25,000 upon engagement of representative’s legal counsel, $25,000 upon receipt of the FINRA No Objection Letter, and the balance upon the completion of the offering); (ii) payment of $25,000 for due diligence; (iii) payment of up to $50,000 for road show, travel, platform on-boarding fees and other reasonable out of pocket expense; and (iv) payment of $5,000 for background checks. Any out-of-pocket expenses above $1,000 are to be pre-approved by the Company. We have paid $75,000 to the representative as a refundable advance, which shall be applied against actual out-of-pocket accountable expenses and such advance shall be reimbursed to us to the extent any portion of the advance is not actually incurred, in compliance with FINRA Rule 5110(g)(4)(A) in the event of the termination of the offering.

 

Representative’s Warrants

 

We have agreed to issue to the representative (or its permitted assignees) warrants to purchase up to a total of 201,250 shares of common stock (7% of the shares of common stock sold in this offering) at an exercise price equal to 125% of the public offering price of the shares sold in this offering. The warrants will be exercisable at any time, and from time to time, in whole or in part, commencing from the closing of the offering and expiring five (5) years from the effectiveness of the offering, will have a cashless exercise provision and will terminate on the fifth (5th) anniversary of the effective date of the registration statement of which this prospectus is a part. The warrants will also provide for customary anti-dilution provisions and “piggyback” registration rights with respect to the registration of the shares of common stock underlying the warrants for a period of seven years from the commencement of sales of this offering.

 

The warrants and the underlying shares are deemed compensation by FINRA and therefore will be subject to a 180-day lock-up pursuant to FINRA Rule 5110(e)(1). The representative (or permitted assignees under FINRA Rule 5110(e)(1) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days immediately following commencement of sale of this offering subject to certain exceptions permitted by FINRA Rule 5110(e)(2).

 

Indemnification

 

We have agreed to indemnify the representative and the other underwriters against certain liabilities, including liabilities under the Securities Act. If we are unable to provide this indemnification, we will contribute to payments the representative and the other underwriters may be required to make for these liabilities.

 

Right of First Refusal

 

The representative has the right of first refusal for two (2) years following the consummation of this offering or the termination or expiration of the engagement with the representative to act as financial advisor or joint financial advisor on at least equal economic terms on any public or private financing (debt or equity), merger, business combination, recapitalization or sale of some or all of our equity or our assets, whether in conjunction with another broker-dealer or on the Company’s own volition (collectively, “Future Services”). In the event that we engage the representative to provide such Future Services, the representative will be compensated consistent with the engagement agreement with the Representative, unless we mutually agree otherwise. To the extent we are approached by a third party to lead any public or private financing (debt or equity), merger, business combination, recapitalization or sale of some or all of our equity or assets, the representative will be notified of the transaction and be granted the right to participate in such transaction under any syndicate formed by such third party.

 

137
 

 

No Sales of Similar Securities

 

We have agreed not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any shares of our common stock or other securities convertible into or exercisable or exchangeable for shares of common stock at a price per share that is less than the price per shares of common stock in this offering, or modify the terms of any existing securities, whether in conjunction with another broker-dealer or on the Company’s own volition for a period of twelve months following date on which our common stock are trading on the Nasdaq Capital Market, without the prior written consent of the Representative.

 

Lock-Up Agreements

 

We, all of our directors and executive officers, and holders of five percent (5%) or more of our outstanding securities (or securities convertible into shares of our common stock) have agreed that, for a period of twelve (12) months from the consummation of the offering, subject to certain limited exceptions, we and they will not directly or indirectly, without the prior written consent of the representative: (1) offer, sell, agree to offer or sell, solicit offers to purchase, grant any call option or purchase any put option with respect to, pledge, encumber, assign, borrow or otherwise dispose of or transfer any shares of common stock (including, without limitation, shares of common stock that may be deemed to be beneficially owned by us or them in accordance with the rules and regulations of the SEC and shares of common stock that may be issued upon exercise of any options or warrants) or securities convertible into or exercisable or exchangeable for common stock; (2) establish or increase any “put equivalent position” or liquidate or decrease any “call equivalent position” (in each case within the meaning of Section 16 of the Exchange Act and the rules and regulations thereunder) with respect to any common stock or otherwise enter into any swap, derivative or other transaction or arrangement that transfers to another, in whole or in part, any economic consequence of ownership of common stock, whether or not such transaction is to be settled by the delivery of common stock, other securities, cash or other consideration, or otherwise publicly disclose the intention to do so; (3) file or participate in the filing with the SEC of any registration statement or circulate or participate in the circulation of any preliminary or final prospectus or other disclosure document, in each case with respect to any proposed offering or sale of common stock; or (4) exercise any rights the undersigned may have to require registration with the SEC of any proposed offering or sale of common stock.

 

The representative may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time. When determining whether or not to release common stock and other securities from lock-up agreements, the representative will consider, among other factors, the holder’s reasons for requesting the release, the number of shares of common stock and other securities for which the release is being requested and market conditions at the time.

 

At least three business days before the effectiveness of any release or waiver of any of the restrictions described above with respect to an officer or director of the Company, the representative will notify us of the impending release or waiver, and we have agreed to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver.

 

Trading; Nasdaq Listing

 

We intend to list our common stock on Nasdaq under the symbol “HTCR.” There is no assurance that our listing application will be approved by Nasdaq. The approval of our listing on Nasdaq is a condition of closing this offering.

 

Price Stabilization, Short Positions and Penalty Bids

 

Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the underwriters may engage in transactions that stabilize the price of our common stock, such as bids or purchases to peg, fix or maintain that price.

 

In connection with the offering, the underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ over-allotment option described above. The underwriters may close out any covered short position by either exercising their over-allotment or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option granted to them. “Naked” short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares made by the underwriters in the open market prior to the completion of the offering.

 

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on Nasdaq, in the over-the-counter market or otherwise.

 

138
 

 

Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our shares of common stock. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that any transaction, if commenced, will not be discontinued without notice.

 

Electronic Distribution

 

This prospectus in electronic format may be made available on websites maintained by the underwriters, or selling group members, if any, participating in this offering and the underwriters may distribute prospectuses electronically. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Other than this prospectus in electronic format, the information on these websites and any information contained in any other websites maintained by the underwriters is not part of, nor incorporated by reference into, this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters in their capacity as underwriters, and should not be relied upon by investors.

 

Other Relationships

 

The representative and its respective affiliates may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They may in the future receive customary fees and commissions for these transactions. Except for services provided in connection with this offering, the representative has not provided any financing, investment and/or advisory services to us during the 180 day period preceding the initial filing of the registration statement of which this prospectus forms a part, and as of the date of this prospectus, we do not have any agreement or arrangement with the representative to provide any of such services during the 60 day period following the effective date of such registration statement.

 

Offers Outside the United States

 

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

The underwriters are expected to make offers and sales both in and outside the United States through their respective selling agents. Any offers and sales in the United States will be conducted by broker-dealers registered with the SEC.

 

Canada

 

The securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

 

139
 

 

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

 

Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriter is not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

 

European Economic Area — Belgium, Germany, Luxembourg and Netherlands

 

The information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption under the Directive 2003/71/EC (the “Prospectus Directive”), as implemented in Member States of the European Economic Area (the “Relevant Member States”), from the requirement to produce a prospectus for offers of securities.

 

An offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:

 

  to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
     
  to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements) and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements);
     
  to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive) subject to obtaining the prior consent of our Company or any underwriter for any such offer; or
     
  in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by our Company of a prospectus pursuant to Article 3 of the Prospectus Directive.

 

France

 

This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code monétaire et financier) and Articles 211-1, et seq. of the General Regulation of the French Autorité des marchés financiers (the “AMF”). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.

 

This document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.

 

Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs non-qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation.

 

140
 

 

Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.

 

Ireland

 

The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors.

 

Italy

 

The offering of the securities in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le Societá e la Borsa (“CONSOB”)) pursuant to the Italian securities legislation and, accordingly, no offering material relating to the securities may be distributed in Italy and such securities may not be offered or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”), other than:

 

  to Italian qualified investors, as defined in Article 100 of Decree No. 58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999, as amended (“Regulation no. 11971”); and
     
  in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended.

 

Any offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding placements where a qualified investor solicits an offer from the issuer) under the paragraphs above must be:

 

  made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and
     
  in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws.

 

Any subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity transferring the securities for any damages suffered by the investors.

 

Portugal

 

This document is not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.

 

141
 

 

Switzerland

 

The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (the “SIX”), or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the securities may be publicly distributed or otherwise made publicly available in Switzerland.

 

Neither this document nor any other offering material relating to the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority.

 

This document is personal to the recipient only and not for general circulation in Switzerland.

 

United Kingdom

 

Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (the “FSMA”)) has been published or is intended to be published in respect of the securities. This document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the securities may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.

 

Any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the securities has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to our company.

 

In the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (the “FPO”), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated. The investments to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engaged in only with, such persons. Any person who is not such a person should not act or rely on this document or any of its contents.

 

Japan

 

The securities have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the “FIEL”), pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly, the securities may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires securities may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of securities is conditional upon the execution of an agreement to that effect.

 

142
 

 

China

 

The information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in the People’s Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The securities may not be offered or sold directly or indirectly in the People’s Republic of China to legal or natural persons other than directly to “qualified domestic institutional investors.”

 

Hong Kong

 

The securities have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the securities has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to securities which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

 

LEGAL MATTERS

 

The validity of the securities offered by this prospectus will be passed upon for us by Anthony L.G., PLLC, West Palm Beach, Florida. Bevilacqua PLLC, Washington, DC, is acting as counsel to the underwriters.

 

EXPERTS

 

Our consolidated financial statements as of December 31, 2020 and 2019 and for the years then ended included in this prospectus have been audited by MaloneBailey, LLP, independent registered public accounting firm, as indicated in their report with respect thereto, and have been so included in reliance upon the report of such firm given on their authority as experts in accounting and auditing.

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed a registration statement, of which this prospectus is a part, on Form S-1 with the SEC relating to this offering. This prospectus does not contain all of the information in the registration statement and the exhibits included with the registration statement. For further information pertaining to us and the common stock to be sold in this offering, you should refer to the registration statement and its exhibits. References in this prospectus to any of our contracts, agreements or other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contracts, agreements or documents. You may read and copy the registration statement, the related exhibits and other material we file with the SEC at the SEC’s public reference room in Washington, D.C. at 100 F Street, Room 1580, N.E., Washington, D.C. 20549. You can also request copies of those documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file with the SEC. The website address is http://www.sec.gov.

 

Upon the effectiveness of the registration statement, we will be subject to the informational requirements of the Exchange Act, and, in accordance with the Exchange Act, will file reports, proxy and information statements and other information with the SEC. Such annual, quarterly and special reports, proxy and information statements and other information can be inspected and copied at the locations set forth above. We also anticipate making these documents publicly available, free of charge, on our website as soon as reasonably practicable after filing such documents with the SEC. Information on, or accessible through, our website is not part of this prospectus.

 

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HEARTCORE ENTERPRISES, INC.

 

INDEX TO FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2020 and 2019 F-4
Consolidated Statements of Changes in Shareholders’ Deficit for the Years Ended December 31, 2020 and 2019 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-6
Notes to Consolidated Financial Statements F-7

 

Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 F-23
Consolidated Statements of Operations and Comprehensive Income for the Nine Months Ended September 30, 2021 and 2020 (Unaudited) F-24
Consolidated Statements of Changes in Shareholders’ Deficit for the Nine Months Ended September 30, 2021 and 2020 (Unaudited) F-25
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited) F-26
Notes to Unaudited Consolidated Financial Statements F-27

 

F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

HeartCore Enterprises, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of HeartCore Enterprises, Inc. and its subsidiary (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ MaloneBailey, LLP

www.malonebailey.com

We have served as the Company’s auditor since 2021.

Houston, Texas

November 12, 2021

 

F-2
 

 

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

 

    December 31,     December 31,  
    2020     2019  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 3,058,175     $ 535,287  
Accounts receivable, net     708,450       906,928  
Prepaid expenses     408,792       423,590  
Due from related parties     23,926       8,342  
Loan receivable from employees     12,205       9,944  
Other current assets     63,876       47,699  
Total current assets     4,275,424       1,931,790  
                 
Non-current assets:                
Property and equipment, net     376,860       455,067  
Operating lease right-of-use assets     4,291,800       4,417,357  
Deferred tax assets     683,043       717,673  
Security deposits     310,181       294,845  
Long-term loan receivable from related party     386,516       86,371  
Loan receivable from employees, non-current     14,336       13,995  
Other non-current assets     18,642       26,182  
Total non-current assets     6,081,378       6,011,490  
                 
Total assets   $ 10,356,802     $ 7,943,280  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
                 
Current liabilities:                
Accounts payable and accrued expenses   $ 269,868     $ 307,177  
Accrued payroll and other employee costs     254,273       244,291  
Current portion of long-term debts     936,690       625,392  
Operating lease liabilities, current     392,765       373,202  
Finance lease liabilities, current     54,274       51,590  
Income tax payables     10,154       4,404  
Deferred revenue     2,017,204       1,757,074  
Other current liabilities     187,801       226,948  
Total current liabilities     4,123,029       3,590,078  
                 
Non-current liabilities:                
Long-term debts     3,024,646       1,965,096  
Operating lease liabilities, non-current     4,012,772       4,162,857  
Finance lease liabilities, non-current     71,144       121,152  
Other non-current liabilities     185,483       185,818  
Total non-current liabilities     7,294,045       6,434,923  
                 
Total liabilities:     11,417,074       10,025,001  
                 
Shareholders’ deficit:                
Preferred shares ($0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of December 31, 2020 and 2019)     -       -  
Common shares ($0.0001 par value, 200,000,000 shares authorized; 15,999,999 and 14,338,110 shares issued; 15,242,454 and 13,580,565 outstanding as of December 31, 2020 and 2019, respectively) *     1,524       1,358  
Additional paid-in capital *     2,735,315       1,803,203  
Accumulated deficit     (4,014,046 )     (4,165,001 )
Accumulated other comprehensive loss     (136,890 )     (72,504 )
Total HeartCore Enterprises, Inc.’s shareholders’ deficit     (1,414,097 )     (2,432,944 )
Non-controlling interest     353,825       351,223  
Total shareholders’ deficit     (1,060,272 )     (2,081,721 )
                 
Total liabilities and shareholders’ deficit   $ 10,356,802     $ 7,943,280  

 

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

 

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

 

F-3
 

 

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

    For the Years Ended December 31,  
    2020     2019  
             
Revenues   $ 9,026,463     $ 7,208,964  
                 
Cost of revenues     5,008,311       4,547,551  
                 
Gross profit     4,018,152       2,661,413  
                 
Operating expenses:                
Selling expenses     242,709       445,873  
General and administrative expenses     3,205,689       3,149,711  
Research and development expenses     311,049       332,701  
                 
Total operating expenses     3,759,447       3,928,285  
                 
Income (loss) from operations     258,705       (1,266,872 )
                 
Other income (expenses):                
Interest income     3,711       12  
Interest expense     (50,199 )     (48,689 )
Other income     25,495       17,584  
Other expenses     (10,431 )     (19,119 )
Total other expenses     (31,424 )     (50,212 )
                 
Income (loss) before income tax provision     227,281       (1,317,084 )
                 
Income tax expense (benefit)     72,217       (56,057 )
                 
Net income (loss)     155,064       (1,261,027 )
                 
Less: net income (loss) attributable to non-controlling interest     4,109       (37,453 )
                 
Net income (loss) attributable to HeartCore Enterprises, Inc.   $ 150,955     $ (1,223,574 )
                 
Other comprehensive loss:                
Foreign currency translation adjustment     (65,893 )     (16,900 )
                 
Total comprehensive income (loss)     89,171       (1,277,927 )
Less: comprehensive income (loss) attributable to non-controlling interest     2,602       (37,845 )
Comprehensive income (loss) attributable to HeartCore Enterprises, Inc.   $ 86,569     $ (1,240,082 )
                 
Net earnings (loss) per common share attributable to HeartCore Enterprises, Inc. *                
Basic   $ 0.01     $ (0.10 )
Diluted   $ 0.01     $ (0.10 )
Weighted average common shares outstanding*                
Basic     14,475,079       12,781,492  
Diluted     14,764,915       12,781,492  

 

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

 

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

 

F-4
 

 

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 

    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, 2018*     12,749,620     $ 1,275     $ 1,346,550     $ (2,941,427 )   $ (55,996 )   $ (1,649,598 )   $ 389,068     $ (1,260,530 )
Issuance of common shares*     830,945       83       456,653       -       -       456,736       -       456,736  
Net loss     -       -       -       (1,223,574 )     -       (1,223,574 )     (37,453 )     (1,261,027 )
Foreign currency translation adjustment     -       -       -       -       (16,508 )     (16,508 )     (392 )     (16,900 )
Balance, December 31, 2019*     13,580,565     $ 1,358     $ 1,803,203     $ (4,165,001 )   $ (72,504 )   $ (2,432,944 )   $ 351,223     $ (2,081,721 )
Issuance of common shares*     1,661,889       166       932,112       -       -       932,278       -       932,278  
Net loss     -       -       -       150,955       -       150,955       4,109       155,064  
Foreign currency translation adjustment     -       -       -       -       (64,386 )     (64,386 )     (1,507 )     (65,893 )
Balance, December 31, 2020*     15,242,454     $ 1,524     $ 2,735,315     $ (4,014,046 )   $ (136,890 )   $ (1,414,097 )   $ 353,825     $ (1,060,272 )

 

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

 

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

 

F-5
 

 

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Years Ended December 31,  
    2020     2019  
Cash flows from operating activities:                
Net income (loss)   $ 155,064     $ (1,261,027 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:                
Depreciation expenses     114,467       124,414  
Amortization of debt issuance costs     7,742       8,295  
Loss on disposal of property and equipment     -       4,240  
Non-cash lease expense     343,642       322,684  
Deferred income taxes     69,593       (62,656 )
                 
Changes in assets and liabilities:                
Accounts receivable, net     237,574       144,998  
Prepaid expenses     35,620       193,674  
Other assets     (4,637 )     15,323  
Accounts payable and accrued expenses     12,121       (105,070 )
Accrued payroll and other employee costs     10,105       143,419  
Operating lease liabilities     (354,414 )     (320,095 )
Finance lease liabilities     (1,939 )     (2,575 )
Income tax payables     5,339       (1,284 )
Deferred revenue     163,188       814  
Other liabilities     (47,717 )     109,043  
                 
Net cash flows provided by (used in) operating activities     745,748       (685,803 )
                 
Cash flows from investing activities:                
Purchases of property and equipment     (27,170 )     (30,822 )
Loan provided to employees     (14,052 )     (27,518 )
Advance and loan provided to related parties     (359,928 )     (405,684 )
                 
Net cash flows used in investing activities     (401,150 )     (464,024 )
                 
Cash flows from financing activities:                
Proceeds from issuance of common shares     932,278       456,736  
Payments for finance leases     (52,520 )     (49,613 )
Proceeds from long-term debts     1,873,536       988,264  
Repayment of long-term debts     (678,604 )     (510,338 )
Payments for debt issuance costs     (11,524 )     (9,335 )
                 
Net cash flows provided by financing activities     2,063,166       875,714  
                 
Effect of exchange rate changes     115,124       11,446  
                 
Net change in cash and cash equivalents     2,522,888       (262,667 )
                 
Cash and cash equivalents - beginning of the year     535,287       797,954  
                 
Cash and cash equivalents - end of the year   $ 3,058,175     $ 535,287  
                 
Supplemental cash flow disclosure:                
Interest paid   $ 26,731     $ 34,660  
Income taxes paid   $ 5,432     $ 4,187  
                 
Non-cash investing and financing transactions                
                 
Remeasurement of the lease liability and right-of-use asset due to lease modification   $ -     $ 395,687  
Equipment obtained in connection with finance lease   $ -     $ 6,654  
Payroll withheld as repayment of loan receivable from employees   $ 12,740     $ 3,669  
Expense paid by related party on behalf of the Company   $ 59,345     $ 317,459  

 

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

 

F-6
 

 

HEARTCORE ENTERPRISES, INC.

NOTES TO 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. As a result, HeartCore Japan becomes a majority-owned operating subsidiary of the Company.

 

The share exchange 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 consolidated financial statements.

 

The Company, via its majority-owned operating subsidiary, HeartCore Japan, is engaged in the business of developing and sales of comprehensive software in Japan. 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

 

Non-controlling Interest

 

Non-controlling interest in the consolidated balance sheets represents the portion of the equity in the subsidiary not attributable, directly or indirectly, to the Company. The portion of the income or loss applicable to the non-controlling interest in subsidiary is also separately reflected in the consolidated statements of operations and comprehensive income (loss).

 

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.

 

F-7
 

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, deposits in banks, and all highly liquid investments that are unrestricted as to withdrawal or use, and which have original maturities of three months or less.

 

Accounts Receivable

 

Accounts receivable, net represent the amounts that the Company has an unconditional right to consideration, which are stated at the original amount less an allowance for doubtful receivables. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. The Company usually determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of operations and comprehensive income (loss). Delinquent account balances are written off against the allowance for doubtful accounts after management has determined that the likelihood of collection is remote. In circumstances in which the Company receives payment for accounts receivable that have previously been written off, the Company reverses the allowance and bad debt.

 

Property and Equipment, Net

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line and declining methods over the estimated useful lives, as more details follow:

 

    Depreciation Method   Useful Life
Leasehold improvement   Straight-line method   Shorter of estimated useful life or lease term
Machinery and equipment   Declining balance method   2-15 years
Vehicle   Straight-line method   5 years
Software   Straight-line method   3-5 years

 

Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements of operations and comprehensive income (loss).

 

F-8
 

 

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:

 

    December 31,     December 31,  
    2020     2019  
Beginning balance   $ 164,018     $ 161,484  
Accretion expense     467       466  
Foreign currency translation adjustment     8,558       2,068  
Ending balance   $ 173,043     $ 164,018  

 

Lease-Lessee

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which is effective for annual reporting periods (including interim periods) beginning after December 15, 2018, and early adoption is permitted. The Company adopted the Topic 842 on January 1, 2019 using a modified retrospective approach. The Company elected the package of practical expedients permitted under the transition guidance, which allows the Company to carry forward the historical lease classification, the assessment whether a contract is or contains a lease and initial direct costs for any leases that exist prior to adoption of the new standard. The primary impact of the adoption is the initial recognition of approximately $4.7 million of lease liabilities and approximately $4.6 million of right-of-use assets on the Company’s consolidated balance sheet as of January 1, 2019, for leases classified as operating leases under Topic 840, as well as enhanced disclosure of the Company’s leasing arrangements. There is no cumulative effect to retained earnings or other components of equity recognized as of January 1, 2019.

 

The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. Lease terms of certain operating leases include the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain.

 

The Company leases office facilities, which are classified as operating leases and leases office equipment and furniture, and a vehicle, which are classified as a finance lease in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Operating leases are included in operating lease right-of-use assets, operating lease liabilities, current, and operating lease liabilities, non-current, and finance leases are included in property and equipment, finance lease liabilities, current, and finance lease liabilities, non-current in the consolidated balance sheet.

 

As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

 

The Company has elected the short-term lease exception, and therefore operating lease right-of-use assets and liabilities do not include leases with a lease term of twelve months or less.

 

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.

 

F-9
 

 

In the years ended December 31, 2020 and 2019, software development costs expensed as incurred amounted to $311,049 and $332,701, 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 years ended December 31, 2020 and 2019.

 

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$”), and the accompanying consolidated financial statements have been expressed in US$. 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 loss within the statements of changes shareholders’ deficit.

 

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

 

    December 31, 2020     December 31, 2019  
Current JPY: US$1 exchange rate     103.24       108.61  
Average JPY: US$1 exchange rate     106.75       109.02  

 

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 8% before October 1, 2019, and 10% afterwards of gross sales.

 

F-10
 

 

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 price (“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 recognized 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.

 

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 years ended December 31, 2020 and 2019 that were included in the opening deferred revenues balance was approximately $1.7 million and $1.8 million, respectively.

 

Disaggregation of Revenue

 

The Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the years ended December 31, 2020 and 2019 is as following:

 

    For the Years Ended  
    December 31,  
    2020     2019  
             
Revenue from On-Premise Software   $ 2,099,761     $ 1,815,970  
Revenue from Maintenance and Support service     3,493,316       3,241,146  
Revenue from Software as a Service (“SaaS”)     484,716       376,111  
Revenue from Software Development and other Miscellaneous Services     2,948,670       1,775,737  
Total Revenue   $ 9,026,463     $ 7,208,964  

 

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

 

    For the Years Ended  
    December 31,  
    2020     2019  
             
Revenue from Customer Experience Management Platform   $ 6,873,454     $ 6,210,296  
Revenue from Process Mining     690,789       813,275  
Revenue from Robotic Process Automation     1,180,081       169,582  
Revenue from Task Mining     179,375       6,181  
Revenue from Others     102,764       9,630  
Total Revenue   $ 9,026,463     $ 7,208,964  

 

As of December 31, 2020 and 2019, and for the years then ended, all long-lived assets and almost all of the revenue generated are attributed to the Company’s operation in Japan.

 

F-11
 

 

Cost of Revenues

 

Cost of revenues primarily consists of salaries and related expenses (e.g. bonuses, employee benefits, and payroll taxes) for personnel directly involved in the delivery of services and products directly to customers. Cost of revenues also includes royal/license payments to vendors, and hosting and infrastructure costs related to the delivery of the Company’s products and services.

 

Advertising Expenses

 

Advertising expenses consist primarily of costs of promotion and marketing for the Company’s image and products, and costs of direct advertising, and are included in selling expenses. The Company expenses advertising costs as incurred or the first time the advertising takes place, whichever is earlier, in accordance with the ASC 720-35, “Advertising Costs”. The advertising expenses were $97,943 and $387,877 for the years ended December 31, 2020 and 2019, respectively.

 

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 years ended December 31, 2020 and 2019, no customer accounted for more than 10% of the Company’s total revenues.

 

For the year ended December 31, 2020, vendor A, B, C and D represents 38%, 24%, 19% and 11%, respectively, of the Company’s total purchases. For the year ended December 31, 2019, vendor A and C represents 54% and 25%, respectively, of the Company’s total purchases.

 

Segment Reporting

 

ASC 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the Company for making operating decisions assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

 

Management determined the Company’s operations constitute a single reportable segment in accordance with ASC 280. The Company operates exclusively in one business and industry segment: sales and development of software.

 

Comprehensive Income or Loss

 

ASC 220, “Comprehensive Income,” establishes standards for reporting and display of comprehensive income or loss, its components and accumulated balances. Comprehensive income or loss as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying consolidated statements of changes in shareholders’ deficit, consists of changes in unrealized gains and losses on foreign currency translation.

 

F-12
 

 

Earnings (Loss) Per Share

 

The Company computes basic and diluted earnings (loss) per share in accordance with ASC 260, Earnings per Share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share reflects the potential dilution that could occur if stock options and other commitments to issue common shares were exercised or equity awards vest resulting in the issuance of common shares that could share in the earnings (loss) of the Company.

 

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 statement 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.

 

Related Parties and Transactions

 

The Company identifies related parties, and accounts for, discloses related party transactions in accordance with ASC 850, “Related Party Disclosures” and other relevant ASC standards.

 

Parties, which can be an entity or individual, are considered to be related if they have the ability, directly or indirectly, to control the Company or exercise significant influence over the Company in making financial and operational decisions. Entities are also considered to be related if they are subject to common control or common significant influence.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.

 

Income Taxes

 

Income taxes are accounted for using an asset and liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current period and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets also include the prior years’ net operating losses carried forward. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.

 

The Company follows ASC 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.

 

F-13
 

 

Under the provisions of ASC 740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statement of income.

 

Fair Value Measurements

 

The Company performs fair value measurements in accordance with ASC 820. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or a liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

 

  Level 1: quoted prices in active markets for identical assets or liabilities;
  Level 2: inputs other than Level 1 that are observable, either directly or indirectly; or
  Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

 

As of December 31, 2019 and 2020, the carrying values of cash and cash equivalents, accounts receivable, prepaid expenses, current portion of loan receivable from employees, other current assets, accounts payable and accrued expenses, accrued payroll and other employee costs, current portion of long term debts, current operating and finance lease liabilities, income tax payables, deferred revenue, and other current liabilities approximated their fair values reported in the consolidated balance sheets due to the short-term maturities of these instruments.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and has since issued various amendments including ASU No. 2018-19, ASU No. 2019-04, and ASU No. 2019-05. The guidance and related amendments modify the accounting for credit losses for most financial assets and require the use of an expected loss model, replacing the currently used incurred loss method. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The new guidance will be effective for the Company for the fiscal year, and interim periods within the fiscal year, beginning January 1, 2023, though early adoption is permitted. The Company is currently reviewing this guidance to assess the potential impact on its consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting. The amendments in the updated guidance expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted this guidance as of January 1, 2019, and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

F-14
 

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures for certain investments. The Company adopted this guidance as of January 1, 2020, and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU No. 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU No. 2019-12 will be effective for the Company for the fiscal year, and interim periods within the fiscal year, beginning January 1, 2021, with early adoption permitted. The Company does not expect adoption of the new guidance to have a significant impact on its consolidated financial statements.

 

NOTE 3 — ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consists of the following:

 

    December 31,     December 31,  
    2020     2019  
Accounts receivable   $ 746,197     $ 934,273  
Less: allowance for doubtful accounts     (37,747 )     (27,345 )
Accounts receivable, net   $ 708,450     $ 906,928  

 

Allowance for doubtful accounts movement is as follows:

 

    December 31,     December 31,  
    2020     2019  
Beginning balance   $ 27,345     $ 33,454  
Changes during the year     8,979       (6,537 )
Foreign currency translation adjustment     1,423       428  
Ending balance   $ 37,747     $ 27,345  

 

NOTE 4 — PREPAID EXPENSES

 

Prepaid expenses consist of the following:

 

    December 31,     December 31,  
    2020     2019  
Prepayments to software vendors   $ 258,713     $ 231,835  
Prepaid selling expenses     54,470       34,306  
Prepaid subscription fees     63,437       51,140  
Others     32,172       106,309  
Total   $ 408,792     $ 423,590  

 

NOTE 5 — RELATED PARTY TRANSACTIONS

 

As of December 31, 2020 and 2019, the Company has a due from related party balance of $23,926 and $8,342, respectively, from Sumitaka Yamamoto, the CEO and major shareholder of the Company. The due from related party represents funds advanced to the related party to pay off the Company’s expenses. The balance is unsecured, non-interest bearing and due on demand. During the years ended December 31, 2020 and 2019, the Company advanced $73,997 and $319,638, respectively, to this related party, and the related party paid expenses of $59,345 and $317,459, respectively, on behalf of the Company. As of December 31, 2020 and 2019, Sumitaka Yamamoto held 467,622 and 386,946 shares, respectively, issued with repurchase provision in relation to the stock options the Company granted in May 2016 that he repurchased on behalf of the Company (also see Note 11).

 

F-15
 

 

As of December 31, 2020 and 2019, the Company has a loan receivable balance of $386,516 and $86,371, 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 years ended December 31, 2020 and 2019, the Company loaned $285,931 and $86,046, respectively, to this related party.

 

In June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. During the year ended December 31, 2020, the Company has revenue from this related party of $411,823 from software sales and incurred cost with this related party of $453,600 for software development services provided. As of December 31, 2020, the Company has deferred revenue with this related party of $49,967. 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.

 

NOTE 6 — LOAN RECEIVABLE FROM EMPLOYEES

 

The Company occasionally made loans to its employees to assist their life. The annual interest rate for these loans ranges from 1.600% to 1.975%, and the term ranges from two to three years. Repayments are deducted from the monthly salary of these employees.

 

NOTE 7 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

    December 31,     December 31,  
    2020     2019  
Leasehold improvement   $ 357,026     $ 339,374  
Machinery and equipment     325,744       293,972  
Vehicle     135,154       128,472  
Software     206,938       196,707  
Subtotal     1,024,862       958,525  
Accumulated depreciation     (648,002 )     (503,458 )
Property and equipment, net   $ 376,860     $ 455,067  

 

Depreciation expense was $114,467 and $124,414 for the years ended December 31, 2020 and 2019, respectively.

 

NOTE 8 — 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 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 $120,144 and $167,827 are included in property and equipment as of December 31, 2020 and December 31, 2019, respectively.

 

F-16
 

 

The components of lease costs are as follows:

 

    For the Years Ended  
    December 31,  
    2020     2019  
Finance lease costs                
Amortization of right-of-use assets   $ 54,558     $ 52,039  
Interest on lease liabilities     1,939       2,575  
Total finance lease costs     56,497       54,614  
Operating lease costs     402,440       382,917  
Total lease costs   $ 458,937     $ 437,531  

 

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

 

    For the Years Ended  
    December 31,  
    2020     2019  
Cash paid for amounts included in the measurement of lease liabilities:                
Operating cash flows from finance leases   $ 1,939     $ 2,575  
Operating cash flows from operating leases     413,213       380,328  
Financing cash flows from finance leases     52,520       49,613  
Remeasurement of operating lease liability and right-of-use asset due to lease modification           395,687  
Right-of-use asset obtained in exchange for new finance lease liability           6,654  
                 
Weighted average remaining lease term (years)                
Finance leases     2.3       3.3  
Operating leases     11.1       12.1  
                 
Weighted-average discount rate: (per annum)                
Finance leases     1.32 %     1.32 %
Operating leases     1.32 %     1.32 %

 

As of December 31, 2020, the future maturity of lease liabilities is as follows:

 

Year ending December 31,   Finance lease     Operating lease  
2021   $ 58,315     $ 426,400  
2022     43,843       426,400  
2023     24,719       426,400  
2024     363       426,400  
2025     -       426,400  
Thereafter     -       2,611,675  
Total lease payments     127,240       4,743,675  
Less: imputed interest     (1,822 )     (338,138 )
Total lease liabilities     125,418       4,405,537  
Less: current portion     54,274       392,765  
Non-current lease liabilities   $ 71,144     $ 4,012,772  

 

Pursuant to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $310,181 and $294,845 as of December 31, 2020 and 2019, respectively.

 

F-17
 

 

NOTE 9 — 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
December 31,
2019
    Balance as of
December 31,
2020
 
Bond payable                                    
Corporate bond issued through Resona Bank    

100,000,000

(a)(b)

    1/10/2019—1/10/2024     0.430 %   $ 828,653     $ 678,032  

Loans  with banks and other financial institutions

                                   
Resona Bank, Limited.     30,000,000 (a)   12/29/2017—12/30/2022     1.475 %     170,334       121,077  
Resona Bank, Limited.    

50,000,000

(a)(b)

    12/29/2017—12/29/2024     0.675 %     334,361       282,594  
Resona Bank, Limited.    

10,000,000

(a)(b)

    9/30/2020—9/30/2027     0.000 %     -       94,556  
Resona Bank, Limited.    

40,000,000

(a)(b)

    9/30//2020—9/30/2027     0.000 %     -       378,225  
Resona Bank, Limited.    

20,000,000

(a)(b)

    11/13/2020—10/31/2027     1.600 %     -       191,418  
Sumitomo Mitsui Banking Corporation     100,000,000     12/28/2018—12/28/2023     1.475 %     751,892       597,239  
Sumitomo Mitsui Banking Corporation     10,000,000 (b)   12/30/2019—12/30/2026     1.975 %     92,073       84,182  
The Shoko Chukin Bank, Ltd.     30,000,000     9/28/2018—8/31/2023     1.200 %     210,478       162,146  
The Shoko Chukin Bank, Ltd.     50,000,000     7/27/2020—6/30/2027     1.290 %     -       461,062  
Japan Finance Corporation     40,000,000     12/15/2017—11/30/2022     0.300 %     226,406       160,306  
Japan Finance Corporation     80,000,000     11/17/2020—11/30/2028     0.210 %     -       774,895  
Aggregate outstanding principal balances                         2,614,197       3,985,732  
Less: unamortized debt issuance costs                         (23,709 )     (24,396 )
Less: current portion                         (625,392 )     (936,690 )
Non-current portion                       $ 1,965,096     $ 3,024,646  

 

  (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.

 

F-18
 

 

The Company’s bond payable balance represents a corporate bond issued through Resona Bank with a principal of JPY100,000,000 (approximately $909,000) entered into in January 2019 with a term of five years payable semi-annually. The bond is guaranteed by Resona Bank and the CEO of the Company.

 

The Company also entered into several loan agreements with banks and other financial institutions during the years ended December 31, 2020 and 2019 with a term ranges from five to eight years payable monthly. These loans are unsecured unless otherwise specified in the table above.

 

Interest expense for long-term debts was $25,040 and $22,286 for the years ended December 31, 2020 and 2019, respectively.

 

As of December 31, 2020, future minimum loan payments are as follows:

 

Year ending December 31,   Loan  
    Payment  
2021   $ 943,898  
2022     953,293  
2023     808,165  
2024     463,958  
2025     291,980  
Thereafter     524,438  
Total   $ 3,985,732  

 

NOTE 10 — INCOME TAXES

 

United States

 

HeartCore USA is a holding company registered in the State of Delaware incorporated in May 2021. During the years ended December 31, 2020 and 2019, no provision for income taxes in the U.S. has been made as HeartCore USA did not generate any U.S. taxable income.

 

Japan

 

The Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. During the years ended December 31, 2020 and 2019, all taxable income (loss) of the Company is generated in Japan. 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 years ended December 31, 2020 and 2019.

 

For the years ended December 31, 2020 and 2019, the Company’s income tax expenses are as follows:

 

    For the Years Ended  
    December 31,  
    2020     2019  
Current   $ 6,651     $ 7,246  
Deferred     65,566       (63,303 )
Total   $ 72,217     $ (56,057 )

 

F-19
 

 

A reconciliation of the effective income tax rates reflected in the accompanying consolidated statements of operations to the Japanese statutory tax rate for the years ended December 31, 2020 and 2019 is as follows:

 

    For the Years Ended  
    December 31,  
    2020     2019  
Japanese statutory tax rate     30.62 %     30.62 %
Entertainment expenses not deductible     1.23 %     (0.78 )%
Change in valuation allowance     - %     (25.86 )%
Other adjustments     (0.08 )%     0.28 %
Effective tax rate     31.77 %     4.26 %

 

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are presented below:

 

    December 31,     December 31,  
    2020     2019  
Deferred tax assets                
Revenue adjustments   $ 80,327     $ 28,247  
Cost adjustments     230,603       9,426  
Expense adjustments     102,450       35,395  
Research and development – costs capitalized for tax purposes     258,105       376,604  
Bad debt allowance     11,558       8,373  
Net operating losses carried forward     849,360       1,066,992  
Subtotal     1,532,403       1,525,037  
Less valuation allowance     (849,360 )     (807,364 )
Total deferred tax assets   $ 683,043     $ 717,673  

 

The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. The Company regularly assesses the ability to realize its deferred tax assets and establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including its earnings history and results of recent operations, projected future taxable income, and tax planning strategies.

 

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the Company’s projections for growth. The adjustments of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which the valuation allowance is adjusted.

 

F-20
 

 

Uncertain tax positions

 

The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. As of December 31, 2020 and 2019, the management considered the Company did not have any significant unrecognized uncertain tax positions. The Company did not incur any interest or penalties tax for the years ended December 31, 2020 and 2019. The Company does not anticipate any significant increases or decreases in unrecognized tax benefits in the next twelve months from December 31, 2020. The Company’s Japan subsidiary income tax return filed for the tax years ending on May 31, 2017 and thereafter are subject to examination by the relevant taxing authorities.

 

NOTE 11 – STOCK BASED COMPENSATION

 

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 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 December 31, 2020 and 2019, 313 and 259 units, respectively, 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.

 

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 JPY1,940 (approximately $19) and JPY2,480 (approximately $23) as of December 31, 2020 and 2019, respectively. The shares issued related to the early exercise of the above-mentioned stock options were not considered outstanding during the years ended December 31, 2020 and 2019.

 

The following summarized the Company’s stock options activity for the years ended December 31, 2019 and 2020:

 

    Number of stock options  
Issued and unvested as of January 1, 2019     297  
Forfeited     49  
Issued and unvested as of December 31, 2019     248  
Forfeited     54  
Issued and unvested as of December 31, 2020     194  

 

NOTE 12 – SHAREHOLDERS’ 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.

 

On December 17, 2019, the Company issued 556 shares of common shares of HeartCore Japan (an equivalent of 830,945 shares of common shares of HeartCore USA) to an existing shareholder for cash of JPY50,040,000 (approximately $457,000). On June 17, 2020, the Company issued 1,112 shares of common shares of HeartCore Japan (an equivalent of 1,661,889 shares of common shares of HeartCore USA) to a third party company for cash of JPY100,080,000 (approximately $932,000).

 

As of December 31, 2020, and 2019, there were 15,999,999 and 14,338,110 shares, respectively, of common shares issued, 15,242,454 and 13,580,565 shares, respectively, of common shares outstanding.

 

No preferred shares were issued and outstanding as of December 31, 2020 and 2019. The number of shares reflects the retrospective presentation of the share issuance on July 16, 2021, due to the recapitalization between entities under common control.

 

NOTE 13 – 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. Dilutive common shares are determined by applying the treasury stock method to the assumed conversion of share repurchase liability to common shares related to the early exercised stock options (also see NOTE 11).

 

The computation of basic and diluted earnings (loss) per share for the years ended December 31, 2019 and 2020 is as follows:

 

    For the Years Ended  
    December 31,  
    2020     2019  
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   $ 150,955     $ (1,223,574 )
Net income (loss) attributable to common shareholders    

150,955

     

(1,223,574

)
Denominator:                
Weighted average number of common shares outstanding used in calculating basic earnings (loss) per share     14,475,079       12,781,492  
Denominator used for earnings (loss) per share     14,475,079       12,781,492  
Earnings (loss) per share — basic   $ 0.01     $ (0.10 )

 

F-21
 

 

    For the Years Ended  
    December 31,  
    2020     2019  
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   $ 150,955     $ (1,223,574 )
Net income (loss) attributable to common shareholders    

150,955

      (1,223,574 )
Denominator:                
Weighted average number of common shares outstanding used in calculating diluted earnings (loss) per share     14,475,079       12,781,492  
Conversion of share repurchase liability to common shares *     289,836       -  
Denominator used for earnings (loss) per share     14,764,915       12,781,492  
Earnings (loss) per share — diluted   $ 0.01     $ (0.10 )

 

* The share repurchase liability is related to the early exercised stock options that are issued and unvested as of December 31, 2020, 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 year ended December 31, 2019, the weighted average shares outstanding is the same for basic and diluted earnings per share calculations, as the inclusion of common shares equivalents of 370,512 would have an anti-dilutive effect.

 

NOTE 14 - SUBSEQUENT EVENTS

 

The Company evaluated subsequent events from December 31, 2020 through November 12, 2021, which is the date the consolidated financial statements were issued, and concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements other than as disclosed below.

 

During the subsequent period, Heartcore Technology Inc., a company controlled by the CEO of the Company, borrowed and repaid approximately $57,000 and $14,000, respectively, from and to the Company.

 

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 November 3, 2021, the Company redeemed 484,056 shares issued of HeartCore Enterprises, Inc. from the CEO of the Company for $1 in total for the shares related to the early exercise of stock options the CEO held on behalf of the Company.

 

The Company is currently engaged in a private placement of up to 400,000 of its shares of common stock for $2.50 per share, for an aggregate of gross proceeds in the amount of $1,000,000. The Company plans to close the private placement by November 30, 2021.

 

F-22
 

 

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2021     2020  
      (unaudited)          
ASSETS                
Current assets:                
Cash and cash equivalents   $ 3,090,782     $ 3,058,175  
Accounts receivable, net     1,271,434       708,450  
Prepaid expenses     550,647       408,792  
Due from related parties     37,887       23,926  
Loan receivable from employees     8,594       12,205  
Other current assets     31,624       63,876  
Total current assets     4,990,968       4,275,424  
                 
Non-current assets:                
Property and equipment, net     286,230       376,860  
Operating lease right-of-use assets     3,499,603       4,291,800  
Deferred tax assets     548,726       683,043  
Security deposits     286,688       310,181  
Long-term loan receivable from related party     360,163       386,516  
Loan receivable from employees, non-current     6,732       14,336  
Other non-current assets     11,060       18,642  
Total non-current assets     4,999,202       6,081,378  
                 
Total assets   $ 9,990,170     $ 10,356,802  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
                 
Current liabilities:                
Accounts payable and accrued expenses   $ 806,881     $ 269,868  
Accrued payroll and other employee costs     287,212       254,273  
Due to related party     29       -  
Current portion of long-term debts     866,395       936,690  
Operating lease liabilities, current     342,258       392,765  
Finance lease liabilities, current     45,223       54,274  
Income tax payables     11,417       10,154  
Deferred revenue     2,485,857       2,017,204  
Other current liabilities     229,384       187,801  
Total current liabilities     5,074,656       4,123,029  
                 
Non-current liabilities:                
Long-term debts     2,050,895       3,024,646  
Operating lease liabilities, non-current     3,251,648       4,012,772  
Finance lease liabilities, non-current     28,977       71,144  
Other non-current liabilities     161,075       185,483  
Total non-current liabilities     5,492,595       7,294,045  
                 
Total liabilities:     10,567,251       11,417,074  
                 
Shareholders’ deficit:                
Preferred shares ($0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of September 30, 2021 and December 31, 2020)     -       -  
Common shares ($0.0001 par value, 200,000,000 shares authorized; 15,999,999 shares issued; 15,242,454 outstanding as of September 30, 2021 and December 31, 2020)*     1,524       1,524  
Additional paid-in capital*     2,735,315       2,735,315  
Accumulated deficit     (3,610,332 )     (4,014,046 )
Accumulated other comprehensive loss     (70,336 )     (136,890 )
Total HeartCore Enterprises, Inc.’s shareholders’ deficit     (943,829 )     (1,414,097 )
Non-controlling interest     366,748       353,825  
Total shareholders’ deficit     (577,081 )     (1,060,272 )
                 
Total liabilities and shareholders’ deficit   $ 9,990,170     $ 10,356,802  

 

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

 

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

 

F-23
 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

   

For the Nine Months Ended

September 30,

 
    2021     2020  
             
Revenues   $ 8,446,011     $ 6,664,487  
                 
Cost of revenues     4,369,144       3,616,972  
                 
Gross profit     4,076,867       3,047,515  
                 
Operating expenses:                
Selling expenses     226,903       85,706  
General and administrative expenses     2,986,291       2,254,015  
Research and development expenses     321,857       256,946  
                 
Total operating expenses     3,535,051       2,596,667  
                 
Income from operations     541,816       450,848  
                 
Other income (expenses):                
Interest income     5,446       1,635  
Interest expense     (29,927 )     (31,309 )
Other income     16,536       22,946  
Other expenses     (21,608 )     (5,266 )
Total other expenses     (29,553 )     (11,994 )
                 
Income before income tax provision     512,263       438,854  
                 
Income tax expense     97,437       40,539  
                 
Net income     414,826       398,315  
                 
Less: net income attributable to non-controlling interest     11,112       10,555  
                 
Net income attributable to HeartCore Enterprises, Inc.   $ 403,714     $ 387,760  
                 
Other comprehensive income (loss):                
Foreign currency translation adjustment     68,365       (36,719 )
                 
Total comprehensive income     483,191       361,596  
Less: comprehensive income attributable to non-controlling interest     12,923       9,821  
Comprehensive income attributable to HeartCore Enterprises, Inc.   $ 470,268     $ 351,775  
                 
Net earnings per common share attributable to HeartCore Enterprises, Inc.*                
Basic   $ 0.03     $ 0.03  
Diluted   $ 0.03     $ 0.03  
Weighted average common shares outstanding*                
Basic     15,242,454       14,217,420  
Diluted     15,515,856       14,507,256  

 

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

 

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

 

F-24
 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

 

    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, 2019*     13,580,565     $ 1,358     $ 1,803,203     $ (4,165,001 )   $ (72,504 )   $ (2,432,944 )   $ 351,223     $ (2,081,721 )
Issuance of common shares*     1,661,889       166       932,112       -       -       932,278       -       932,278  
Net income     -       -       -       387,760       -       387,760       10,555       398,315  
Foreign currency translation adjustment     -       -       -       -       (35,985 )     (35,985 )     (734 )     (36,719 )
Balance, September 30, 2020*     15,242,454     $ 1,524     $ 2,735,315     $ (3,777,241 )   $ (108,489 )   $ (1,148,891 )   $ 361,044     $ (787,847 )

 

    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     $ (4,014,046 )   $ (136,890 )   $ (1,414,097 )   $ 353,825     $ (1,060,272 )
Net income     -       -       -       403,714       -       403,714       11,112       414,826  
Foreign currency translation adjustment     -       -       -       -       66,554       66,554       1,811       68,365  
Balance, September 30, 2021*     15,242,454     $ 1,524     $ 2,735,315     $ (3,610,332 )   $ (70,336 )   $ (943,829 )   $ 366,748     $ (577,081 )

 

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

 

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

 

F-25
 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

For the Nine Months Ended

September 30,

 
    2021     2020  
Cash flows from operating activities:                
Net income   $ 414,826     $ 398,315  
Adjustments to reconcile net income to net cash used in operating activities:                
Depreciation expenses     80,297       86,039  
Amortization of debt issuance costs     4,358       4,395  
Non-cash lease expense     254,848       255,356  
Deferred income taxes     85,004       39,283  
                 
Changes in assets and liabilities:                
Accounts receivable, net     (634,711 )     84,365  
Prepaid expenses     (177,880 )     (131,553 )
Other assets     34,568       (17,225 )
Accounts payable and accrued expenses     684,960       117,035  
Accrued payroll and other employee costs     63,126       43,448  
Operating lease liabilities     (265,984 )     (263,016 )
Finance lease liabilities     (961 )     (1,505 )
Income tax payables     2,092       3,952  
Deferred revenue     639,643       176,357  
Other liabilities     55,064       (103,620 )
                 
Net cash flows provided by operating activities     1,239,250       691,626  
                 
Cash flows from investing activities:                
Purchases of property and equipment     (24,675 )     (16,497 )
Loan provided to employee     -       (14,052 )
Advance and loan provided to related parties     (126,390 )     (281,909 )
                 
Net cash flows used in investing activities     (151,065 )     (312,458 )
                 
Cash flows from financing activities:                
Proceeds from issuance of common shares     -       932,278  
Payments for finance leases     (42,941 )     (42,797 )
Proceeds from long-term debts     -       929,887  
Repayment of long-term debts     (770,181 )     (573,656 )
Payments for debt issuance costs     (3,033 )     (4,279 )
                 
Net cash flows provided by (used in) financing activities     (816,155 )     1,241,433  
                 
Effect of exchange rate changes     (239,423 )     43,874  
                 
Net change in cash and cash equivalents     32,607       1,664,475  
                 
Cash and cash equivalents - beginning of the period     3,058,175       535,287  
                 
Cash and cash equivalents - end of the period   $ 3,090,782     $ 2,199,762  
                 
Supplemental cash flow disclosure:                
Interest paid   $ 22,100     $ 21,291  
Income taxes paid   $ 9,738     $ 5,432  
                 
Non-cash investing and financing transactions                
                 
Remeasurement of the lease liability and right-of-use asset due to lease modification   $ 225,983     $ -  
Payroll withheld as repayment of loan receivable from employees   $ 9,399     $ 8,090  
Expense paid by related party on behalf of the Company   $ 107,178     $ 51,836  

 

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

 

F-26
 

 

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. As a result, HeartCore Japan becomes a majority-owned operating subsidiary of the Company.

 

The share exchange 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 consolidated financial statements.

 

The Company, via its majority-owned operating subsidiary, HeartCore Japan, is engaged in the business of developing and sales of comprehensive software in Japan. 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 consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. 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 interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2020.

 

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 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.

 

F-27
 

 

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:

 

    September 30,     December 31,  
    2021     2020  
Beginning balance   $ 173,043     $ 164,018  
Accretion expense     470       467  
Foreign currency translation adjustment     (13,118 )     8,558  
Ending balance   $ 160,395     $ 173,043  

 

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.

 

F-28
 

 

In the nine months ended September 30, 2021 and 2020, software development costs expensed as incurred amounted to $321,857 and $256,946, 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 nine months ended September 30, 2021 and 2020.

 

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$”), and the accompanying consolidated financial statements have been expressed in US$. 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 loss within the statements of changes shareholders’ deficit.

 

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

 

    September 30, 2021     September 30, 2020  
Current JPY: US$1 exchange rate     111.70       105.58  
Average JPY: US$1 exchange rate     108.52       107.54  

 

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.

 

F-29
 

 

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 price (“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 recognized 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.

 

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 nine months ended September 30, 2021 and 2020 that were included in the opening deferred revenues balance was approximately $2.0 million and $1.7 million, respectively.

 

Disaggregation of Revenue

 

The Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues by type for the nine months ended September 30, 2021 and 2020 is as following:

 

    For the Nine Months Ended  
    September 30,  
    2021     2020  
             
Revenue from On-Premise Software   $ 2,586,542     $ 1,408,815  
Revenue from Maintenance and Support service     2,842,407       2,819,569  
Revenue from Software as a Service (“SaaS”)     615,356       343,343  
Revenue from Software Development and other Miscellaneous Services     2,401,706       2,092,760  
Total Revenue   $ 8,446,011     $ 6,664,487  

 

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

 

    For the Nine Months Ended  
    September 30,  
    2021     2020  
             
Revenue from Customer Experience Management Platform   $ 7,012,129     $ 5,242,239  
Revenue from Process Mining     588,307       799,586  
Revenue from Robotic Process Automation     433,736       488,047  
Revenue from Task Mining     228,712       90,445  
Revenue from Others     183,127       44,170  
Total Revenue   $ 8,446,011     $ 6,664,487  

 

As of September 30, 2021 and 2020, and for the period then ended, all long-lived assets and almost all of the revenue generated are attributed to the Company’s operation in Japan.

 

F-30
 

 

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 nine months ended September 30, 2021, customer A and B represents 19% and 11%, respectively, of the Company’s total revenues. For the nine months ended September 30, 2020, no customer accounted for more than 10% of the Company’s total revenues.

 

For the nine months ended September 30, 2021, vendor A, B and C represents 34%, 31% and 23%, respectively, of the Company’s total purchases. For the nine months ended September 30, 2020, vendor A, B, C and D represents 31%, 30%, 20% and 14%, respectively, of the Company’s total purchases.

 

Recent Accounting Pronouncements Adopted

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU No. 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. The Company adopted this guidance as of January 1, 2021, and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

NOTE 3 — ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consists of the following:

 

    September 30,     December 31,  
    2021     2020  
Accounts receivable   $ 1,277,175     $ 746,197  
Less: allowance for doubtful accounts     (5,741 )     (37,747 )
Accounts receivable, net   $ 1,271,434     $ 708,450  

 

Allowance for doubtful accounts movement is as follows:

 

    September 30,     December 31,  
    2021     2020  
Beginning balance   $ 37,747     $ 27,345  
Write-offs     (34,888 )     -  
Additions to allowance     5,741       8,979  
Foreign currency translation adjustment     (2,859 )     1,423  
Ending balance   $ 5,741     $ 37,747  

 

NOTE 4 — PREPAID EXPENSES

 

Prepaid expenses consist of the following:

 

    September 30,     December 31,  
    2021     2020  
Prepayments to software vendors   $ 292,455     $ 258,713  
Prepaid selling expenses     55,761       54,470  
Prepaid subscription fees     37,237       63,437  
Deferred listing expenses     144,553       -  
Others     20,641       32,172  
Total   $ 550,647     $ 408,792  

 

NOTE 5 — RELATED PARTY TRANSACTIONS

 

As of December 31, 2020, the Company has a due from related party balance of $23,926 from Sumitaka Yamamoto, the CEO and major shareholder of the Company. The due from related party represents funds advanced to the related party to pay off the Company’s expenses. The balance is unsecured, non-interest bearing and due on demand. As of September 30, 2021, the Company has a balance due to this related party in an amount of $29. During the nine months ended September 30, 2021 and 2020, the Company advanced $70,518 and $73,453, respectively, to this related party, and the related party paid expenses of $93,310 and $51,836, respectively, on behalf of the Company. As of September 30, 2021 and December 31, 2020, Sumitaka Yamamoto held 484,056 and 467,622 shares, respectively, issued with repurchase provision in relation to the stock options the Company granted in May 2016 that he repurchased on behalf of the Company (also see Note 11).

 

F-31
 

 

As of September 30, 2021 and December 31, 2020, the Company has a loan receivable balance of $398,050 and $386,516, 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 nine months ended September 30, 2021 and 2020, the Company loaned $55,872 and $208,456, respectively, to this related party. During the nine months ended September 30, 2021 and 2020, the related party paid expenses of $13,868 and nil, respectively, on behalf of the Company.

 

In June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. During the nine months ended September 30, 2020, the Company has revenue from this related party of $361,091 from software sales and incurred cost with this related party of $433,782 for software development services provided. 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, 2021 to July 2021, when Suzuyo Shinwart Corporation was a related party of the Company, the Company has revenue from this related party of $159,677 from software sales and incurred cost with this related party of $336,645 for software development services provided.

 

NOTE 6 — LOAN RECEIVABLE FROM EMPLOYEES

 

The Company occasionally made loans to its employees to assist their life. The annual interest rate for these loans ranges from 1.600% to 1.975%, and the term ranges from two to three years. Repayments are deducted from the monthly salary of these employees.

 

NOTE 7 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

    September 30,     December 31,  
    2021     2020  
Leasehold improvement   $ 329,985     $ 357,026  
Machinery and equipment     316,997       325,744  
Vehicle     124,918       135,154  
Software     191,265       206,938  
Subtotal     963,165       1,024,862  
Accumulated depreciation     (676,935 )     (648,002 )
Property and equipment, net   $ 286,230     $ 376,860  

 

Depreciation expense was $80,297 and $86,039 for the nine months ended September 30, 2021 and 2020, respectively.

 

NOTE 8 — 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 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 $71,751 and $120,144 are included in property and equipment as of September 30, 2021 and December 31, 2020, respectively.

 

F-32
 

 

The components of lease costs are as follows:

 

    For the Nine Months Ended  
    September 30,  
    2021     2020  
Finance lease costs                
Amortization of right-of-use assets   $ 40,100     $ 40,465  
Interest on lease liabilities     961       1,505  
Total finance lease costs     41,061       41,970  
Operating lease costs     294,946       299,560  
Total lease costs   $ 336,007     $ 341,530  

 

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

 

    For the Nine Months Ended  
    September 30,  
    2021     2020  
Cash paid for amounts included in the measurement of lease liabilities:                
Operating cash flows from finance leases   $ 961     $ 1,505  
Operating cash flows from operating leases     306,082       307,220  
Financing cash flows from finance leases     42,941       42,797  
Remeasurement of operating lease liability and right-of-use asset due to lease modification     225,983        -  
                 
Weighted average remaining lease term (years)                
Finance leases     1.7       2.6  
Operating leases     10.4       11.4  
                 
Weighted-average discount rate: (per annum)                
Finance leases     1.32 %     1.32 %
Operating leases     1.32 %     1.32 %

 

As of September 30, 2021, the future maturity of lease liabilities is as follows:

 

Year ending December 31,   Finance lease     Operating lease  
Remaining of 2021   $ 13,474     $ 92,919  
2022     40,523       371,677  
2023     22,847       371,677  
2024     336       371,677  
2025     -       371,677  
Thereafter     -       2,273,695  
Total lease payments     77,180       3,853,322  
Less: imputed interest     (2,980 )     (259,416 )
Total lease liabilities     74,200       3,593,906  
Less: current portion     45,223       342,258  
Non-current lease liabilities   $ 28,977     $ 3,251,648  

 

Pursuant to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $286,688 and $310,181 as of September 30, 2021 and December 31, 2020, respectively.

 

F-33
 

 

NOTE 9 — 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
September 30,
2021
    Balance as of
December 31,
2020
 
Bond payable                                    
Corporate bond issued through Resona Bank    

100,000,000

(a)(b)

    1/10/2019—1/10/2024     0.430 %   $ 447,628     $ 678,032  
Loans with banks and other financial institutions                                    
Resona Bank, Limited.     30,000,000 (a)   12/29/2017—12/30/2022     1.475 %     67,144       121,077  
Resona Bank, Limited.    

50,000,000

(a)(b)

    12/29/2017—12/29/2024     0.675 %     207,923       282,594  
Resona Bank, Limited.    

10,000,000

(a)(b)

    9/30/2020—9/30/2027     0.000 %     76,741       94,556  
Resona Bank, Limited.    

40,000,000

(a)(b)

    9/30//2020—9/30/2027     0.000 %     306,965       378,225  
Resona Bank, Limited.    

20,000,000

(a)(b)

    11/13/2020—10/31/2027     1.600 %     155,613       191,418  
Sumitomo Mitsui Banking Corporation     100,000,000     12/28/2018—12/28/2023     1.475 %     402,766       597,239  
Sumitomo Mitsui Banking Corporation     10,000,000 (b)   12/30/2019—12/30/2026     1.975 %     67,153       84,182  
The Shoko Chukin Bank, Ltd.     30,000,000     9/28/2018—8/31/2023     1.200 %     104,208       162,146  
The Shoko Chukin Bank, Ltd.     50,000,000     7/27/2020—6/30/2027     1.290 %     372,426       461,062  
Japan Finance Corporation     40,000,000     12/15/2017—11/30/2022     0.300 %     88,183       160,306  
Japan Finance Corporation     80,000,000     11/17/2020—11/30/2028     0.210 %     638,854       774,895  
Aggregate outstanding principal balances                         2,935,604       3,985,732  
Less: unamortized debt issuance costs                         (18,314 )     (24,396 )
Less: current portion                         (866,395 )     (936,690 )
Non-current portion                       $ 2,050,895     $ 3,024,646  

 

  (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.

 

F-34
 

 

The Company entered into several loan agreements with banks and other financial institutions during the nine months ended September 30, 2020 with a term of seven years payable monthly. These loans are unsecured unless otherwise specified in the table above.

 

Interest expense for long-term debts was $24,909 and $18,821 for the nine months ended September 30, 2021 and 2020, respectively.

 

As of September 30, 2021, future minimum loan payments are as follows:

 

Year ending December 31,   Loan  
    Payment  
Remaining of 2021   $ 124,154  
2022     881,092  
2023     746,956  
2024     428,818  
2025     269,866  
Thereafter     484,718  
Total   $ 2,935,604  

 

NOTE 10 — INCOME TAXES

 

United States

 

HeartCore USA is a holding company registered in the State of Delaware incorporated in May 2021. During the nine months ended September 30, 2021 and 2020, no provision for income taxes in the U.S. has been made as HeartCore USA did not generate any U.S. taxable income.

 

Japan

 

The Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. During the nine months ended September 30, 2021 and 2020, all taxable income of the Company is generated in Japan. 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 nine months ended September 30, 2021 and 2020.

 

For the nine months ended September 30, 2021 and 2020, the Company’s income tax expenses are as follows:

 

    For the Nine Months Ended  
    September 30,  
    2021     2020  
Current   $ 9,970     $ 6,602  
Deferred     87,467       33,937  
Total   $ 97,437     $ 40,539  

 

The effective tax rate was 19.02% and 9.24% for the nine months ended September 30, 2021 and 2020, respectively.

 

F-35
 

 

NOTE 11 – STOCK BASED COMPENSATION

 

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 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 September 30, 2021 and December 31, 2020, 324 and 313 units, respectively, 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.

 

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) and JPY1,940 (approximately $19) as of September 30, 2021 and December 31, 2020, respectively. The shares issued related to the early exercise of the above-mentioned stock options were not considered outstanding during the nine months ended September 30, 2021 and 2020.

 

The following summarized the Company’s stock options activity for the nine months ended September 30, 2021 and 2020:

 

    Number of stock options  
Issued and unvested as of December 31, 2019     248  
Forfeited     54  
Issued and unvested as of September 30, 2020     194  
         
Issued and unvested as of December 31, 2020     194  
Forfeited     11  
Issued and unvested as of September 30, 2021     183  

 

NOTE 12 – SHAREHOLDERS’ 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.

 

On June 17, 2020, the Company issued 1,112 shares of common shares of HeartCore Japan (an equivalent of 1,661,889 shares of common shares of HeartCore USA) to a third party company for cash of JPY100,080,000 (approximately $932,000).

 

As of September 30, 2021 and December 31, 2020, there were 15,999,999 shares of common shares issued, 15,242,454 shares of common shares outstanding.

 

No preferred shares were issued and outstanding as of September 30, 2021 and December 31, 2020. The number of shares reflects the retrospective presentation of the share issuance on July 16, 2021, due to the recapitalization between entities under common control.

 

NOTE 13 – EARNINGS PER SHARE

 

Basic earnings per share is calculated on the basis of weighted-average outstanding common shares. Diluted earnings per share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options. Dilutive common shares are determined by applying the treasury stock method to the assumed conversion of share repurchase liability to common shares related to the early exercised stock options (also see NOTE 11).

 

The computation of basic and diluted earnings per share for the nine months ended September 30, 2021 and 2020 is as follows:

 

    For the Nine Months Ended  
    September 30,  
    2021     2020  
Earnings per share – basic Numerator:            
Allocation of net income attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings per common share — basic   $ 403,714     $ 387,760  
Net income attributable to common shareholders   $ 403,714     $ 387,760  
Denominator:                
Weighted average number of common shares outstanding used in calculating basic earnings per share     15,242,454       14,217,420  
Denominator used for earnings per share     15,242,454       14,217,420  
Earnings per share — basic   $ 0.03     $ 0.03  

 

F-36
 

 

    For the Nine Months Ended  
    September 30,  
    2021     2020  
Earnings per share – diluted Numerator:                
Allocation of net income attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings per common share — diluted   $ 403,714     $ 387,760  
Net income attributable to common shareholders     403,714       387,760  
Denominator:                
Weighted average number of common shares outstanding used in calculating diluted earnings per share     15,242,454       14,217,420  
Conversion of share repurchase liability to common shares*     273,402       289,836  
Denominator used for earnings per share     15,515,856       14,507,256  
Earnings per share — diluted   $ 0.03     $ 0.03  

 

* The share repurchase liability is related to the early exercised stock options that are issued and unvested as of September 30, 2021 and 2020, 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. 

 

NOTE 14 - SUBSEQUENT EVENTS

 

The Company evaluated subsequent events from October 1, 2021 through January 3, 2022, which is the date the unaudited consolidated financial statements were issued, and concluded that no subsequent events have occurred that would require recognition or disclosure in the unaudited consolidated financial statements other than as disclosed below.

 

On November 3, 2021, the Company redeemed 484,056 shares issued of HeartCore Enterprises, Inc. from the CEO of the Company for $1 in total for the shares related to the early exercise of stock options the CEO held on behalf of the Company.

 

During the period from October 27, 2021 through December 31, 2021, the Company issued 304,000 shares of common shares at a purchase price of $2.50 per share for an aggregate of $760,000 of proceeds in a private placement.

 

On August 6, the Board of directors and stockholders of the Company approved a 2021 Equity Incentive Plan (the “2021 Plan”), under which 2,400,000 of common shares are authorized for issuance. On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common shares pursuant to the 2021 Plan 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, subject to the terms and conditions of the 2021 Plan and the option award agreements pursuant to which the options were awarded.

 

F-37
 

 

 

2,500,000 Shares

 

 

HEARTCORE ENTERPRISES, INC.

 

Common Stock

 

 

PROSPECTUS

 

 

             , 2022

 

Through and including              , 2022 (the 25th day after the date of this offering), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution

 

The following table sets forth all expenses to be paid by the registrant, other than estimated underwriting discounts and commissions, in connection with our public offering. All amounts shown are estimates except for the SEC registration fee, Nasdaq listing fee and the FINRA filing fee:

 

Type   Amount  
SEC Registration Fee   $ 1,711.02  
FINRA Filing Fee     3,313.91  
Nasdaq Capital Market Listing Fee     50,000.00  
Legal Fees and Expenses     225,000.00  
Accounting Fees and Expenses     350,000.00  
Transfer agent and registrar’s fees and expenses     15,000.00  
Printing and engraving expenses     5,000.00  
Miscellaneous expense     5,000.00  
Total Expenses   $ 650,024.93  

 

Item 14. Indemnification of Directors and Officers.

 

Section 145 of the General Corporation Law of the State of Delaware provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement in connection with specified actions, suits and proceedings whether civil, criminal, administrative, or investigative, other than a derivative action by or in the right of the corporation, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification extends only to expenses, including attorneys’ fees, incurred in connection with the defense or settlement of such action and the statute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation’s certificate of incorporation, bylaws, disinterested director vote, stockholder vote, agreement or otherwise.

 

Our certificate of incorporation provides that our officers and directors will be indemnified by us to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended. In addition, our certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, except to the extent such exemption from liability or limitation thereof is not permitted by the General Corporation Law of the State of Delaware.

 

We intend to enter into separate indemnification agreements with our directors and officers. Each indemnification agreement will provide, among other things, for indemnification to the fullest extent permitted by law and our amended and restated certificate of incorporation and bylaws against any and all expenses, judgments, fines, penalties and amounts paid in settlement of any claim. The indemnification agreements will provide for the advancement or payment of all expenses to the indemnitee and for reimbursement to us if it is found that such indemnitee is not entitled to such indemnification under applicable law and our certificate of incorporation and bylaws.

 

Our certificate of incorporation also permits us to maintain insurance on behalf of any officer, director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit such indemnification. We intend to purchase a policy of directors’ and officers’ liability insurance that insures our officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to indemnify our officers and directors.

 

II-1

 

 

These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against officers and directors, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant to these indemnification provisions.

 

We believe that these provisions and the insurance are necessary to attract and retain talented and experienced officers and directors.

 

Any repeal or amendment of provisions of our certificate of incorporation affecting indemnification rights, whether by our board of directors, stockholders or by changes in applicable law, or the adoption of any other provisions inconsistent therewith, will (unless otherwise required by law) be prospective only, except to the extent such amendment or change in law permits us to provide broader indemnification rights on a retroactive basis, and will not in any way diminish or adversely affect any right or protection existing thereunder with respect to any act or omission occurring prior to such repeal or amendment or adoption of such inconsistent provision.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

Item 15. Recent Sales of Unregistered Securities.

 

Since our inception on May 18, 2021, we issued the following securities, which were not registered under the Securities Act.

 

On May 18, 2021, we issued five (5) shares of common stock, par value $0.0001 per share, to Sumitaka Yamamoto, Chief Executive Officer of the Company, for $1.00 per share for a total subscription of $5.00.

 

On July 16, 2021, pursuant to the terms of a share exchange agreement among the Company, HeartCore Co, the shareholders of HeartCore Co (excluding Dentsu Digital Investment Limited) and Sumitaka Yamamoto, as the representative of the shareholders of HeartCore Co, we issued 15,999,994 shares of our common stock to the shareholders of HeartCore Co. in exchange for 10,706 shares HeartCore Co’s common stock, representing 97.5% of the issued and outstanding capital stock of HeartCore Co.

 

On November 3, 2021, the Company redeemed 484,056 shares of common stock held by Sumitaka Yamamoto, Chief Executive Officer of the Company, for $1.00.

 

During the period from October 27, 2021 through December 31, 2021, the Company issued 304,000 shares of common stock at a purchase price of $2.50 per share (for an aggregate of $760,000 of proceeds) to accredited investors in a private placement under Rule 506(b) of Regulation D of the Securities Act.

 

On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to our 2021 Equity Incentive Plan 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 stock, subject to the terms and conditions of the 2021 Equity Incentive Plan and the option award agreements pursuant to which the options were awarded.

 

The above issuances/sales were made pursuant to an exemption from registration as set forth in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.

 

II-2

 

 

Item 16. Exhibits and Financial Statement Schedules

 

(a) Exhibits

 

Exhibit

No.

  Exhibit
1.1   Form of Underwriting Agreement*
3.1   Certificate of Incorporation of HeartCore Enterprises, Inc.*
3.2   Bylaws of HeartCore Enterprises, Inc.*
4.1   Form of Representative’s Warrant**
5.1   Opinion of Anthony L.G., PLLC*
10.1   Memorandum to Share Exchange Agreement dated July 15, 2021, among HeartCore Co, Sumitaka. Yamamoto, and Information Services International-Dentsu Ltd.*
10.2   Share Exchange Agreement dated July 16, 2021, among HeartCore Enterprises, Inc., all shareholders of HeartCore Co., Ltd., and Sumitaka Yamamoto as representative of the shareholders of HeartCore Co., Ltd.*
10.3   Stock Purchase Agreement dated August 10, 2021, between HeartCore Enterprises, Inc. and Dentsu Digital Investment Limited.*
10.4   HeartCore Enterprises, Inc. 2021 Equity Incentive Plan.*†
10.5   Employment Agreement, dated _______, 2022, between the Company and Sumitaka Yamamoto.**†
10.6   Employment Agreement, dated _______, 2022, between the Company and Kimio Hosaka.**†
10.7   Employment Agreement, dated _______, 2022, between the Company and Keisuke Kuno.**†
10.8   Employment Agreement, dated _______, 2022, between the Company and Qizhi Gao.**†
10.9   Employment Agreement, dated _______, 2022, between the Company and Hidekazu Miyata.**†
10.10   Form of Independent Director Agreement between HeartCore Enterprises, Inc. and each independent director*
10.11   Form of Indemnification Agreement between HeartCore Enterprises, Inc. and each independent director*
21.1   List of Subsidiaries*
23.1   Consent of MaloneBailey LLP*
23.2   Consent of Anthony L.G., PLLC (included on Exhibit 5.1)*
24.1   Power of Attorney (included on the signature page of the Form S-1)*

 

* Filed herewith

**To be filed by amendment.

† Includes management contracts and compensation plans and arrangements

 

(b) Financial Statement Schedules.

 

All financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or in the notes thereto.

 

II-3

 

 

Item 17. Undertakings

 

Insofar as indemnification for liabilities arising under the Securities Act “may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

  (a) Rule 415 Offering. The undersigned registrant hereby undertakes:
     
  (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
     
  (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
     
  (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
     
  (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
     
  (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
     
  (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
     
  (i) The undersigned Registrant hereby undertakes that it will:
     
  a. for determining any liability under the Securities Act of 1933, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act of 1933 as part of this registration statement as of the time the SEC declared it effective.
     
  b. for determining any liability under the Securities Act of 1933, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.

 

That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

II-4

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tokyo, Japan, on January 3, 2022.

 

  HEARTCORE ENTERPRISES, INC.
     
  By: /s/ Sumitaka Yamamoto
    Sumitaka Yamamoto
   

Chief Executive Officer and President

(principal executive officer)

 

POWER OF ATTORNEY

 

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sumitaka Yamamoto as his or her true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her in his or her name, place or stead, in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that said attorneys-in-fact and agents, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities held on January 3, 2022.

 

Name   Position   Date
         
/s/ Sumitaka Yamamoto   Chief Executive Officer, President and Director   January 3, 2022
Sumitaka Yamamoto   (Principal Executive Officer)    
         
/s/ Qizhi Gao   Chief Financial Officer     January 3, 2022
Qizhi Gao   (Principal Financial and Accounting Officer)    
         
/s/ Kimio Hosaka   Chief Operating Officer and Director   January 3, 2022
Kimio Hosaka        
         
/s/ Yoshitomo Yamano   Director   January 3, 2022
Yoshitomo Yamano        
         
/s/ Yuki Tan   Director   January 3, 2022
Yuki Tan        
         
/s/ Takeshi Omoto   Director   January 3, 2022
Takeshi Omoto        
         
/s/ Yuta Katai   Director   January 3, 2022
Yuta Katai        

 

II-5

 

Exhibit 1.1

 

UNDERWRITING AGREEMENT

 

[DATE]

 

Boustead Securities, LLC

6 Venture, Suite 265

Irvine, CA 92618

 

As Representative of the several Underwriters named on Schedule 1 attached hereto

 

Ladies and Gentlemen:

 

The undersigned, HeartCore Enterprises, Inc., a Delaware corporation (the “Company”), hereby confirms its agreement (this “Agreement”) with Boustead Securities, LLC (hereinafter referred to as “you” (including its correlatives) or the “Representative”) and with the other underwriters, if any, named on Schedule 1 hereto for which the Representative is acting as representative (the Representative and such other underwriters being collectively called the “Underwriters” or, individually, an “Underwriter”) as follows:

 

1. Purchase and Sale of Shares.

 

1.1 Firm Shares.

 

1.1.1. Nature and Purchase of Firm Shares.

 

(i) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell in the aggregate [*] shares of common stock of the Company, par value $0.0001 per share (the “Common Stock”), and each Underwriter agrees to purchase, severally and not jointly, at the Closing, an aggregate of [*] shares (“Firm Shares”) of the Common Stock.

 

(ii) The Firm Shares are to be offered together to the public at the offering price per one Firm Share as set forth on Schedule 2-A hereto (the “Purchase Price”). The Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Shares set forth opposite their respective names on Schedule 1 attached hereto and made a part hereof at the purchase price for one Firm Share of $[*] (or 93% of the Purchase Price).

 

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1.1.2. Firm Shares Payment and Delivery.

 

(i) Delivery and payment for the Firm Shares shall be made at 10:00 a.m., Eastern time, on the second (2nd) Business Day following the effective date (the “Effective Date”) of the Registration Statement (as defined in Section 2.1.1 below) (or the third (3rd) Business Day following the Effective Date if the Registration Statement is declared effective after 4:01 p.m., Eastern time) or at such earlier time as shall be agreed upon by the Representative and the Company, at the offices of Bevilacqua PLLC (“Representative’s Counsel”), or at such other place (or remotely by facsimile or other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Shares is called the “Closing Date.”

 

(ii) Payment for the Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery of the certificates (in form and substance satisfactory to the Underwriters) representing the Firm Shares (or through the facilities of the Depository Trust Company (“DTC”)) for the account of the Underwriters. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Representative for all of the Firm Shares. The term “Business Day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.

 

1.2. Over-allotment Option.

 

1.2.1. Option Shares. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Company hereby grants to the Underwriters an option (the “Over-allotment Option”) to purchase, in the aggregate, up to [*] additional shares of the Common Stock (the “Option Shares”, and along with the Firm Shares, the “Shares”), representing fifteen percent (15%) of the Firm Shares sold in the offering, from the Company. The purchase price to be paid per Option Share shall be equal to the price per Option Share set forth in Schedule 2-A. The Shares shall be issued directly by the Company and shall have the rights and privileges described in the Registration Statement, the Pricing Disclosure Package and the Prospectus referred to below. The offering and sale of the Shares is herein referred to as the “Offering.”

 

1.2.2. Exercise of Option. The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares within forty-five (45) days after the Effective Date. The Underwriters shall not be under any obligation to purchase any of the Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of written notice to the Company from the Representative, setting forth the number of the Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares (the “Option Closing Date”), which shall not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of Representative’s Counsel or at such other place (including remotely by facsimile or other electronic transmission) as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Shares does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Shares subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of the Option Shares specified in such notice and (ii) each of the Underwriters, acting severally and not jointly, shall purchase that portion of the total number of the Option Shares then being purchased as set forth in Schedule 1 opposite the name of such Underwriter.

 

1.2.3. Payment and Delivery. Payment for the Option Shares shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to you of certificates (in form and substance satisfactory to the Underwriters) representing the Option Shares (or through the facilities of DTC or via DWAC transfer) for the account of the Underwriters. The Option Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Option Shares except upon tender of payment by the Representative for applicable Option Shares.

 

1.3 Representative’s Warrants.

 

1.3.1. Purchase Warrants. The Company hereby agrees to issue and sell to the Representative (and/or its designees) on the Closing Date an option (“Representative’s Warrants”) as applicable, five-year warrants for the purchase of a number of the Firm Shares equal to 7% of the number of the Firm Shares and Option Shares, if any, issued in the Offering, pursuant to a warrant in the form attached hereto as Exhibit A, at an initial exercise price of $[*] (or 125% of the public offering price per Firm Share). The Representative’s Warrants and the Shares issuable upon exercise thereof are hereinafter referred to together as the “Representative’s Securities.” The Representative understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representative’s Warrants and the underlying Shares during the one hundred eighty (180) days after the Effective Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Representative’s Warrants, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Effective Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Representative or of any such Underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.

 

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1.3.2. Delivery. Delivery of the Representative’s Warrants shall be made on the Closing Date and shall be issued in the name or names and in such authorized denominations as the Representative may request.

 

2. Representations and Warranties of the Company. The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below), as of the Closing Date and as of the Option Closing Date, if any, as follows:

 

2.1. Filing of Registration Statement.

 

2.1.1. Pursuant to the Securities Act. The Company has filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement, and an amendment or amendments thereto, on Form S-1 (File No. 333-______), including any related prospectus or prospectuses, for the registration of the Shares and the Representative’s Securities under the Securities Act of 1933, as amended (the “Securities Act”), which registration statement and amendment or amendments have been prepared by the Company in all material respects in conformity with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the “Securities Act Regulations”) and will contain all material statements that are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the Preliminary Prospectus included in the registration statement, financial statements, schedules, exhibits and all other documents filed as a part thereof and all information deemed to be a part thereof as of the Effective Date pursuant to paragraph (b) of Rule 430A of the Securities Act Regulations (the “Rule 430A Information”)), is referred to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term “Registration Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been declared effective by the Commission on the date hereof.

 

Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary Prospectus.” The Preliminary Prospectus, subject to completion, dated [*], that was included in the Registration Statement immediately prior to the Applicable Time is hereinafter called the “Pricing Prospectus.” The final prospectus in the form first furnished to the Underwriters for use in the Offering is hereinafter called the “Prospectus.” Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement.

 

Applicable Time” means 4:00 p.m., Eastern time, on the date of this Agreement.

 

Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations (“Rule 433”), including without limitation any “free writing prospectus” (as defined in Rule 405 of the Securities Act Regulations) relating to the Shares that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Shares or of the Offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).

 

Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a “bona fide electronic road show,” as defined in Rule 433 (the “Bona Fide Electronic Road Show”)), as evidenced by its being specified in Schedule 2-B hereto.

 

Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.

 

3
 

 

Pricing Disclosure Package” means any Issuer General Use Free Writing Prospectus issued at or prior to the Applicable Time, the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.

 

2.1.2. Pursuant to the Exchange Act. The Company has filed with the Commission a Form 8-A (File Number [*]) providing for the registration pursuant to Section 12(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the Common Stock. The registration of the Common Stock under the Exchange Act has become effective on or prior to the date hereof. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.

 

2.2. Share Exchange Listing. The Shares and the shares of Common Stock underlying the Representative’s Warrants have been approved for listing on the Nasdaq Capital Market (the “Exchange”), and the Company has taken no action designed to, or likely to have the effect of, delisting of the Shares or the shares of Common Stock underlying the Representative’s Warrants from the Exchange, nor has the Company received any written notification that the Exchange is contemplating terminating such listing.

 

2.3. No Stop Orders, etc. Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any written order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.

 

2.4. Disclosures in Registration Statement.

 

2.4.1. Compliance with Securities Act and 10b-5 Representation.

 

(i) Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriters for use in connection with this Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

(ii) Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

 

(iii) The Pricing Disclosure Package, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), did not, does not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Limited Use Free Writing Prospectus hereto does not conflict with the information contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus, as supplemented by and taken together with the Pricing Prospectus as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to statements made in reliance upon and in conformity with written information furnished to the Company in writing with respect to the Underwriters by the Representative expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the disclosure contained in the “Underwriting” subsections “- Discounts and Commissions; Expenses,” “Representative’s Warrants,” “Price Stabilization, Short Positions and Penalty Bids,” and “Other Relationships” of the Prospectus (the “Underwriters’ Information”).

 

4
 

 

(iv) Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information.

 

2.4.2. Disclosure of Agreements. The agreements and documents described in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the Pricing Disclosure Package and the Prospectus, or (ii) is material to the Company’s business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. None of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder, except for any default or event which would not reasonably be expected to result in a Material Adverse Change (as defined below). To the Company’s knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses (each, a “Governmental Entity”), including, without limitation, those relating to environmental laws and regulations, except for any violation which would not reasonably be expected to result in a Material Adverse Change (as defined below).

 

2.4.3. Prior Securities Transactions. During the past three (3) years from the date of this Agreement, no securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and any Preliminary Prospectus.

 

2.4.4. Regulations. The disclosures in the Registration Statement, the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign regulation on the Offering and the Company’s business as currently contemplated are correct in all material respects and no other such regulations are required to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which are not so disclosed

 

2.5. Changes after Dates in Registration Statement.

 

2.5.1. No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations of the Company or its Subsidiaries taken as a whole, nor any change or development that, singularly or in the aggregate, would involve a material adverse change in or affecting the condition (financial or otherwise), results of operations, business, or assets of the Company or its Subsidiaries taken as a whole (a “Material Adverse Change”); (ii) there have been no material transactions entered into by the Company or its Subsidiaries, other than as contemplated pursuant to this Agreement; and (iii) no officer or director of the Company has resigned from any position with the Company.

 

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2.5.2. Recent Securities Transactions, etc. Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not: (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.

 

2.6. Independent Accountants. To the knowledge of the Company, MaloneBailey, LLP (“Auditor”), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. The Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.

 

2.7. Financial Statements, etc. The financial statements, including the notes thereto and supporting schedules, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, fairly present in all material respects the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by GAAP); and any supporting schedules included in the Registration Statement present fairly in all material respects the information required to be stated therein. Except as included therein, no historical or pro forma financial statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The pro forma and pro forma as adjusted financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly in all material respects the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) neither the Company nor any of its subsidiaries listed in Exhibit 21.1 to the Registration Statement (each, a “Subsidiary” and, collectively, the “Subsidiaries”), has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its Common Stock or preferred stock (c) there has not been any change in the capital of the Company or any of its Subsidiaries, or, other than in the course of business, any grants under any stock compensation plan, and (d) there has not been any Material Adverse Change in the Company’s long-term or short-term debt. The Company represents that it has no direct or indirect subsidiaries other than those listed in Exhibit 21.1 to the Registration Statement.

 

2.8. Authorized Capital; Options, etc. The Company had, at the date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the Prospectus, on the Effective Date, as of the Applicable Time and on the Closing Date and any Option Closing Date, there will be no options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued Common Stock or any security convertible or exercisable into Common Stock, or any contracts or commitments to issue or sell Common Stock or any such options, warrants, rights or convertible securities.

 

6
 

 

2.9. Valid Issuance of Securities, etc.

 

2.9.1. Outstanding Securities. All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The Common Stock, preferred stock, and any other securities outstanding or to be outstanding upon consummation of the Offering conform in all material respects to all statements relating thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding Common Stock were at all relevant times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based in part on the representations and warranties of the purchasers of such shares, exempt from such registration requirements.

 

2.9.2. Securities Sold Pursuant to this Agreement. The Shares and Representative’s Warrants have been duly authorized for issuance and sale and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Shares and Representative’s Warrants are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Shares and Representative’s Warrants has been duly and validly taken; the Common Stock issuable upon exercise of the Representative’s Warrants have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when issued in accordance with such Representative’s Warrants, as the case may be, such Common Stock will be validly issued, fully paid and non-assessable. The Shares and the Representative’s Warrants conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.10. Registration Rights of Third Parties. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in a registration statement to be filed by the Company.

 

2.11. Validity and Binding Effect of Agreements. This Agreement and the Representative’s Warrants have been duly and validly authorized by the Company, and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

 

2.12. No Conflicts, etc. The execution, delivery and performance by the Company of this Agreement and all ancillary documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a material breach of, or conflict with any of the terms and provisions of, or constitute a material default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation of the provisions of the Company’s Certificate of Incorporation (as the same may be amended or restated from time to time, the “Charter”) or the by-laws of the Company; or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any Governmental Entity as of the date hereof.

 

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2.13. No Defaults; Violations. No material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not (i) in violation of any term or provision of its Charter or by-laws, or (ii) in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity, except in the cases of clause (ii) for such violations which would not reasonably be expected to cause a Material Adverse Change.

 

2.14. Corporate Power; Licenses; Consents.

 

2.14.1. Conduct of Business. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except for the absence of which would not reasonably be expected to have a Material Adverse Change.

 

2.14.2. Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency, the Exchange or other body is required for the valid issuance, sale and delivery of the Shares and the consummation of the transactions and agreements contemplated by this Agreement and the delivery of the Representative’s Warrants and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except with respect to applicable Securities Act Regulations, state securities laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

 

2.15. D&O Questionnaires. To the Company’s knowledge, all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors and officers immediately prior to the Offering (the “Insiders”) as supplemented by all information concerning the Company’s directors, officers and principal shareholders as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, as well as in the Lock-Up Agreement (as defined in Section 2.24 below), provided to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate and incorrect.

 

2.16. Litigation; Governmental Proceedings. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.17. Good Standing. The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the State of Delaware as of the date hereof, and is duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would not have or reasonably be expected to result in a Material Adverse Change.

 

2.18. Insurance. The Company carries or is entitled to the benefits of insurance, (including, without limitation, as to directors and officers insurance coverage), with, to the Company’s knowledge, reputable insurers, in the amount of directors and officers insurance coverage at least equal to $ [*] and the Company has included each Underwriter as an additional insured party to the directors and officers insurance coverage and all such insurance is in full force and effect. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change.

 

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2.19. Transactions Affecting Disclosure to FINRA.

 

2.19.1. Finder’s Fees. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the Shares hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its shareholders that may affect the Underwriters’ compensation, as determined by FINRA.

 

2.19.2. Payments within Six (6) Months. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not made any direct or indirect payments (in cash, securities or otherwise) to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) any FINRA member participating in the offering as defined in FINRA Rule 5110(j)(15) (“Participating Member”); or (iii) any person or entity that has any direct or indirect affiliation or association with any Participating Member, within the six (6) months immediately prior to the original filing of the Registration Statement, other than the payment to the Underwriters as provided hereunder in connection with the Offering.

 

2.19.3. Use of Proceeds. None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.

 

2.19.4. FINRA Affiliation. To the Company’s knowledge, and except as may otherwise be disclosed in FINRA questionnaires provided to the Representative’s Counsel, there is no (i) officer or director of the Company, (ii) beneficial owner of 5% or more of any class of the Company’s securities or (iii) beneficial owner of the Company’s unregistered equity securities which were acquired during the 180-day period immediately preceding the filing of the Registration Statement that is an affiliate or associated person of a Participating Member.

 

2.19.5. Information. All information provided by the Company in its FINRA questionnaire to Representative’s Counsel specifically for use by Representative’s Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.

 

2.20. Foreign Corrupt Practices Act. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.

 

2.21. Compliance with OFAC. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), and the Company will not, directly or indirectly, use the proceeds of the Offering hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

 

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2.22. Money Laundering Laws. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

 

2.23. Officers’ Certificate. Any certificate signed by any duly authorized officer of the Company and delivered to you or to Representative’s Counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.

 

2.24. Lock-Up Agreements. Schedule 3 hereto contains a complete and accurate list of the Company’s officers, directors and each owner of 5% or more of the Company’s outstanding Common Stock (or securities convertible or exercisable into Common Stock) (collectively, the “Lock-Up Parties”). The Company has caused each of the Lock-Up Parties to deliver to the Representative an executed Lock-Up Agreement, in a form substantially similar to that attached hereto as Exhibit B (the “Lock-Up Agreement”), prior to the execution of this Agreement.

 

2.25. Subsidiaries. All Subsidiaries of the Company are duly organized and in good standing under the laws of the place of organization or incorporation, and each Subsidiary is in good standing in each jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify would not have a Material Adverse Change. The Company’s ownership and control of each Subsidiary is as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.26. Related Party Transactions. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described as required by the Securities Act Regulations.

 

2.27. Board of Directors. The Board of Directors of the Company is comprised of the persons set forth under the heading of the Pricing Prospectus and the Prospectus captioned “Management.” The qualifications of the persons serving as board members and the overall composition of the board comply with the Exchange Act, the Exchange Act Regulations, the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of the Board of Directors of the Company qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange. In addition, at least a majority of the persons serving on the Board of Directors qualify as “independent,” as defined under the listing rules of the Exchange.

 

2.28. Sarbanes-Oxley Compliance.

 

2.28.1. Disclosure Controls. Except as disclosed in the Registration Statement, Pricing Disclosure Package and the Prospectus, the Company has developed and currently maintains disclosure controls and procedures that will comply with Rule 13a-15 or 15d-15 under the Exchange Act Regulations, and such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents.

 

2.28.2. Compliance. The Company is, or at the Applicable Time and on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act applicable to it, and has implemented or will implement such programs and has taken reasonable steps to ensure the Company’s future compliance (not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley Act.

 

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2.29. Accounting Controls. Except as disclosed in the Registration Statement, Pricing Disclosure Package and the Prospectus, the Company maintains systems of “internal control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply in all material respects with the requirements of the Exchange Act and have been designed by, or under the supervision of, its respective principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses in its internal control over financial reporting, and, if applicable, with respect to such remedial actions disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company represents that it has taken all remedial actions set forth in such disclosure. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are known to the Company’s management and that have adversely affected or are reasonably likely to adversely affect the Company’ ability to record, process, summarize and report financial information; and (ii) any fraud known to the Company’s management, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

 

2.30. No Investment Company Status. The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in the Investment Company Act of 1940, as amended.

 

2.31. No Labor Disputes. No labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent.

 

2.32. Intellectual Property Rights. The Company and each of its Subsidiaries owns or possesses or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights (“Intellectual Property Rights”) necessary for the conduct of the business of the Company and its Subsidiaries as currently carried on and as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus. To the knowledge of the Company, no action or use by the Company or any of its Subsidiaries necessary for the conduct of its business as currently carried on and as described in the Registration Statement and the Prospectus will involve or give rise to any infringement of, or license or similar fees for, any Intellectual Property Rights of others. Neither the Company nor any of its Subsidiaries has received any written notice alleging any such infringement, fee or conflict with asserted Intellectual Property Rights of others. Except as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change (A) to the knowledge of the Company, there is no infringement, misappropriation or violation by third parties of any of the Intellectual Property Rights owned by the Company; (B) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the rights of the Company in or to any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim, that would, individually or in the aggregate, together with any other claims in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (C) the Intellectual Property Rights owned by the Company and, to the knowledge of the Company, the Intellectual Property Rights licensed to the Company have not been adjudged by a court of competent jurisdiction invalid or unenforceable, in whole or in part, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (D) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company infringes, misappropriates or otherwise violates any Intellectual Property Rights or other proprietary rights of others, the Company has not received any written notice of such claim and the Company is unaware of any other facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims in this Section 2.32, reasonably be expected to result in a Material Adverse Change; and (E) to the Company’s knowledge, no employee of the Company is in or has ever been in violation in any material respect of any term of any employment contract, patent disclosure agreement, invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive covenant to or with a former employer where the basis of such violation relates to such employee’s employment with the Company, or actions undertaken by the employee while employed with the Company and could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change. To the Company’s knowledge, all material technical information developed by and belonging to the Company which has not been patented has been kept confidential. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus and are not described therein. The Registration Statement, the Pricing Disclosure Package and the Prospectus contain in all material respects the same description of the matters set forth in the preceding sentence. None of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual obligation binding on the Company or, to the Company’s knowledge, any of its officers, directors or employees, or otherwise in violation of the rights of any persons.

 

2.33. Taxes. Each of the Company and its Subsidiaries has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof, except in any case in which the failure so to file would not reasonably be expected to cause a Material Adverse Change. Each of the Company and its Subsidiaries has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company or such respective Subsidiary, except for any such taxes that are currently being contested in good faith or as would not reasonably be expected to cause a Material Adverse Change. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriters, (i) no issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company or its Subsidiaries, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company or its Subsidiaries. The term “taxes” means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes.

 

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2.34. ERISA Compliance. The Company is not subject to the Employee Retirement Income Security Act of 1974, as amended, or the regulations and published interpretations thereunder.

 

2.35. Compliance with Laws. Except as otherwise disclosed in the Registration Statement, Pricing Disclosure Package and Prospectus and as could not, individually or in the aggregate, be expected to result in a Material Adverse Change, each of the Company and each Subsidiary, the Company: (A) is and at all times has been in compliance with all statutes, rules, or regulations applicable to the services provided by the Company (“Applicable Laws”), except as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Change; (B) has not received any warning letter, untitled letter or other correspondence or notice from any other governmental authority alleging or asserting noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws (“Authorizations”); (C) possesses all material Authorizations and such material Authorizations are valid and in full force and effect and are not in material violation of any term of any such Authorizations; (D) has not received written notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any governmental authority or third party alleging that any product operation or activity is in violation of any Applicable Laws or Authorizations and has no knowledge that any such governmental authority or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding that if brought would result in a Material Adverse Change; (E) has not received written notice that any Governmental Authority has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such Governmental Authority is considering such action; (F) has filed, obtained, maintained or submitted all material reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct in all material respects on the date filed (or were corrected or supplemented by a subsequent submission); and (G) has not, either voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any recall, market withdrawal or replacement, safety alert, post-sale warning, or other notice or action relating to the alleged lack of safety of any product or any alleged product defect or violation and, to the Company’s knowledge, no third party has initiated, conducted or intends to initiate any such notice or action.

 

2.36. Ineligible Issuer. At the time of filing the Registration Statement and any post-effective amendment thereto, at the time of effectiveness of the Registration Statement and any amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Securities Act Regulations) of the Shares and at the date hereof, the Company was not and is not an “ineligible issuer,” as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.

 

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2.37. Real Property. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company and its Subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real or personal property which are material to the business of the Company and its Subsidiaries taken as a whole, in each case free and clear of all liens, encumbrances, security interests, claims and defects that do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or its Subsidiaries; and all of the leases and subleases material to the business of the Company and its Subsidiaries, considered as one enterprise, and under which the Company or any of its Subsidiaries holds properties described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, are in full force and effect, and neither the Company nor any Subsidiary has received any written notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease, which would result in a Material Adverse Change.

 

2.38. Contracts Affecting Capital. There are no transactions, arrangements or other relationships between and/or among the Company, any of its affiliates (as such term is defined in Rule 405 of the Securities Act Regulations) and any unconsolidated entity, including, but not limited to, any structured finance, special purpose or limited purpose entity that could reasonably be expected to materially affect the Company’s or its Subsidiaries’ liquidity or the availability of or requirements for their capital resources required to be described or incorporated by reference in the Registration Statement, the Pricing Disclosure Package and the Prospectus which have not been described or incorporated by reference as required.

 

2.39. Loans to Directors or Officers. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company or its Subsidiaries to or for the benefit of any of the officers or directors of the Company, its Subsidiaries or any of their respective family members, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

2.40. Industry Data; Forward-looking statements. The statistical and market-related data included in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data derived from such sources. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

 

2.41. Intentionally omitted.

 

2.42. Intentionally omitted.

 

2.43. Electronic Road Show. The Company has made available a Bona Fide Electronic Road Show in compliance with Rule 433(d)(8)(ii) of the Securities Act Regulations such that no filing of any “road show” (as defined in Rule 433(h) of the Securities Act Regulations) is required in connection with the Offering.

 

2.44. Margin Securities. The Company owns no “margin securities” as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and none of the proceeds of Offering will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Common Stock to be considered a “purpose credit” within the meanings of Regulation T, U or X of the Federal Reserve Board.

 

2.45. Dividends and Distributions. Except as disclosed in the Pricing Disclosure Package, Registration Statement and the Prospectus, no Subsidiary of the Company is currently prohibited or restricted, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Subsidiary’s capital stock, from repaying to the Company any loans or advances to such Subsidiary from the Company or from transferring any of such Subsidiary’s property or assets to the Company or any other Subsidiary of the Company.

 

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2.46. Lending Relationships. Except as disclosed in the Pricing Disclosure Package, Registration Statement and the Prospectus, the Company (i) does not have any material lending or other relationship with any bank or lending affiliate of the Underwriters and (ii) does not intend to use any of the proceeds from the sale of the Securities hereunder to repay any outstanding debt owed to any affiliate of the Underwriters.

 

3. Covenants of the Company. The Company covenants and agrees as follows:

 

3.1. Amendments to Registration Statement. The Company shall deliver to the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.

 

3.2. Federal Securities Laws.

 

3.2.1. Compliance. The Company, subject to Section 3.2.2, shall comply with the requirements of Rule 430A of the Securities Act Regulations, and will notify the Representative promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed; (ii) of the receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Shares and the Representative’s Warrants for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Shares and Representative’s Warrants. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall use its reasonable best efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.

 

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3.2.2. Continued Compliance. The Company shall comply with the Securities Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Shares is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales of the Shares, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or Representative’s Counsel shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company has given the Representative notice of any filings made pursuant to the Exchange Act or the Exchange Act Regulations within 48 hours prior to the Applicable Time. The Company shall give the Representative notice of its intention to make any such filing from the Applicable Time until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof and will furnish the Representative with copies of the related document(s) a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall reasonably object.

 

3.2.3. Exchange Act Registration. Until three (3) years after the date of this Agreement, the Company shall use its commercially reasonable efforts to maintain the registration of the Common Stock under the Exchange Act.

 

3.2.4. Free Writing Prospectuses. The Company agrees that, unless it obtains the prior consent of the Representative, it shall not make any offer relating to the Shares that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representative shall be deemed to have consented to each Issuer General Use Free Writing Prospectus set forth in Schedule 2-B. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Underwriters as an “issuer free writing prospectus,” as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Underwriters and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.

 

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3.2.5. Testing-the-Waters Communications. If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company shall promptly notify the Representative and shall promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.

 

3.3. Delivery to the Underwriters of Registration Statements. The Company has delivered or made available or shall deliver or make available to the Representative and Representative’s Counsel, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and upon request will also deliver to the Underwriters, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

3.4. Delivery to the Underwriters of Prospectuses. The Company has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Shares is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

 

3.5. Effectiveness and Events Requiring Notice to the Representative. The Company shall use its commercially reasonable efforts to cause the Registration Statement covering the issuance of the shares of Common Stock underlying the Representative’s Warrants to remain effective with a current prospectus for at least nine (9) months after the Applicable Time, and shall notify the Representative immediately and confirm the notice in writing: (i) of the cessation of the effectiveness of the Registration Statement and any amendment thereto; (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding for that purpose; (iii) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the shares underlying the Representative’s Warrants for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (iv) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (v) of the receipt of any comments or request for any additional information from the Commission; and (vi) of the happening of any event during the period described in this Section 3.5 that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement, the Pricing Disclosure Package or the Prospectus untrue or that requires the making of any changes in (a) the Registration Statement in order to make the statements therein not misleading, or (b) in the Pricing Disclosure Package or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company shall make every reasonable effort to obtain promptly the lifting of such order.

 

3.6. Review of Financial Statements. For a period of three (3) years after the date of this Agreement, the Company, at its expense, shall cause its regularly engaged independent registered public accounting firm to review (but not audit) the Company’s financial statements for each of the three fiscal quarters immediately preceding the announcement of any quarterly financial information.

 

3.7. Listing. The Company shall use its commercially reasonable efforts to maintain the listing of the Shares and the shares of Common Stock underlying the Representative’s Warrant on the Exchange for at least three (3) years from the date of this Agreement.

 

3.8. Intentionally omitted.

 

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3.9. Reports to the Representative.

 

3.9.1. Periodic Reports, etc. For a period of three (3) years after the date of this Agreement, the Company shall furnish or make available to the Representative copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also furnish or make available to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission under the Exchange Act and the Exchange Act Regulations; (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company; (iii) a copy of each Form 8-K prepared and filed by the Company; (iv) a copy of each registration statement filed by the Company under the Securities Act; and (v) such additional documents and information with respect to the Company and the affairs of any future subsidiaries of the Company as the Representative may from time to time reasonably request; provided the Representative shall sign, if requested by the Company, a Regulation FD compliant confidentiality agreement which is reasonably acceptable to the Representative and Representative’s Counsel in connection with the Representative’s receipt of such information. Documents filed with the Commission pursuant to its EDGAR system shall be deemed to have been delivered to the Representative pursuant to this Section 3.9.1.

 

3.9.2. Transfer Agent; Transfer Sheets. For a period of three (3) years after the date of this Agreement, the Company shall retain a transfer agent and registrar acceptable to the Representative (the “Transfer Agent”) and shall furnish to the Representative at the Company’s sole cost and expense such transfer sheets of the Company’s securities as the Representative may reasonably request, including the daily and monthly consolidated transfer sheets of the Transfer Agent and DTC. Transhare Corporation is acceptable to the Representative to act as Transfer Agent for the Common Stock.

 

3.9.3. Trading Reports. For a period of six (6) months after the date hereof, during such time as the Shares are listed on the Exchange, the Company shall provide to the Representative, at the Company’s expense, such reports published by the Exchange relating to price trading of the Shares, as the Representative shall reasonably request.

 

3.10. Payment of Expenses

 

3.10.1. General Expenses Related to the Offering. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the Shares to be sold in the Offering (including the Over-allotment Option) with the Commission; (b) all Public Filing System filing fees associated with the review of the Offering by FINRA; (c) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Shares under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (d) the costs associated with receiving commemorative mementos and lucite tombstones; (e) fees and expenses of the Representative’s Counsel; and (f) the Underwriters’ “road show” expenses for the Offering, with all of the Underwriters’ actual out-of-pocket expenses under sub-sections 3.10.1(e)-(f) not to exceed $205,000. Any out-of-pocket expenses above $1,000 are to be pre-approved by the Company. The Representative may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Underwriters; provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriters pursuant to Section 7.3 hereof.

 

3.10.2. Non-accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3.10.1, on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1.0%) of the gross proceeds received by the Company from the sale of the Firm Shares.

 

3.11. Application of Net Proceeds. The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

 

3.12. Delivery of Earnings Statements to Security Holders. The Company shall make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth (15th) full calendar month following the date of this Agreement, an earnings statement (which need not be certified by independent registered public accounting firm unless required by the Securities Act or the Securities Act Regulations, but which shall satisfy the provisions of Rule 158(a) under Section 11(a) of the Securities Act) covering a period of at least twelve (12) consecutive months beginning after the date of this Agreement.

 

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3.13. Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or shareholders has taken or shall take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares.

 

3.14. Internal Controls. Except to the extent disclosed in the Registration Statement, Pricing Disclosure Package and Prospectus, the Company shall maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

3.15. Accountants. As of the date of this Agreement, the Company has retained an independent registered public accounting firm reasonably acceptable to the Representative, and the Company shall continue to retain a nationally recognized independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement. The Representative acknowledges that the Auditor is acceptable to the Representative.

 

3.16. FINRA. For a period of ninety (90) days from the later of the Closing Date or the Option Closing Date, the Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered equity securities which were acquired during the 180 days immediately preceding the filing of the original Registration Statement is or becomes an affiliate or associated person of a Participating Member.

 

3.17. No Fiduciary Duties. The Company acknowledges and agrees that the Underwriters’ responsibility to the Company is solely contractual in nature and that none of the Underwriters or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.

 

3.18. Company Lock-Up. The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of twelve months (12) months after the Closing Date (the “Lock-Up Period”), (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company (other than pursuant to a registration statement on Form S-8 for employee benefit plans); or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise. The restrictions contained in this section shall not apply to (i) the Shares and the Representative’s Warrants and shares underlying the Representative’s Warrants to be sold hereunder; and (ii) the issuance by the Company of Common Stock upon the exercise of an outstanding option or warrant or the conversion of a security outstanding on the date hereof or disclosed in the Registration Statement and the Pricing Disclosure Package.

 

3.19. Release of D&O Lock-up Period. If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in the Lock-Up Agreements described in Section 2.24 hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three (3) Business Days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two (2) Business Days before the effective date of the release or waiver.

 

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3.20. Blue Sky Qualifications. The Company shall use its best efforts, in cooperation with the Underwriters, if necessary, to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Shares; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.

 

3.21. Reporting Requirements. The Company, during the period when a prospectus relating to the Shares is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Shares as may be required under Rule 463 under the Securities Act Regulations.

 

4. Conditions of Underwriters’ Obligations. The obligations of the Underwriters to purchase and pay for the Shares, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:

 

4.1. Regulatory Matters.

 

4.1.1. Effectiveness of Registration Statement; Rule 430A Information. The Registration Statement has become effective not later than 5:00 p.m., Eastern time, on the date of this Agreement or such later date and time as shall be consented to in writing by you, and, at each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. The Prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.

 

4.1.2. FINRA Clearance. On or before the date of this Agreement, the Representative shall have received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.

 

4.1.3. Exchange Share Market Clearance. On the Closing Date, the Firm Shares shall have been approved for listing on the Exchange, subject only to official notice of issuance. On the first Option Closing Date (if any), the Option Shares shall have been approved for listing on the Exchange, subject only to official notice of issuance.

 

4.2. Company Counsel Matters.

 

4.2.1. Closing Date Opinion of Counsel for the Company. On the Closing Date, the Representative shall have received the favorable opinion and negative assurances statement of Anthony L.G., PLLC., counsel for the Company, dated the Closing Date, in customary form and substance reasonably satisfactory to Representative’s Counsel addressed to the Representative and stating that such opinions may be relied upon by Representative’s Counsel.

 

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4.2.2 Closing Date Opinion of Japan Counsel for the Company. On the Closing Date, the Representative shall have received the favorable opinion and negative assurances statement of [*], Japan counsel for the Company, dated the Closing Date, in customary form and substance reasonably satisfactory to Representative’s Counsel addressed to the Representative and stating that such opinions may be relied upon by Representative’s Counsel.

 

4.2.3. Option Closing Date Opinion of Counsel for the Company. On the Option Closing Date, if any, the Representative shall have received the favorable opinion and negative assurances statement of Anthony L.G., PLLC, counsel for the Company, dated the Option Closing Date, addressed to the Representative and in customary form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date, the statements made by such counsel in their opinions delivered on the Closing Date.

 

4.2.4. Option Closing Date Opinion of Japan Counsel for the Company. On the Option Closing Date, if any, the Representative shall have received the favorable opinion and negative assurances statement of [*], Japan counsel for the Company, dated the Option Closing Date, addressed to the Representative and in customary form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date, the statements made by such counsel in their opinions delivered on the Closing Date.

 

4.2.5. Reliance. In rendering such opinions, such counsel may rely: (i) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to the Representative) of other counsel reasonably acceptable to the Representative, familiar with the applicable laws; and (ii) as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of the Company and officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Representative’s Counsel if requested.

 

4.3. Comfort Letters.

 

4.3.1. Cold Comfort Letter. At the time this Agreement is executed you shall have received a cold comfort letter containing statements and information of the type customarily included in accountants’ comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Representative and in form and substance satisfactory in all respects to you and to the Auditor, dated as of the date of this Agreement.

 

4.3.2. Bring-down Comfort Letter. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received from the Auditor a letter, dated as of the Closing Date or the Option Closing Date, as applicable, to the effect that the Auditor reaffirms the statements made in the letter furnished pursuant to Section 4.3.1, except that the specified date referred to shall be a date not more than three (3) Business Days prior to the Closing Date or the Option Closing Date, as applicable.

 

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4.4. Officers’ Certificates.

 

4.4.1. Officers’ Certificate. The Company shall have furnished to the Representative a certificate, dated the Closing Date and any Option Closing Date (if such date is other than the Closing Date), of its Chief Executive Officer, its President and its Chief Financial Officer stating that (i) such officers have carefully examined the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date) did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Pricing Disclosure Package, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), any Issuer Free Writing Prospectus as of its date and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the Prospectus and each amendment or supplement thereto, as of the respective date thereof and as of the Closing Date, did not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, (ii) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus, (iii) to the best of their knowledge after reasonable investigation, as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the representations and warranties of the Company in this Agreement are true and correct in all material respects (except for those representations and warranties qualified as to materiality, which shall be true and correct in all respects and except for those representations and warranties which refer to facts existing at a specific date, which shall be true and correct as of such date) and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date (or any Option Closing Date if such date is other than the Closing Date), and (iv) there has not been, subsequent to the date of the most recent audited financial statements included or incorporated by reference in the Pricing Disclosure Package, a Material Adverse Change.

 

4.4.2. Secretary’s Certificate. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Date, as the case may be, respectively, certifying: (i) that each of the Charter and Bylaws is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions of the Company’s Board of Directors (and any pricing committee thereof) relating to the Offering are in full force and effect and have not been modified; (iii) as to the accuracy and completeness of all correspondence between the Company or its counsel and the Commission; and (iv) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.

 

4.5. No Material Changes. Prior to and on each of the Closing Date and each Option Closing Date, if any: (i) there shall have been no Material Adverse Change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may reasonably be expected to cause a Material Adverse Change, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

4.6. Delivery of Agreements.

 

4.6.1. Lock-Up Agreements. On or before the date of this Agreement, the Company shall have delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 3 hereto.

 

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4.7. Additional Documents. At the Closing Date and at each Option Closing Date (if any) Representative’s Counsel shall have been furnished with such documents and opinions as they may require for the purpose of enabling Representative’s Counsel to deliver an opinion to the Underwriters, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Shares and the Representative’s Warrants as herein contemplated shall be satisfactory in form and substance to the Representative and Representative’s Counsel.

 

5. Indemnification.

 

5.1. Indemnification of the Underwriters.

 

5.1.1. General. Subject to the conditions set forth below, the Company agrees to indemnify, defend and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, members, employees, representatives, partners, shareholders, affiliates, counsel, and agents and each person, if any, who controls any such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each an “Underwriter Indemnified Party”), from and against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) to which they or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries (a “Claim”), arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in (A) the Registration Statement, the Pricing Disclosure Package, any Preliminary Prospectus, the Prospectus, or in any Issuer Free Writing Prospectus or in any Written Testing-the-Waters Communication (as from time to time each may be amended and supplemented); (B) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any “road show” or investor presentations made to investors by the Company (whether in person or electronically); or (C) any application or other document or written communication (in this Section 5, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Shares and Representative’s Warrants under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; unless, with respect to each subsection (A) through (C), such statement or omission was made in reliance upon, and in conformity with, the Underwriters’ Information. With respect to any untrue statement or omission or alleged untrue statement or omission made in the Registration Statement, Pricing Disclosure Package or Prospectus, the indemnity agreement contained in this Section 5.1.1 shall not inure to the benefit of any Underwriter Indemnified Party to the extent that any loss, liability, claim, damage or expense of such Underwriter Indemnified Party results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability, claim or damage at or prior to the written confirmation of sale of the Shares to such person as required by the Securities Act and the Securities Act Regulations, and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of non-compliance by the Company with its obligations under Section 3.3 hereof. The Company also agrees that it will reimburse each Underwriter Indemnified Party for all reasonable fees and expenses (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) (collectively, the “Expenses”), and further agrees wherever and whenever possible to advance payment of Expenses as they are incurred by an Underwriter Indemnified Party in investigating, preparing, pursuing or defending any Claim.

 

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5.1.2. Procedure. If any action is brought against an Underwriter Indemnified Party in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the approval of such Underwriter Indemnified Party (which approval shall not be unreasonably withheld)) and payment of actual expenses if an Underwriter Indemnified Party requests that the Company do so. Such Underwriter Indemnified Party shall have the right to employ its or their own counsel in any such case, and the fees and expenses of such counsel shall be at the expense of the Company and shall be advanced by the Company; provided, however, that the Company shall not be obligated to bear the reasonable fees and expenses of more than one firm of attorneys selected by the Underwriter Indemnified Party (in addition to local counsel). Notwithstanding anything to the contrary contained herein, and provided that the Company has timely honored its obligations under Section 5, the Underwriter Indemnified Party shall not enter into any settlement without the prior written consent (which shall not be unreasonably withheld) of the terms of any settlement by the Company. The Company shall not be liable for any settlement of any action effected without its prior written consent (which shall not be unreasonably withheld). In addition, the Company shall not, without the prior written consent of the Underwriters (which consent shall not be unreasonably withheld), settle, compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action in respect of which advancement, reimbursement, indemnification or contribution may be sought hereunder (whether or not such Underwriter Indemnified Party is a party thereto) unless such settlement, compromise, consent or termination (i) includes an unconditional release of each Underwriter Indemnified Party, acceptable to such Underwriter Indemnified Party, from all liabilities, expenses and claims arising out of such action for which indemnification or contribution may be sought and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any Underwriter Indemnified Party.

 

5.2. Indemnification of the Company. Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to such losses, liabilities, claims, damages and expenses (or actions in respect thereof) which arise out of or are based upon untrue statements or omissions, or alleged untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in conformity with, the Underwriters’ Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2. The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Shares or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus, or any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication.

 

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5.3. Contribution. If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5.1 or 5.2 in respect of any liabilities and Expenses referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such liabilities and Expenses, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and each of the Underwriters, on the other hand, from the Offering, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other hand, in connection with the matters as to which such liabilities or Expenses relate, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be deemed to be in the same proportion as the total net proceeds actually received by the Company from the Offering of the Shares purchased under this Agreement (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions actually received by the Underwriters in connection with the Offering, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company, on the one hand, and the Underwriters, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Underwriters, on the other, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement, omission, act or failure to act; provided that the parties hereto agree that the written information furnished to the Company through the Representative by or on behalf of any Underwriter for use in any Preliminary Prospectus, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, consists solely of the Underwriters’ Information. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (d). Notwithstanding the above, no person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the Securities Act shall be entitled to contribution from a party who was not guilty of such fraudulent misrepresentation.

 

5.4. Limitation. The Company also agrees that no Underwriter Indemnified Party shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company for or in connection with advice or services rendered or to be rendered by any Underwriter Indemnified Party pursuant to this Agreement, the transactions contemplated thereby or any Underwriter Indemnified Party’s actions or inactions in connection with any such advice, services or transactions, except to the extent that a court of competent jurisdiction has made a finding that liabilities (and related Expenses) of the Company have resulted from such Underwriter Indemnified Party’s fraud, bad faith, gross negligence or willful misconduct in connection with any such advice, actions, inactions or services or such Underwriter Indemnified Party’s breach of this Agreement or any obligations of confidentiality owed to the Company.

 

5.5. Survival & Third-Party Beneficiaries. The advancement, reimbursement, indemnity and contribution obligations set forth in this Section 5 shall remain in full force and effect regardless of any termination of, or the completion of any Underwriter Indemnified Party’s services under or in connection with, this Agreement. Each Underwriter Indemnified Party’s is an intended third-party beneficiary of this Section 5, and has the right to enforce the provisions of Section 5 as if he/she/it was a party to this Agreement.

 

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6. Right of First Refusal. During the period ending two years after the Closing Date, if and only if the closing of the purchase of the Firm Shares hereunder actually occurs, the Company grants the Representative the right of first refusal to act as financial advisor, or as lead managing underwriter, book runner, placement agent, or to act as joint advisor, underwriter, or placement agent, on at least equal economic terms on any public or private financing (debt or equity), merger, business combination, recapitalization or sale of some or all of the equity or assets of the Company (collectively, “Future Services”). In the event the Company notifies Representative of its intention to pursue an activity that would enable Representative to exercise its right of first refusal to provide Future Services, Representative shall notify the Company of its election to provide such Future Services, including notification of the compensation and other terms to which Representative shall be entitled, within thirty (30) days of written notice by the Company. In the event the Company engages Representative to provide such Future Services, Representative will be compensated consistent with the compensation in this Agreement, unless mutually agreed otherwise by the Company and Representative

 

7. Effective Date of this Agreement and Termination Thereof.

 

7.1. Effective Date. This Agreement shall become effective when both the Company and the Representative have executed the same and delivered counterparts of such signatures to the other party.

 

7.2. Termination. The Representative shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Share Exchange or the Nasdaq Share Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Firm Shares or Option Shares; or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder; or (viii) if the Representative shall have become aware after the date hereof of such a Material Adverse Change, or such adverse material change in general market conditions as in the Representative’s judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Shares or to enforce contracts made by the Underwriters for the sale of the Shares.

 

7.3. Expenses. Notwithstanding anything to the contrary in this Agreement, in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable up to the amounts set forth in Section 3.10.1 and upon demand the Company shall pay such amount thereof to the Representative on behalf of the Underwriters; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement. Notwithstanding the foregoing, any advance received by the Representative will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(g)(4)(A).

 

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7.4. Indemnification. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.

 

7.5. Representations, Warranties, Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Shares.

 

8. Miscellaneous.

 

8.1. Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by facsimile transmission and confirmed and shall be deemed given when so delivered or faxed and confirmed or if mailed, two (2) days after such mailing.

 

If to the Representative:

 

Boustead Securities, LLC

6 Venture, Suite 265

Irvine, CA 92618

Attn: Keith Moore

Fax No: [*]

 

With a copy (which shall not constitute notice) to:

 

Bevilacqua PLLC

1050 Connecticut Ave, NW, Suite 500

Washington, DC 20036

Attention: Louis A. Bevilacqua

Fax No: [*]

 

If to the Company:

 

HeartCore Enterprises, Inc.

1-2-33, Higashigotanda, Shinagawa-ku

Tokyo, Japan

Attention: Sumitaka Yamamoto

Fax No: [*]

 

With a copy (which shall not constitute notice) to:

 

Anthony L.G., PLLC

625 N. Flagler Drive, Suite 600

West Palm Beach, Florida 33401

Attention: Laura Anthony, Esq.

Attention: Craig D. Linder, Esq.

Fax No: [*]

 

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8.2. Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.

 

8.3. Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.

 

8.4. Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. Notwithstanding anything to the contrary set forth herein, it is understood and agreed by the parties hereto that all other terms and conditions of that certain engagement letter between the Company and Representative dated as of May 18, 2021, as such engagement letter may be amended from time to time, shall remain in full force and effect.

 

8.5. Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon the Representative, the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from any of the Underwriters.

 

8.6. Governing Law; Consent to Jurisdiction; Trial by Jury. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its Shareholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

 

8.7. Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery thereof.

 

8.8. Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

 

[Signature Page Follows]

 

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If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.

 

Very truly yours,  
   
HeartCore Enterprises, Inc.  
   
By:    
Name: Sumitaka Yamamoto  
Title: Chief Executive Officer  

 

Confirmed as of the date first written above mentioned, on behalf of itself and as Representative of the several Underwriters named on Schedule 1 hereto:

 

Boustead Securities, LLC  
   
By:    
Name: Keith Moore  
Title: Chief Executive Officer  

 

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SCHEDULE 1

 

Underwriter   Total
Number
of
Firm
Shares
to be
Purchased
    Number of
Additional
Option Shares
to be
Purchased if the
Over-
Allotment
Option is
Fully Exercised
 
Boustead Securities, LLC                
                 
TOTAL     [*]       [*]  

 

29
 

 

SCHEDULE 2-A

 

Pricing Information

 

Number of Firm Shares: [*]

 

Number of Option Shares: [*]

 

Public Offering Price per Firm Share: [*]

 

Public Offering Price per Option Share: [*]

 

Underwriting Discount per Firm Share: [*]

 

Underwriting Discount per Option Share: [*]

 

Non-Accountable Expense Allowance per Firm Share: [*]

 

Non-Accountable Expense Allowance per Option Share: [*]

 

30
 

 

SCHEDULE 2-B

 

Issuer General Use Free Writing Prospectuses

 

31
 

 

SCHEDULE 2-C

 

Written Testing-the-Waters Communications

 

32
 

 

SCHEDULE 3

 

List of Lock-Up Parties

 

33
 

 

EXHIBIT A

 

Form of Representative’s Warrant

 

34
 

 

EXHIBIT B

 

Form of Lock-Up Agreement

 

35
 

 

EXHIBIT C

 

Form of Press Release

 

36

 

 

Exhibit 3.1

 

 

State of Delaware

Secretary of State

Division of Corporations

Delivered 09:43 AM 05/18/2021

FILED 09:43 AM 05/18/2021

SR 20211848427 – File Number 5925021

 

Certificate of Incorporation

of

HeartCore Enterprises, Inc.

 

The undersigned incorporator, in order to form a corporation under the General Corporation Law of the State of Delaware (the “DGCL”), certifies as follows:

 

Section 1. Name. The name of the corporation is HeartCore Enterprises, Inc. (the “Corporation”).

 

Section 2. Incorporator; Registered Office and Agent

 

  (a) Incorporator. The name and mailing address of the incorporator are Sumitaka Yamamoto, 1-2-33, Higashigotanda, Shinagawa-ku, Tokyo, Japan. The powers of the incorporator are to terminate upon the filing of this Certificate of Incorporation with the Secretary of State of the State of Delaware, and the initial director of the Corporation shall be as set forth in Section 7.

 

  (b) Registered Agent. The name and address of the registered agent of the Corporation in the State of Delaware is Corporate Creations Network Inc., 3411 Silverside Road Tatnall Building #104, Wilmington, DE 19810, New Castle County, or such other agent and address as the Board of Directors of the Corporation (the “Board”) shall from time to time select.

 

Section 3. Purpose and Business. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the DGCL, including, but not limited to the following:

 

  (a) The Corporation may at any time exercise such rights, privileges, and powers, when not inconsistent with the purposes and object for which this Corporation is organized.
     
  (b) The Corporation shall have the power to have succession by its corporate name in perpetuity, or until dissolved and its affairs wound up according to law.
     
  (c) The Corporation shall have the power to sue and be sued in any court of law or equity.
     
  (d) The Corporation shall have the power to make contracts.
     
  (e) The Corporation shall have the power to hold, purchase and convey real and personal estate and to mortgage or lease any such real and personal estate with its franchises. The power to hold real and personal estate shall include the power to take the same by devise or bequest in the State of Delaware, or in any other state, territory or country.
     
  (f) The Corporation shall have the power to appoint such officers and agents as the affairs of the Corporation shall requite and allow them suitable compensation.
     
  (g) The Corporation shall have the power to make bylaws not inconsistent with the constitution or laws of the United States, or of the State of Delaware, for the management, regulation and government of its affairs and property, the transfer of its stock, the transaction of its business and the calling and holding of meetings of stockholders.

 

 
 

 

  (h) The Corporation shall have the power to wind up and dissolve itself, or be wound up or dissolved.
     
  (i) The Corporation shall have the power to adopt and use a common seal or stamp, or to not use such seal or stamp and if one is used, to alter the same. The use of a seal or stamp by the Corporation on any corporate documents is not necessary. The Corporation may use a seal or stamp, if it desires, but such use or non-use shall not in any way affect the legality of the document.
     
  (j) The Corporation shall have the power to borrow money and contract debts when necessary for the transaction of its business, or for the exercise of its corporate rights, privileges or franchises, or for any other lawful purpose of its incorporation; to issue bonds, promissory notes, bills of exchange, debentures and other obligations and evidence of indebtedness, payable at a specified time or times, or payable upon the happening of a specified event or events, whether secured by mortgage, pledge or otherwise, or unsecured, for money borrowed, or in payment for property purchased, or acquired, or for another lawful object.
     
  (k) The Corporation shall have the power to guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of the shares of the capital stock of, or any bonds, securities or evidence in indebtedness created by any other corporation or corporations in the State of Delaware, or any other state or government and, while the owner of such stock, bonds, securities or evidence of indebtedness, to exercise all the rights, powers and privileges of ownership, including the right to vote, if any.
     
  (l) The Corporation shall have the power to purchase, hold, sell and transfer shares of its own capital stock and use therefore its capital, capital surplus, surplus or other property or fund.
     
  (m) The Corporation shall have the power to conduct business, have one or more offices and hold, purchase, mortgage and convey real and personal property in the State of Delaware and in any of the several states, territories, possessions and dependencies of the United States, the District of Columbia and in any foreign country.
     
  (n) The Corporation shall have the power to do all and everything necessary and proper for the accomplishment of the objects enumerated in its Certificate of Incorporation, or any amendments thereof, or necessary or incidental to the protection and benefit of the Corporation and, in general, to carry on any lawful business necessary or incidental to the attainment of the purposes of the Corporation, whether or not such business is similar in nature to the purposes set forth in the Certificate of Incorporation of the Corporation, or any amendment thereof.
     
  (o) The Corporation shall have the power to make donations for the public welfare or for charitable, scientific or educational purposes.
     
  (p) The Corporation shall have the power to enter partnerships, general or limited, or joint ventures, in connection with any lawful activities.

 

 
 

 

Section 4. Capital Stock.

 

  (a) Classes and Number of Shares. The total number of shares of all classes of stock, which the Corporation shall have authority to issue shall be Two Hundred Million (200,000,000) shares of common stock, par value of $0.0001 per share (the “Common Stock”) and Twenty Million (20,000,000) shares of preferred stock, par value of $0.0001 per share (the “Preferred Stock”).
     
  (b) Powers and Rights of Common Stock.

 

  (i) Preemptive Right. No shareholders of the Corporation holding Common Stock shall have any preemptive or other right to subscribe for any additional unissued or treasury shares of stock or for other securities of any class, or for rights, warrants or options to purchase stock, or for scrip, or for securities of any kind convertible into stock or carrying stock purchase warrants or privileges unless so authorized by the Corporation.
     
  (ii) Voting Rights and Powers. With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of the Common Stock shall be entitled to cast thereon one (1) vote in person or by proxy for each share of the Common Stock standing in his/her name.
     
  (iii) Dividends and Distributions.

 

  (A) Cash Dividends. Subject to the rights of holders of Preferred Stock, holders of Common Stock shall be entitled to receive such cash dividends as may be declared thereon by the Board from time to time out of assets of funds of the Corporation legally available therefore; and
     
  (B) Other Dividends and Distributions. The Board may issue shares of the Common Stock in the form of a distribution or distributions pursuant to a stock dividend or split-up of the shares of the Common Stock.

 

  (iv) Other Rights. Except as otherwise required by the DGCL and as may otherwise be provided in this Certificate of Incorporation, each share of the Common Stock shall have identical powers, preferences and rights, including rights in liquidation.

 

  (c) Classes of Preferred Stock. The powers, preferences, rights, qualifications, limitations and restrictions pertaining to the Preferred Stock, or any series thereof, shall be such as may be fixed, from time to time, by the Board in its sole discretion, authority to do so being hereby expressly vested in the Board. The authority of the Board with respect to each such series of Preferred Stock will include, without limiting the generality of the foregoing, the determination of any or all of the following:

 

  (i) The number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series;
     
  (ii) the voting powers, if any, of the shares of such series and whether such voting powers are full or limited;
     
  (iii) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid;
     
  (iv) whether dividends, if any, will be cumulative or noncumulative, the dividend rate or rates of such series and the dates and preferences of dividends on such series;
     
  (v) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation;

 

 
 

 

  (vi) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Corporation or any other corporation or other entity, and the rates or other determinants of conversion or exchange applicable thereto;
     
  (vii) the right, if any, to subscribe for or to purchase any securities of the Corporation or any other corporation or other entity;
     
  (viii) the provisions, if any, of a sinking fund applicable to such series; and
     
  (ix) any other relative, participating, optional or other powers, preferences or rights, and any qualifications, limitations or restrictions thereof, of such series.

 

  (d) Issuance of the Common Stock and the Preferred Stock. The Board may from time to time authorize by resolution the issuance of any or all shares of the Common Stock and the Preferred Stock herein authorized in accordance with the terms and conditions set forth in this Certificate of Incorporation for such purposes, in such amounts, to such persons, corporations, or entities, for such consideration and in the case of the Preferred Stock, in one or more series, all as the Board in its discretion may determine and without any vote or other action by the stockholders, except as otherwise required by law. The Board, from time to time, also may authorize, by resolution, options, warrants and other rights convertible into Common or Preferred stock (collectively “securities”). The securities must be issued for such consideration, including cash, property, or services, as the Board may deem appropriate, subject to the requirement that the value of such consideration be no less than the par value of the shares issued. Any shares issued for which the consideration so fixed has been paid or delivered shall be fully paid stock and the holder of such shares shall not be liable for any further call or assessment or any other payment thereon, provided that the actual value of such consideration is not less that the par value of the shares so issued. The Board may issue shares of the Common Stock in the form of a distribution or distributions pursuant to a stock dividend or split-up of the shares of the Common Stock only to the then holders of the outstanding shares of the Common Stock.
     
  (e) Cumulative Voting. Except as otherwise required by applicable law, there shall be no cumulative voting on any matter brought to a vote of stockholders of the Corporation.
     
  (f) One Class. Except as otherwise required by the DGCL, this Certificate of Incorporation, or any designation for a class of Preferred Stock (which may provide that an alternate vote is required), (i) all shares of capital stock of the Corporation shall vote together as one class on all mattes submitted to a vote of the shareholders of the Corporation; and (ii) the affirmative vote of a majority of the voting power of all outstanding shares of voting stock entitled to vote in connection with the applicable matter shall be required for approval of such matter.
     
  (g) Section 242(b)(2) Election. For the avoidance of doubt, the intent of Section 4(f) is, and the operation of Section 4(f) shall be, that, without limitation, (i) the number of authorized shares of Common Stock, may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote irrespective of Section 242(b)(2) of the DGCL, with no vote of any holders of a particular class of stock, voting as a separate class, being required; and (ii) unless otherwise set forth in a certificate of designations for the applicable class of Preferred Stock, the number of authorized shares of any class of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote irrespective of Section 242(b)(2) of the DGCL, with no vote of any holders of a particular class of stock, voting as a separate class, being required.

 

 
 

 

Section 5. Adoption of Bylaws. In the furtherance and not in limitation of the powers conferred by statute and subject to Section 6, the Board is expressly authorized to adopt, repeal, rescind, alter or amend in any respect the bylaws of the Corporation (the “Bylaws”).

 

Section 6. Shareholder Amendment of Bylaws. Notwithstanding Section 5, the Bylaws may also be adopted, repealed, rescinded, altered or amended in any respect by the stockholders of the Corporation, but only by the affirmative vote of the holders of a majority of the voting power of all outstanding shares of voting stock, regardless of class and voting together as a single voting class.

 

Section 7. Board of Directors. The business and affairs of the Corporation shall be managed by and under the direction of the Board. The first Board shall initially consist of one (1) person. The initial director of the Corporation shall be as follows, and his mailing addresses is as follows: Sumitaka Yamamoto, 1-2-33, Higashigotanda, Shinagawa-ku, Tokyo, Japan. Except as may otherwise be provided in connection with rights to elect additional directors under specified circumstances, which may be granted to the holders of any class or series of Preferred Stock, the number of directors of the Corporation may be amended from time to time as set forth in the Bylaws. The exact number of directors shall be fixed from time to time by the Board pursuant to resolution adopted by a majority of the full Board. Directors need not be stockholders.

 

Section 8. Powers of Board.

 

  (a) In furtherance and not in limitation of the powers conferred by the laws of the DGCL, the Board is expressly authorized and empowered:

 

  (i) To make, alter, amend, and repeal the Bylaws;
     
  (ii) Subject to the applicable provisions of the Bylaws then in effect, to determine, from time to time, whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to stockholder inspection, provided that no stockholder shall have any right to inspect any of the accounts, books or documents of the Corporation, except as permitted by law, unless and until authorized to do so by resolution of the Board or of the stockholders of the Corporation;
     
  (iii) To authorize and issue, without stockholder consent, obligations of the Corporation, secured and unsecured, under such terms and conditions as the Board, in its sole discretion, may determine, and to pledge or mortgage, as security therefore, any real or personal property of the Corporation, including after-acquired property;
     
  (iv) To determine whether any and, if so, what part of the earned surplus of the Corporation shall be paid in dividends to the stockholders, and to direct and determine other use and disposition of any such earned surplus;
     
  (v) To fix, from time to time, the amount of the profits of the Corporation to be reserved as working capital or for any other lawful purpose;

 

 
 

 

  (vi) To establish bonus, profit-sharing, stock option, or other types of incentive compensation plans for the employees, including officers and directors, of the Corporation, and to fix the amount of profits to be shared or distributed, and to determine the persons to participate in any such plans and the amount of their respective participations;
     
  (vii) to designate, by resolution or resolutions passed by a majority of the whole Board, one or more committees, each consisting of two or more directors, which, to the extent permitted by law and authorized by the resolution or the Bylaws, shall have and may exercise the powers of the Board; and
     
  (viii) To provide for the reasonable compensation of its own members by Bylaw, and to fix the terms and conditions upon which such compensation will be paid.

 

  (b) In addition to the powers and authority hereinbefore, or by statute, expressly conferred upon it, the Board may exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the laws of the State of Delaware, of this Certificate of Incorporation, and of the Bylaws of the Corporation.

 

Section 9. Interested Directors. No contract or transaction between this Corporation and any of its directors, or between this Corporation and any other corporation, firm, association, or other legal entity shall be invalidated by reason of the fact that the director of the Corporation has a direct or indirect interest, pecuniary or otherwise, in such corporation, firm, association, or legal entity, or because the interested director was present at the meeting of the Board which acted upon or in reference to such contract or transaction, or because he participated in such action, provided that: (1) the interest of each such director shall have been disclosed to or known by the Board and a disinterested majority of the Board shall have, nonetheless, ratified and approved such contract or transaction (such interested director or directors may be counted in determining whether a quorum is present for the meeting at which such ratification or approval is given); or (2) the conditions of DGCL Title 8, Section 144 are met.

 

Section 10. Term of Board of Directors. Except as otherwise required by applicable law, each director shall serve for a term ending on first anniversary of their date of election, provided that, notwithstanding the foregoing provisions of this Section 10 each director shall serve until their successor is elected and qualified or until his death, resignation or removal. All directors shall have equal standing. Notwithstanding the foregoing provisions of this Section 10, no decrease in the authorized number of directors shall shorten the term of any incumbent director; and additional directors, elected in connection with rights to elect such additional directors under specified circumstances, which may be granted to the holders of any class or series of Preferred Stock, shall not be included in any class, but shall serve for such term or terms and pursuant to such other provisions as are specified in the resolution of the Board establishing such class or series.

 

Section 11. Vacancies on Board of Directors. Except as may otherwise be provided in connection with rights to elect additional directors under specified circumstances, which may be granted to the holders of any class or series of Preferred Stock, newly created directorships resulting from any increase in the number of directors, or any vacancies on the Board resulting from death, resignation, removal, or other causes, shall be filled solely by the quorum of the Board. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of directors in which the new directorship was created or the vacancy occurred and until such director’s successor shall have been elected and qualified or until such director’s death, resignation or removal, whichever first occurs.

 

 
 

 

Section 12. Removal of Directors. Except as may otherwise be provided in connection with rights to elect additional directors under specified circumstances, which may be granted to the holders of any class or series of Preferred Stock, any director may be removed from office only by the affirmative vote of the holders of not less than two-thirds (2/3) of the voting power of the issued and outstanding stock entitled to vote. Failure of an incumbent director to be nominated to serve an additional term of office shall not be deemed a removal from office requiring any stockholder vote.

 

Section 13. Stockholder Action. Any action required or permitted to be taken by the stockholders of the Corporation must be effective at a duly called annual meeting or at a special meeting of stockholders of the Corporation, unless such action requiring or permitting stockholder approval is approved by a majority of the directors, in which case such action may be authorized or taken by the written consent of the holders of outstanding shares of voting stock having not less than the minimum voting power that would be necessary to authorize or take such action at a meeting of stockholders at which all shares entitled to vote thereon were present and voted, provided all other requirements of applicable law and this Certificate of Incorporation have been satisfied.

 

Section 14. Special Stockholder Meetings. Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by a majority of the Board. Special meetings may not be called by any other person or persons. Each special meeting shall be held at such date and time as is requested by Board, within the limits fixed by law.

 

Section 15. Location of Stockholder Meetings. Meetings of stockholders of the Corporation may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision of the DGCL) outside the State of Delaware at such place or places as may be designated from time to time by the Board or in the Bylaws.

 

Section 16. Private Property of Stockholders. The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever and the stockholders shall not be personally liable for the payment of the Corporation’s debts.

 

Section 17. Amendments. The Corporation reserves the right to adopt, repeal, rescind, alter or amend in any respect any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by applicable law and all rights conferred on stockholders herein granted subject to this reservation.

 

Section 18. Term of Existence. The Corporation is to have perpetual existence.

 

Section 19. Liability of Directors. No director of this Corporation shall have personal liability to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director or officers involving any act or omission of any such director or officer. The foregoing provision shall not eliminate or limit the liability of a director (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or, which involve intentional misconduct or a knowing violation of law, (iii) under applicable sections of the DGCL, (iv) the payment of dividends in violation of the DGCL or, (v) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Section 19 by the stockholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the personal liability of a director or officer of the Corporation for acts or omissions prior to such repeal or modification.

 

 
 

 

Section 20. Indemnification.

 

  (a) Indemnification in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation. Subject to Section 20(c) and Section 20(j), the Corporation shall, to the fullest extent permitted by the DGCL and applicable Delaware law as in effect at any time, indemnify, hold harmless and defend any person who: (i) was or is a director or officer of the Corporation or was or is a director or officer of a direct or indirect wholly owned subsidiary of the Corporation, and (ii) was or is a party or is threatened to be made a party to, or was or is otherwise directly involved in (including as a witness), any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person was or is a director or officer of the Corporation or any direct or indirect wholly owned subsidiary of the Corporation, or was or is serving at the request of the Corporation as a director, officer, employee, partner, member or agent of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise, whether the basis of such proceeding is alleged action in an official capacity or in any other capacity, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea or nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.
     
  (b) Indemnification in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 20(c) and Section 20(j), the Corporation shall indemnify, hold harmless and defend any person who: (i) was or is a director or officer of the Corporation or was or is a director or officer of a direct or indirect wholly owned subsidiary of the Corporation, and (ii) was or is a party or is threatened to be made a party to, or was or is otherwise directly involved in (including as a witness), any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person was or is a director or officer of the Corporation or any direct or indirect wholly owned subsidiary of the Corporation, or was or is serving at the request of the Corporation as a director, officer, employee, partner, member or agent of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise, and whether the basis of such action, suit or proceeding is alleged action in an official capacity or in any other capacity, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Courts in the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court in the State of Delaware or such other court shall deem proper.

 

 
 

 

  (c) Authorization of Indemnification. Any indemnification or defense under this Section 20 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 20(a) or Section 20(b), as the case may be. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination,: (i) by directors constituting the Board Voting Majority and who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by the Board Voting Majority, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iv) by the stockholders. Such determination shall be made, with respect to former directors and officers, by any person or persons having the authority to act on the matter on behalf of the Corporation. To the extent, however, that a present or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding set forth in Section 20(a) or Section 20(b) or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case.
     
  (d) Good Faith Defined. For purposes of any determination under Section 20(c), a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such person’s conduct was unlawful, if such person’s action is based on good faith reliance on the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term “another enterprise” as used in this Section 20(d) shall mean any other corporation or any partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise of which such person was or is serving at the request of the Corporation as a director, officer, employee, partner, member or agent. The provisions of this Section 20(d) shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 20(a) or Section 20(b), as the case may be.

 

  (e) Expenses Payable in Advance. Expenses, including attorneys’ fees, incurred by a current or former director or officer in defending any action, suit or proceeding described in Section 20(a) or Section 20(b) shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Section 20.

 

  (f) Non-exclusivity of Indemnification and Advancement of Expenses. The indemnification, defense and advancement of expenses provided by or granted pursuant to this Section 20 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate, any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Section 20(a) or Section 20(b) shall be made to the fullest extent permitted by applicable law. The provisions of this Section 20 shall not be deemed to preclude the indemnification of, or advancement of expenses to, any person who is not specified in Section 20(a) or Section 20(b) but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL or otherwise.

 

 
 

 

  (g) Insurance. The Corporation may purchase and maintain insurance on behalf of any person who was or is a director, officer, employee or agent of the Corporation, or a direct or indirect wholly owned subsidiary of the Corporation, or was or is serving at the request of the Corporation, as a director, officer, employee, partner, member or agent of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power or the obligation to indemnify, hold harmless or defend such person against such liability under the provisions of this Section 20.
     
  (h) Certain Definitions. For purposes of this Section 20 references to the “Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who was or is a director, officer, employee or agent of such constituent corporation, or was or is serving at the request of such constituent corporation as a director, officer, employee, partner, member or agent of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Section 20 with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Section 20, references to “fines” shall include any excise taxes assessed on a person with respect of any employee benefit plan; and references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Section 20.
     
  (i) Survival of Indemnification and Advancement of Expenses. The indemnification, defense and advancement of expenses provided by, or granted pursuant to, this Section 20 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.
     
  (j) Limitation on Indemnification. Notwithstanding anything contained in this Section 20 to the contrary, except for proceedings to enforce rights to indemnification and defense under this Section 20 (which shall be governed by Section 20(k)(ii)), the Corporation shall not be obligated under this Section 20 to indemnify, hold harmless or defend any director, officer, employee or agent in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized by the Board.

 

 
 

 

  (k) Contract Rights.

 

  (i) The obligations of the Corporation under this Section 20 to indemnify, hold harmless and defend a person who was or is a director or officer of the Corporation or was or is a director or officer of a direct or indirect wholly owned subsidiary of the Corporation, including the duty to advance expenses, shall be considered a contract between the Corporation and such person, and no modification or repeal of any provision of this Section 20 shall affect, to the detriment of such person, such obligations of the Corporation in connection with a claim based on any act or failure to act occurring before such modification or repeal.
     
  (ii) If a claim under Section 20(a), Section 20(b) or Section 20(e) is not paid in full by the Corporation within 90 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 45 days, the person making such claim may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. To the fullest extent permitted by applicable law, if successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, such person shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by such person to enforce a right to indemnification hereunder (but not in a suit brought by such person to enforce a right to an advancement of expenses) it shall be a defense, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that such person has not met any applicable standard for indemnification set forth in the DGCL. Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel or its Stockholders) to have made a determination prior to the commencement of such suit that indemnification of such person is proper in the circumstances because such person has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel or its Stockholders) that such person has not met such applicable standard of conduct, shall create a presumption that such person has not met the applicable standard of conduct or, in the case of such a suit brought by such person, be a defense to such suit.

 

  (l) Indemnification Agreements. Without limiting the generality of the foregoing, the Corporation shall have the express authority to enter into such agreements as the Board deems appropriate for the indemnification of present or future directors and officers of the Corporation in connection with their service to, or status with, the Corporation or any other corporation, entity or enterprise with whom such person is serving at the express written request of the Corporation.

 

Section 21. Forum Selection. Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) an action asserting a claim arising pursuant to any provision of the DGCL, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. Notwithstanding the foregoing, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act of 1934, as amended, the Securities Act of 1933, as amended, or any claim for which the federal courts have exclusive or concurrent jurisdiction.

 

Section 22. Headings. The headings contained herein are for convenience only, do not constitute a part of this Certificate of Incorporation and shall not be deemed to limit or affect any of the provisions hereof.

 

 
 

 

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Incorporation as of May 17, 2021.

 

  Sole Incorporator
     
  By: /s/ Sumitaka Yamamoto
    Sumitaka Yamamoto
    Sole Incorporator

 

 

 

 

 

Exhibit 3.2

 

BYLAWS OF

HeartCore Enterprises, Inc.

a Delaware corporation

 

Adopted May 18, 2021

 

1. Offices. HeartCore Enterprises, Inc. (the “Corporation”) may have an office or offices, and keep the books and records of the Corporation, except as may otherwise be required by applicable law, at such other place or places, either within or without the State of Delaware, as the Board may from time to time determine or the business of the Corporation may require.
   
2. Meetings of Stockholders.

 

  2.1. Annual Meetings. The annual meetings of stockholders for the election of directors and for such other business as may be stated in the notice of the meeting shall be held at such time and date and place as the Board, by resolution, shall determine and as set forth in the notice of the meeting and shall be held at such place, either within or without the State of Delaware. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day.
     
  2.2. Deferred Meeting for Election of Directors, etc. If the annual meeting of stockholders for the election of directors and the transaction of other business is not held within the time specified in Section 2.1, the Board shall call a special meeting of stockholders for the election of directors and the transaction of other business as soon thereafter as convenient.
     
  2.3. Other Special Meetings. A special meeting of stockholders (other than a special meeting for the election of directors), unless otherwise prescribed by statute, may only be called by the Board and may be called at any time by the Board. At any special meeting of stockholders, only such business may be transacted as is related to the purpose(s) of such meeting set forth in the notice thereof given pursuant to Section 2.5 or in any waiver of notice thereof given pursuant to Section 2.6.
     
  2.4. Fixing Record Date. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix, in advance, a date as of the record date for any such determination of stockholders. Such date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting nor more than sixty (60) days prior to any other action. If no such record date is fixed:

 

  (a) The record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if no notice is given or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held;
     
  (b) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board is necessary, shall be the day on which the first written consent is expressed;

 

 
 

 

  (c) The record date for determining stockholders for any purpose other than those specified in Sections 2.4(a) and Section 2.4(b) shall be at the close of business on the day on which the Board adopts the resolution relating thereto.

 

When a determination of stockholders entitled to notice of, or to vote at, any meeting of stockholders has been made as provided in this Section 2.4, such determination shall apply to any adjournment thereof, unless the Board fixes a new record date for the adjourned meeting.

 

  2.5. Notice of Meetings of Stockholders; Location. Except as otherwise provided in Section 2.4 and Section 2.6, whenever under any provision of the Delaware General Corporation Law (as the same may be amended and supplemented from time to time, and including any successor provision thereto, the “DGCL”), the Certificate of Incorporation of the Corporation (as the same may be amended, supplemented and/or restated from time to time, the “Certificate”) or these Bylaws, stockholders are required or permitted to take any action at a meeting, written notice shall be given stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose(s) for which the meeting is called. Except as otherwise provided by any provision of the DGCL, a copy of the notice of any meeting shall be given, personally or by mail, not less than 10 nor more than 60 days before the date of the meeting, to each stockholder entitled to notice of, or to vote at, such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States Mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the Corporation that the notice required by this Section 2.5 has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken and, at the adjourned meeting, any business may be transacted that might have been transacted at the meeting originally called. If, however, the adjournment is for more than 60 days or if, after the adjournment, a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. The Board may designate the place of meeting for any meeting of Stockholders. If no designation is made by the Board, the place of meeting shall be the principal executive offices of the Corporation. The Board may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized by the DGCL
     
  2.6. Waivers of Notice. Whenever notice is required to be given to the stockholders under any provision of the DGCL, or the Certificate or these Bylaws, a written waiver thereof, signed by a stockholder entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a stockholder at a meeting shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice.

 

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  2.7. Quorum of Stockholders; Adjournment; Postponement. The holders of a majority of the voting power, present, in person or represented by proxy, shall be necessary and sufficient to constitute a quorum for the transaction of any business at such meeting, except where otherwise provided by any provision of the DGCL. When a quorum is once present to organize a meeting of stockholders, it is not broken by the subsequent withdrawal of any stockholders. The Chairman, or the holders of a majority of the shares of stock present in person or represented by proxy at any meeting of stockholders, including an adjournment meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. Any previously scheduled meeting of stockholders may be postponed, and any previously scheduled special meeting of Stockholders may be canceled, by the Board upon public notice given prior to the time previously scheduled for such meeting of stockholders.
     
  2.8. Voting; Proxies.

 

  (a) Unless otherwise provided in the Certificate, every stockholder of record shall be entitled at every meeting of stockholders to one vote for each share of capital stock standing in his name on the record of stockholders determined in accordance with Section 2.4. If the Certificate provides for more or less than one vote for any share on any matter, every reference in these Bylaws or any provision of the DGCL, to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. The provisions of the DGCL shall apply in determining whether any shares of capital stock may be voted and the persons, if any entitled to vote such shares, but the Corporation shall be protected in treating the persons in whose names shares of capital stock stand on the record of stockholders as owners thereof for all purposes.
     
  (b) In any uncontested election of directors, each person receiving a majority of the votes cast shall be deemed elected. For purposes of this paragraph, a ‘majority of the votes cast’ shall mean that the number of votes cast ‘for’ a director must exceed the number of votes cast ‘against’ that director (with ‘abstentions’ and ‘broker non-votes’ not counted as a vote cast with respect to that director). In any contested election of directors, the persons receiving a plurality of the votes cast, up to the number of directors to be elected in such election, shall be deemed elected. The Board may, but need not, establish policies and procedures regarding the nomination, election and resignation of directors, which policies and procedures may: (i) include a condition to nomination by the Board for election or re-election as a director that an individual agree to tender, if elected or re-elected, an irrevocable offer of resignation conditioned on: (A) failing to receive the required vote for re-election at the next meeting at which such person would face re-election and (B) acceptance of the resignation by the Board, (ii) require: (A) if one exists, the Corporation’s nominating and governance committee or other committee designated by the Board (the “Nominating and Governance Committee”) to make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken and (B) the Board to act on the Nominating and Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days, to the extent practicable, from the date of the certification of the election results. A “contested election” is one in which: (i) the Secretary receives a notice that a Stockholder has nominated a person for election to the Board in compliance with the advance notice requirements for stockholder nominees for director set forth in Section and (ii) such nomination has not been withdrawn by such stockholder on or before the 10th day before the Corporation first mails its notice of meeting for such meeting to the stockholders. An “uncontested election” is any election other than a contested election. All elections of directors shall be by written ballot unless otherwise provided in the Certificate.

 

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  (c) As to each matter submitted to a vote of the stockholders (other than the election of directors), except as otherwise provided by law or by the Certificate or by these Bylaws, such matter shall be decided by a majority of the votes cast on such matter.
     
  (d) In voting on any other question on which a vote by ballot is required by law, the voting shall be by ballot. Each ballot shall be signed by the stockholder voting or by his proxy and shall state the number of shares voted. Every stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person(s) to act for him by proxy. Any proxy to be used at a meeting of stockholders must be delivered to the Secretary of the Corporation or his or her representative at the principal executive offices of the Corporation at or before the time of the meeting. The validity and enforceability of any proxy shall be determined in accordance with the provisions of the DGCL. The Chairman shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting.

 

  2.9. Nomination of Directors. Only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as directors. Nominations of persons for election to the Board may be made at a meeting of stockholders at which directors are to be elected only (a) by or at the direction of the Board or (b) by any stockholder of the Corporation entitled to vote for the election of directors at a meeting who complies with the notice procedures set forth in Section 2.10

 

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  2.10. Notices of Business or Nominations for Director.

 

  (a) For director nominations or other business to be properly brought before an annual meeting of stockholders by a stockholder, a stockholder’s notice must include the following information and/or documents, as applicable: (A) the name and address of the stockholder giving the notice, as they appear on the Corporation’s books, and of the beneficial owner of stock of the Corporation, if any, on whose behalf such nomination or proposal of other business is made (such beneficial owner, the “Beneficial Owner”); (B) representations that, as of the date of delivery of such notice, such stockholder is a holder of record of stock of the Corporation and is entitled to vote at such meeting and intends to appear in person or by proxy at such meeting to propose and vote for such nomination and any such other business; (C) as to each person whom the stockholder proposes to nominate for election or re-election as a director (a “Stockholder Nominee”): (1) all information relating to such Stockholder Nominee that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (as amended from time to time, the “Exchange Act”) or any successor provision thereto, including such Stockholder Nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected and to being named in the Corporation’s proxy statement and form of proxy if the Corporation so determines, (2) a statement whether such Stockholder Nominee, if elected, intends to tender, promptly following such Stockholder Nominee’s election or re-election, an irrevocable offer of resignation effective upon such Stockholder Nominee’s failure to receive the required vote for re-election at the next meeting at which such Stockholder Nominee would face re-election and upon acceptance of such resignation by the Board; and (3) such other information as may be reasonably requested by the Corporation; (D) as to any other business that the stockholder proposes to bring before the meeting: (1) a brief description of such business, (2) the text of the proposal (including the text of any resolutions proposed for consideration and, if such business includes a proposal to amend these Bylaws, the text of the proposed amendment) and (3) the reasons for conducting such business at the meeting; and (E) in all cases: (1) the name of each individual, firm, corporation, limited liability company, partnership, trust or other entity (including any successor thereto, a “Person”) with whom the stockholder, any Beneficial Owner, any Stockholder Nominee and the respective affiliates and associates (as defined under Regulation 12B under the Exchange Act or any successor provision thereto) of such stockholder, Beneficial Owner and/or Stockholder Nominee (each of the foregoing, including, for the avoidance of doubt, the Stockholder, Beneficial Owner and/or Stockholder Nominee, a “Stockholder Group Member”) either is acting in concert with respect to the Corporation or has any agreement, arrangement or understanding (whether written or oral) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy given to such Person in response to a public proxy solicitation made generally by such Person to all holders of common stock of the Corporation) or disposing of any capital stock of the Corporation or to cooperate in obtaining, changing or influencing the control of the Corporation (except independent financial, legal and other advisors acting in the ordinary course of their respective businesses) (each Person described in this clause (1), including each Stockholder Group Member, a “Covered Person”), and a description, and, if in writing, a copy, of each such agreement, arrangement or understanding, (2) a list of the class, series and number of shares of capital stock of the Corporation that are beneficially owned or owned of record by each Covered Person, together with documentary evidence of such record or beneficial ownership, (3) a list of all derivative securities (as defined in Rule 16a-1 under the Exchange Act or any successor provision thereto) and other derivatives or similar arrangements to which any Covered Person is a counterparty and relating to any shares of capital stock of the Corporation, a description of all economic terms of all such derivative securities and other derivatives or similar arrangements and copies of all agreements and other documents relating to each of such derivative securities and other derivatives or similar arrangements, (4) a list of all transactions by any Covered Person involving any shares of capital stock of the Corporation or any derivative securities (as defined under Rule 16a-1 under the Exchange Act or any successor provision thereto) or other derivatives or similar arrangements related to any shares of capital stock of the Corporation entered into or consummated within 60 days prior to the date of such notice, (5) details of all other material interests of each Covered Person in such nomination or proposal or shares of capital stock of the Corporation (including any rights to dividends or performance-related fees based on any increase or decrease in the value of such shares of capital stock) and (6) a representation as to whether any Covered Person intends or is part of a group which intends to deliver a proxy statement and/or form of proxy to, in the case of a nomination or nominations, at least the percentage of the Corporation’s outstanding capital stock reasonably believed by the Covered Person to be sufficient to elect the nominee or nominees proposed to be nominated by the stockholder and, in the case of a proposal, holders of at least the percentage of the Corporation’s outstanding capital stock required to elect any Stockholder Nominee or approve such proposal (such representation, the “Solicitation Representation”).

 

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  (b) A notice delivered by or on behalf of any Stockholder under this Section 2.10 shall be deemed to be not in compliance with this Section 2.10 and not be effective if: (x) such notice does not include all of the information, documents and representations required under this Section 2.10, (y) after delivery of such notice, any information or document required to be included in such notice changes or is amended, modified or supplemented, as applicable, prior to the date of the relevant meeting and such information and/or document is not delivered to the Corporation by way of a further written notice as promptly as practicable following the event causing such change in information or amendment, modification or supplement, as applicable, and in any case where such event occurs within 45 days of the date of the relevant meeting, within five business days after such event or (z) any Covered Person does not act in accordance with the representation set forth in the Solicitation Representation; provided, however, that the Board shall have the authority to waive any such non-compliance if the Board determines that such action is appropriate in the exercise of its fiduciary duties.
     
  (c) Notwithstanding Section 2.10(b), in the event that the number of directors to be elected to the Board is increased effective at the next annual meeting and there is no Public Announcement (as defined below) specifying the size of the increased Board made by the Corporation at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 2.10 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such Public Announcement is first made by the Corporation and such notice otherwise complies with the requirements of this Section 2.10. To be timely, a stockholder’s notice must be delivered to the Secretary at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days, or delayed by more than 90 days, from such anniversary date, or if no annual meeting was held in the preceding year, notice by a stockholder to be timely must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting and the 10th day following the day on which the Public Announcement of the date of such meeting is first made by the Corporation. In no event shall the Public Announcement of an adjournment or postponement of an annual meeting commence a new time period for the giving of a Stockholder’s notice as described in this Section 2.10.
     
  (d) “Public Announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, Section 14 or Section 15(d) of the Exchange Act or any document delivered to all Stockholders (including any quarterly income statement).

 

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  2.11. Selection and Duties of Inspectors at Meeting of Stockholders. The Board, in advance of any meeting of stockholders, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at such meeting may and, on the request of any stockholder entitled to vote thereat shall, appoint one or more inspectors. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspector(s) shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and shall do such acts as are proper to conduct the election or vote with fairness to all stockholders. On the request of the person presiding at the meeting or any stockholder entitled to vote thereat, the inspector(s) shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. Any report or certificate made by the inspector(s) shall be prima facie evidence of the facts stated and of the vote as certified by him or them.
     
  2.12. Organization. At every meeting of stockholders, the Chief Executive Officer or, in the absence of the Chief Executive Officer, a President or a Vice President, and in case more than one Vice President shall be present, that Vice President designated by the Board (or in the absence of any such designation, the most senior Vice President, based on age, present) shall act as chairman of the meeting. In case none of the officers above designated to act as chairman or secretary of the meeting, respectively, shall be present, a chairman or a secretary of the meeting, as the case may be, may be chosen by a majority of the voting power present at such meeting, which includes the voting power which is present in person or represented by proxy and entitled to vote at the meeting.
     
  2.13. Order of Business. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting, but the order of business to be followed at any meeting at which a quorum is present may be changed by a majority of the votes cast at such meeting by the holders of shares of capital stock present, in person or represented by proxy and entitled to vote at the meeting.

 

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  2.14. Action Without Meeting. Unless otherwise provided by the Certificate or these Bylaws, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting, may be taken without a meeting, without prior notice and without a vote if a consent in writing setting forth the action so taken is signed by the stockholders holding at least a majority of the voting power, except that if a different proportion of voting power is required for such action at a meeting, then that proportion of written consents is required. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the date the earliest dated consent is delivered to the Corporation, a written consent or consents signed by a sufficient number of holders to take action are delivered to the Corporation in the manner prescribed herein. An electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxyholder, or by a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written, signed and dated for the purposes of this Section 2.14 to the extent permitted by law. Any such consent shall be delivered in accordance with the DGCL. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing or electronic transmission and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date of such meeting had been the date that written consents signed by a sufficient number of stockholders or members to take the action were delivered to the Corporation as provided by law.
     
  2.15. Copies, Etc. Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing

 

3. Directors.

 

  3.1. Number and Term. Except as provided by any provision of the DGCL, the number of directors shall initially be one (1) or such other number of persons as the majority of the full Board, by resolution, may from time to time determine. The directors shall, except for filling vacancies (whether resulting from an increase in the number of directors, resignations, removals or otherwise), be elected at the annual meeting of the stockholders and each director shall be elected to serve until his successor is elected and qualifies. Directors need not be stockholders. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. The members of the Board may elect a chairman of the Board (the “Chairman”) by a vote of a majority vote of all directors (which may include the vote of the person so elected).
     
  3.2. Resignations. Any director, member of a committee or other officer may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein and, if no time be specified, at the time of its receipt by the Chief Executive Officer or Secretary. The acceptance of a resignation shall not be necessary to make it effective.
     
  3.3. Vacancies. Except as may otherwise be provided in connection with rights to elect additional directors under specified circumstances, which may be granted to the holders of any class or series of Preferred Stock, if the position of any director becomes vacant (whether resulting from an increase in the number of directors, resignations, removals or otherwise), the remaining directors in office, though less than a quorum, by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen.
     
  3.4. Removal. Other than with respect to any director(s) who are named by a class of preferred stock of the Corporation, which may be removed and replaced either for or without cause at any time solely by the holders of such class of preferred stock, any director(s) may be removed by the affirmative vote of the holders of not less than two-thirds (2/3) of the voting power of the issued and outstanding stock entitled to vote, at a special meeting of the stockholders called for that purpose and the vacancies thus created may be filled, at the meeting held for the purpose of removal, by the majority affirmative vote of the holders of all of the voting power of the issued and outstanding stock entitled to vote.

 

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  3.5. Increase or Decrease of Number. The number of directors may be increased or decreased only by the affirmative vote of a majority of the directors, though less than a quorum. Any newly created directorships may be filled in the same manner as a vacancy.
     
  3.6. Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board, except as otherwise provided by applicable law or by the Certificate. If any such provision is made in the Certificate, the powers and duties imposed upon the Board by applicable law shall be exercised or performed to such extent and by such person or persons as shall be provided in the Certificate. The Board shall exercise all of the powers of the Corporation except such as are by law, or by the Certificate of the Corporation or by these Bylaws, conferred upon or reserved to the stockholders.
     
  3.7. Conference Call. Members of the Board or any committee designated by such Board may participate in a meeting of the Board or such committee by means of telephone conference or similar communication equipment by means of which all persons participating in the meeting can hear each other and participation pursuant to this Section 3.7 shall constitute presence at such meeting.
     
  3.8. Committees. The Board may, by resolution(s) passed by a majority of the whole Board, designate one or more committees, each committee to consist of one (1) or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member or such committee or committees, the member or members thereof present at any such meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board or in these Bylaws, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, but no such committee shall have the power or authority in reference to amending the Certificate, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation’s property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending these Bylaws of the Corporation and, unless the resolution, these Bylaws or the Certificate expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock.
     
  3.9. Meetings. Meetings of the Board, regular or special, may be held at any place within or without the State of Delaware.

 

  (a) On the day when, and at the place where, the annual meeting of stockholders for the election of directors is held, and as soon as practicable thereafter, the Board may hold its annual meeting, without notice of such meeting, for the purposes or organization, election of officers and transaction of other business. The annual meeting of the Board may be held at any other time and place specified in a notice given as provided in this Section 3.9 for special meetings of the Board or in a waiver of notice thereof.

 

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  (b) Regular meetings of the directors may be held without notice at such place and time as shall be determined from time to time by resolution of the directors.
     
  (c) Special meetings of the Board may be called by the Chief Executive Officer or by the Secretary on the written request of any two or more directors on at least ten (10) days’ notice to each director and shall be held at such place(s) as may be determined by the directors, or as shall be stated in the call of the meeting.
     
  (d) Anything in these Bylaws or in any resolution adopted by the Board to the contrary notwithstanding, notice of any meeting of the Board need not be given to any director who submits a signed waiver of such notice, whether before or after such meeting, or who attends such meeting without protesting, prior thereto or at its commencement, the lack of notice to him.

 

  3.10. Quorum. A majority of the directors in office from time to time shall constitute a quorum for the transaction of business. If at any meeting of the Board there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained and no further notice thereof need be given, other than by announcement at the meeting which shall be so adjourned.
     
  3.11. Compensation. Unless otherwise restricted by the Certificate, the Board shall have the authority to fix the compensation of the directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board and may be paid a fixed sum for attendance at each meeting of the Board or paid a stated salary or paid other compensation as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed compensation for attending committee meetings.
     
  3.12. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if a written consent thereto is signed by all members of the Board, or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee.
     
  3.13. Telephone Meeting. Any one or more members of the Board or any committee thereof may participate in a meeting of the Board or such committee by means of a telephone conference or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such meeting.
     
  3.14. Annual Report. As soon as practicable after the close of each fiscal year, a report of the business and affairs of the Corporation to the shareholders shall be made under the direction of the Board, unless the Board determines, in its reasonable discretion, that such a report is not reasonably required.

 

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4. Officers.

 

  4.1. Officers. The Board may elect or appoint a Chief Executive Officer and such other officers as it may determine. The Board may designate one or more Vice Presidents as Executive Vice Presidents and may use descriptive words or phrases to designate the standing, seniority or area of special competence of the Vice Presidents elected or appointed by it. Each officer shall hold his office until his successor is elected and qualified or until his earlier death, resignation or removal in the manner provided in Section 4.2. Any two or more offices may be held by the same person. The Board may require any officer to give a bond or other security for the faithful performance of his duties, in such amount and with such sureties as the Board may determine. All officers as between themselves and the Corporation shall have such authority and perform such duties in the management of the Corporation as may be provided in these Bylaws or as the Board may from time to time determine.
     
  4.2. Removal of Officers. Any officer elected or appointed by the Board may be removed by the Board with or without cause. The removal of an officer without cause shall be without prejudice to his contract rights, if any. The election or appointment of an officer shall not of itself create contract rights.
     
  4.3. Resignations. Any officer may resign at any time by notifying the Board, the Chief Executive Officer or the Secretary in writing. Such resignation shall take effect at the date of receipt of such notice or at such later time as is therein specified and, unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective. The resignation of an officer shall be without prejudice to the contract rights of the Corporation, if any.
     
  4.4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term in the manner prescribed in these Bylaws for the regular election or appointment to such office.
     
  4.5. Compensation. Salaries or other compensation of the officers may be fixed from time to time by the Board. No officer shall be prevented from receiving a salary or other compensation by reason of the fact that he is also a director.
     
  4.6. Chief Executive Officer. The Chief Executive Officer shall have general supervision and direction of the business and affairs of the Corporation, subject to control of the Board, and shall report directly to the Board, and shall have supervisory responsibility over officers operating and discharging their responsibilities. The Chief Executive Officer shall perform all such other duties which are commonly incident to the capacity of Chief Executive Officer or which are delegated to him or her by the Board.
     
  4.7. President. The President shall have general supervision and direction of the business and affairs of the Corporation as directed by the Chief Executive Officer. The President shall, if present, preside at all meetings of the stockholders. He may, with the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer, sign certificates for shares of the Corporation. He may sign and execute, in the name of the Corporation, deeds, mortgages, bonds, contracts and other instruments, except in cases where the signing and execution thereof shall be expressly delegated by the Board or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law otherwise to be signed or executed, and, in general, he shall perform all duties incident to the office of President and such other duties as from time to time may be assigned to him by the Board. If there is no President, the Chief Executive Officer shall perform the President’s functions.

 

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  4.8. Principal Financial Officer. The Principal Financial Officer shall perform all the powers and duties of the office of the principal financial officer and in general have overall supervision of the financial operations of the Corporation. The Principal Financial Officer shall, when requested, counsel with and advise the other officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine. If there is no Principal Financial Officer, the Chief Executive Officer shall perform the Principal Financial Officer’s functions.
     
  4.9. Executive Vice Presidents. At the request of the President or, in his absence, at the request of the Board, the Executive Vice Presidents shall (in such order as may be designated by the Board or, in the absence of any such designation, in order of seniority based on age) perform all of the duties of the President and, so acting, shall have all the powers of and be subject to all restrictions upon the President. Any Executive Vice President may also, with the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer, sign certificates for shares of the Corporation, may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts or other instruments authorized by the Board, except in cases where the signing and execution thereof shall be expressly delegated by the Board or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law otherwise to be signed or executed, and shall perform such other duties as from time to time may be assigned to him by the Board or the President.
     
  4.10. Secretary. The Secretary, if present, shall act as Secretary of all meetings of the stockholders and of the Board and shall keep the minutes thereof in the proper book(s) to be provided for that purpose; he shall see that all notices required to be given by the Corporation are duly given and served; he may, with the Chief Executive Officer or a Vice President, sign certificates for shares of the Corporation; he shall be custodian of the seal of the Corporation, if any, and may seal with the seal of the Corporation or a facsimile thereof, if any, all certificates for shares of capital stock of the Corporation and all documents; he shall have charge of the stock ledger and also of the other books, records and papers of the Corporation relating to its organization and management as a Corporation and shall see that the reports, statements and other documents required by law are properly kept and filed; and shall, in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board or the Chief Executive Officer. If there is no Secretary, the Chief Executive Officer shall perform the Secretary’s functions.

 

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  4.11. Treasurer. The Treasurer shall have charge and custody of, and be responsible for, all funds, securities and notes of the Corporation; receive and give receipts for monies due and payable to the Corporation from any sources whatsoever; deposit all such monies in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with these Bylaws; against proper vouchers, cause such funds to be disbursed by checks or drafts on the authorized depositories of the Corporation signed in such manner as shall be determined in accordance with any provisions of these Bylaws, and be responsible for the accuracy of the amounts of all monies to disbursed; regularly enter or cause to be entered in books to be kept by him or under his direction full and adequate account of all monies received or paid by him for the account of the Corporation; have the right to require, from time to time, reports or statements giving such information as he may desire with respect to any and all financial transactions of the Corporation from the officers or agents transacting the same; render to the Chief Executive Officer or the Board, whenever the Chief Executive Officer or the Board, respectively, shall require him so to do, an account of the financial conditions of the Corporation and of all his transactions as Treasurer; exhibit at all reasonable times his books of account and other records to any of the directors upon application at the office of the Corporation where such books and records are kept; and, in general, perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Chief Executive Officer or the Board; and he may sign with the Chief Executive Officer or a Vice President certificates for shares of the capital stock of the Corporation. If there is no Treasurer, the Chief Executive Officer shall perform the Treasurer’s functions.
     
  4.12. Assistant Secretaries and Assistant Treasurers. Assistant Secretaries and Assistant Treasurers shall perform such duties as shall be assigned to them by the Secretary or by the Treasurer, respectively, or by the Board or the Chief Executive Officer. Assistant Secretaries and Assistant Treasurers may, with the Chief Executive Officer or a Vice President, sign certificates for shares of the Corporation.
     
  4.13. Additional Matters. The Chief Executive Officer, the President and the Principal Financial Officer of the Corporation shall have the authority to designate employees of the Corporation to have the title of Vice President, Assistant Vice President, Assistant Treasurer, Assistant Controller or Assistant Secretary. Any employee so designated shall have the powers and duties determined by the officer making such designation. The persons upon whom such titles are conferred shall not be deemed officers of the Corporation unless elected by the Board.

 

5. Contracts, Checks, Drafts, Bank Accounts, etc.

 

  5.1. Execution of Contracts. The Board may authorize any officer, employee or agent, in the name and on behalf of the Corporation, to enter into any contract or execute and satisfy any instrument, and any such authority may be general or confined to specific instances, or otherwise limited.
     
  5.2. Loans. The Chief Executive Officer or any other officer, employee or agent authorized by these Bylaws or by the Board may effect loans and advances at any time for the Corporation from any bank, trust company or other institutions or from any firm, corporation or individual and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidence of indebtedness of the Corporation and, when authorized by the Board to do so, may pledge and hypothecate or transfer any securities or the property of the Corporation as security for any such loans or advances. Such authority conferred by the Board may be general or confined to specific instances or otherwise limited.
     
  5.3. Checks, Drafts, etc. All checks, drafts and other orders for the payment of money out of the funds of the Corporation and all notes or other evidence of indebtedness of the Corporation shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board.
     
  5.4. Deposits. The funds of the Corporation not otherwise employed shall be deposited from time to time to the order of the Corporation in such banks, trust companies or other depositories as the Board may select or as may be selected by an officer, employee or agent of the Corporation to whom such power may from time to time be delegated by the Board.

 

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6. Stocks and Dividends.

 

  6.1. Certificates Representing Shares. The shares of the Corporation shall not be certificated unless required by law.
     
  6.2. Transfer of Shares. Transfers of shares of capital stock of the Corporation shall be made only on the books of the Corporation by the holder thereof or by his duly authorized attorney appointed by a power of attorney duly executed and filed with the Secretary or a transfer agent of the Corporation and on surrender of any certificate(s) representing such shares of capital stock, if they exist, properly endorsed for transfer and upon payment of all necessary transfer taxes and such other instruments of transfer as requested by the Corporation. A person in whose name shares of capital stock shall stand on the books of the Corporation shall be deemed the owner thereof to receive dividends, to vote as such owner and for all other purposes as respects the Corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until such transfer shall have been entered on the books of the Corporation by an entry showing from and to whom transferred.
     
  6.3. Registered Stockholders and Addresses of Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of capital stock to receive dividends and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of capital stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by applicable law. Each stockholder shall designate to the Secretary or transfer agent of the Corporation an address at which notices of meetings and all other corporate notices may be given to such person, and, if any stockholder fails to designate such address, corporate notices may be given to such person by mail directed to such person at such person’s post office address, if any, as the same appears on the stock record books of the Corporation or at such person’s last known post office address or as otherwise provided by applicable law.
     
  6.4. Transfer and Registry Agents. The Corporation may from time to time maintain one or more transfer offices or agents and registry offices or agents at such place(s) as may be determined from time to time by the Board.
     
  6.5. Lost, Destroyed, Stolen and Mutilated Certificates. The holder of any shares shall immediately notify the Corporation of any loss, destruction, theft or mutilation of the certificate representing such shares and the Corporation may issue a new certificate to replace the certificate alleged to have been lost, destroyed, stolen or mutilated. The Board may, in its discretion, as a condition to the issue of any such new certificate, require the owner of the lost, destroyed, stolen or mutilated certificate, or his legal representatives, to make proof satisfactory to the Board of such loss, destruction, theft or mutilation and to advertise such fact in such manner as the Board may require, and to give the Corporation and its transfer agents and registrars, or such of them as the Board may require, a bond in such form, in such sums and with such surety or sureties as the Board may direct, to indemnify the Corporation and its transfer agents and registrars against any claim that may be made against any of them on account of the continued existence of any such certificate so alleged to have been lost, destroyed, stolen or mutilated and against any expense in connection with such claim.

 

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  6.6. Regulations. The Board may make rules and regulations as it may deem expedient, not inconsistent with these Bylaws or with the Certificate, concerning the issue, transfer and registration of certificates representing shares of its capital stock.
     
  6.7. Restriction on Transfer of Stock. A written restriction on the transfer or registration of transfer of capital stock of the Corporation, if permitted by the provisions of the DGCL, and noted conspicuously on the certificate representing such capital stock, if such certificate exists, may be enforced against the holder of the restricted capital stock of any successor or transferee of the holder including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate representing such capital stock, a restriction, even though permitted by the provisions of the DGCL, as the same may be amended and supplements, shall be ineffective except against a person with actual knowledge of the restriction. A restriction on the transfer or registration of transfer of capital stock of the Corporation may be imposed either by the Certificate or by an agreement among any number of stockholders or among such stockholders and the Corporation. No restriction so imposed shall be binding with respect to capital stock issued prior to the adoption of the restriction unless the holders of such capital stock are parties to an agreement or voted in favor of the restriction. Except to the extent that the Corporation has obtained an opinion of counsel acceptable to the Corporation that transfer restrictions are not required under applicable securities laws, or has otherwise satisfied itself that such transfer restrictions are not required, any certificates representing shares of the Corporation shall bear a legend on the face of the certificate, or on the reverse of the certificate if a reference to the legend is contained on the face, which reads substantially as follows:

 

THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND NO INTEREST MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES, (B) THIS CORPORATION RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THESE SECURITIES SATISFACTORY TO THIS CORPORATION STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THIS CORPORATION OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.

 

  6.8. Dividends, Surplus, etc. Subject to the provisions of the Certificate and of law, the Board:

 

  (a) may declare and pay dividends or make other distributions on the outstanding shares of capital stock in such amounts and at such time to times as, in its discretion, the conditions of the affairs of the Corporation shall render advisable;
     
  (b) may use and apply, in its discretion, any of the surplus of the Corporation in purchasing or acquiring any shares of capital stock of the Corporation, or purchase warrants therefor, in accordance with law, or any of its bonds, debentures, notes, scrip or other securities or evidence of indebtedness; and

 

15
 

 

  (c) may set aside from time to time out of such surplus or net profits such sum(s) as, in its discretion, it may think proper, as a reserve fund to meet contingencies, or for equalizing dividends or for the purpose of maintaining or increasing the property or business of the Corporation, or for any other purpose it may think conducive to the best interests of the Corporation.

 

7. Miscellaneous.

 

  7.1. Seal. The Board shall have the power by resolution to adopt, make and use a corporate seal and to alter the form of such seal from time to time.
     
  7.2. Fiscal Year. The fiscal year of the Corporation shall be determined, and may be changed, by resolution of the Board.
     
  7.3. Books and Records. The Corporation shall: (1) Keep as permanent records minutes of all meetings of its stockholders and the Board, a record of all actions taken by the stockholders or the Board without a meeting, and a record of all actions taken by a committee of the Board exercising the authority of the Board on behalf of the Corporation; (2) Maintain appropriate accounting records; (3) Maintain a record of its stockholders, in a form that permits preparation of a list of the names and addresses of all stockholders, in alphabetical order by class of shares showing the number and class of shares held by each; provided, however, such record may be maintained by an agent of the Corporation; (4) Maintain its records in written form or in another form capable of conversion into written form within a reasonable time; and (5) Keep a copy of the following records (subject to any provision of the DGCL) outside the State of Delaware at such place or places as may be designated from time to time by the Board: (a) the Certificate as currently in effect; (b) these Bylaws and all amendments thereto as currently in effect; (c) the minutes of all meetings of stockholders and records of all action taken by stockholders; (d) the Corporation’s financial statements for the past three years; (e) all written communications to stockholders generally within the past three years; (f) a list of the names and business addresses of the current Directors and officers; and (g) the most recent annual report delivered to the Delaware Secretary of State.
     
  7.4. Forum Selection; Attorneys’ Fees. Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) an action asserting a claim arising pursuant to any provision of the DGCL, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. If any action is brought by any party against another party, relating to or arising out of these Bylaws, or the enforcement hereof, the prevailing party shall be entitled to recover from the other party reasonable attorneys’ fees, costs and expenses incurred in connection with the prosecution or defense of such action. For purposes of these Bylaws, the term “attorneys’ fees” or “attorneys’ fees and costs” shall mean the fees and expenses of counsel to the Corporation and any other parties asserting a claim as set forth in the initial paragraph of this Section 7.4, which may include printing, photocopying, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals and other persons not admitted to the bar but performing services under the supervision of an attorney, and the costs and fees incurred in connection with the enforcement or collection of any judgment obtained in any such proceeding. The provisions of this Section 7.4 shall survive the entry of any judgment, and shall not merge, or be deemed to have merged, into any judgment. Notwithstanding the foregoing, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act of 1934, as amended, the Securities Act of 1933, as amended, or any claim for which the federal courts have exclusive or concurrent jurisdiction.

 

16
 

 

  7.5. Subject to Law and Certificate of Incorporation. All powers, duties and responsibilities provided for in these Bylaws, whether or not explicitly so qualified, are qualified by the provisions of the Certificate and applicable law.
     
  7.6. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used at any time unless otherwise restricted by the Board or a committee thereof.
     
  7.7. Time Periods. In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included.
     
  7.8. Electronic Transmission. For purposes of these Bylaws, “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

 

8. Indemnification. The Corporation shall have the rights and obligations related to indemnification as set forth in the Certificate.

 

9. Amendments. These Bylaws may be altered or repealed and Bylaws may be made at any annual meeting of the stockholders or at any special meeting thereof, if notice of the proposed alteration or repeal of Bylaw or Bylaws to be made be contained in the notice of such special meeting, by the affirmative vote of a majority of the voting power of the capital stock issued and outstanding and entitled to vote thereat, or by the affirmative vote of a majority of the Board at any regular meeting of the Board, or at any special meeting of the Board, if notice of the proposed alteration or repeal, or Bylaw or Bylaws to be made, be contained in the notice of such meeting, or by a written consent in lieu of a meeting as set forth herein.

 

***************************************************************************

 

17

 

 

Exhibit 5.1

 

ANTHONY L.G., PLLC

 

laura aNTHONy, esq

JOHN CACOMANOLIS, ESQ*

CHAD FRIEND, ESQ, LLM

SVETLANA ROVENSKAYA, ESQ**

 

 

OF COUNSEL:

Jack A. Fattal, esq.***

Jessica Haggard, esq. ****

MICHAEL R. GEROE, ESQ, CIPP/US*****

CRAIG D. LINDER, ESQ******

PETER P. LINDLEY, ESQ, CPA, MBA

john lowy, esq.*******

STUART REED, ESQ

Harris Tulchin, Esq. ********

www.ANTHONYPLLC.com

WWW.SECURITIESLAWBLOG.COM

WWW.LAWCAST.COM

 

 

 

DIRECT E-MAIL: LANTHONY@ANTHONYPLLC.COM

 

 

*licensed in FL and NY

**licensed in NY and NJ

*** licensed in NY

****licensed in Missouri

*****licensed in CA, DC, MO and NY

******licensed in CA, FL and NY

*******licensed in NY and NJ

********licensed in CA and HI (inactive in HI)

 

January 3, 2022

 

HeartCore Enterprises, Inc.

1-2-33, Higashigotanda, Shinagawa-ku

Tokyo, Japan

 

Re: HeartCore Enterprises, Inc. – Registration Statement on Form S-1

 

Ladies and Gentlemen:

 

We have acted as counsel to HeartCore Enterprises, Inc., a Delaware corporation (the “Company”), in connection with the preparation and filing with the Securities and Exchange Commission (the “Commission”) pursuant to the Securities Act of 1933, as amended (the “Securities Act”), of a Registration Statement on Form S-1 (as amended through the date hereof, the “Registration Statement”) relating to the offer and sale by the Company of up to $17,250,000 of shares (the “Shares”) of the Company’s common stock, par value $0.0001 per share (“Common Stock”) (including $2,250,000 of shares of Common Stock subject to the underwriters’ over-allotment option described in the Registration Statement). The Shares are to be sold by the Company pursuant to an underwriting agreement (the “Underwriting Agreement”) by and between the Company and Boustead Securities, LLC (the “Underwriter”), the form of which is filed as Exhibit 1.1 to the Registration Statement. The Company is also registering (i) warrants to purchase up to $1,509,375 of shares of Common Stock of the Company to be issued to the Underwriter as additional compensation pursuant to the Underwriting Agreement (the “Representative’s Warrants”), and (ii) up to an aggregate of $1,509,375 of Common Stock issuable upon exercise of the Representative’s Warrants (the “Representative’s Warrant Shares”).

  

In rendering the opinion set forth herein, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments as we have deemed necessary or advisable. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all items submitted to us as originals, the conformity with originals of all items submitted to us as copies, and the authenticity of the originals of such copies. As to any facts material to the opinions expressed herein that we did not independently establish or verify, we have relied upon statements and representations of officers and other representatives of the Company and public officials.

 

We express no opinion herein as to the laws of any state or jurisdiction other than the substantive laws of the State of California as it relates to the Representative’s Warrants, the Delaware General Corporation Law (including all related provisions of the Delaware Constitution and all reported judicial decisions interpreting the Delaware General Corporation Law and the Delaware Constitution) and the federal laws of the United States of America.

 

 
 

 

With regard to our opinion concerning the Representative’s Warrants constituting valid and binding obligations of the Company:

 

(i) Our opinion is subject to, and may be limited by, (a) applicable bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance, debtor and creditor, and similar laws which relate to or affect creditors’ rights generally, and (b) general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing) regardless of whether considered in a proceeding in equity or at law.

 

(ii) Our opinion is subject to the qualification that the availability of specific performance, an injunction or other equitable remedies is subject to the discretion of the court before which the request is brought.

 

(iii) We express no opinion as to any provision of the Representative’s Warrants that: (a) provides for liquidated damages, buy-in damages, monetary penalties, prepayment or make-whole payments or other economic remedies to the extent such provisions may constitute unlawful penalties, (b) relates to advance waivers of claims, defenses, rights granted by law, or notice, opportunity for hearing, evidentiary requirements, statutes of limitations, trial by jury, or procedural rights, (c) restricts non-written modifications and waivers, (d) provides for the payment of legal and other professional fees where such payment is contrary to law or public policy, (e) relates to exclusivity, election or accumulation of rights or remedies, (f) authorizes or validates conclusive or discretionary determinations, or (g) provides that provisions of the Common Warrants and the Representative’s Warrants are severable to the extent an essential part of the agreed exchange is determined to be invalid and unenforceable.

 

(iv) We express no opinion as to whether a state court outside of the State of California or a federal court of the United States would give effect to the choice of California law or jurisdiction provided for in the Representative’s Warrants.

 

In rendering this opinion we have assumed that prior to the issuance of the Representative’s Warrants (i) the Registration Statement, as then amended, will have become effective under the Securities Act, and (ii) the Board of Directors of the Company will have taken action to set the sale price of the Representative’s Warrants and the exercise price of the Representative’s Warrants.

 

With regard to our opinion regarding the Representative’s Warrants, we express no opinion to the extent that, notwithstanding its current reservation of shares of Common Stock, future issuances of securities, including the Representative’s Warrant Shares, of the Company and/or antidilution adjustments to outstanding securities, including the Representative’s Warrants, of the Company cause the Representative’s Warrants to be exercisable for more shares of Common Stock than the number that then remain authorized but unissued.

 

Based upon and subject to the foregoing, we are of the opinion that: (i) the Shares have been duly authorized for issuance and, when issued, delivered and paid for in accordance with the terms of the Underwriting Agreement, the Shares will be validly issued, fully paid and non-assessable; (ii) the Representative’s Warrants, when executed and delivered by the Company in accordance with and in the manner described in the Registration Statement, the Underwriting Agreement and the Representative’s Warrants, will constitute a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, moratorium and similar laws affecting creditors’ rights generally and equitable principles of general applicability; and (iii) the Representative’s Warrant Shares have been duly authorized for issuance and, when issued and sold by the Company and delivered by the Company and upon valid exercise thereof and against receipt of the exercise price therefor, in accordance with and in the manner described in the Registration Statement, the Underwriting Agreement and the Representative’s Warrants, will be validly issued, fully paid and non-assessable.

 

We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption “Legal Matters” in the Registration Statement. In so doing, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act and the rules and regulations of the Commission promulgated thereunder.

 

Sincerely yours,

 

/s/ Laura E. Anthony  
Laura E. Anthony,  
For the Firm  

 

625 N. FLAGLER DRIVE, SUITE 600 ● WEST PALM BEACH, FLORIDA ● 33401 ● PHONE: 561-514-0936 ● FAX 561-514-0832

 

 

 

 

Exhibit 10.1

 

Memorandum regarding Share Exchange Agreement

 

Dated as of July 15, 2021

 

THIS MEMORANDUM regarding Share Exchange Agreement (this “MEMORANDUM”) is agreed by and among Information Services International-Dentsu Ltd. (the “Investor”), Heartcore Co., Ltd. (the “Company”), Mr. Sumitaka Yamamoto (the “Management Controller”) and Heartcore Enterprises Inc., a company established under the Delaware laws (“HUS”) with respect to the Share Exchange Agreement (the “Agreement”) to be executed by HUS, the Company and certain shareholders of the Company. Unless otherwise specified herein any terminologies and procedures under the Japanese laws shall be interpreted, where context requires, to mean the corresponding terminologies and procedures under the Delaware laws.

 

Article 1 (Purpose)

 

The purpose of this Memorandum is to establish and enhance long-term and stable cooperative relationships with important business partners and to improve the competitiveness and profitability of the Investor, the Company and HUS.

 

Article 2 (Execution of the Agreement)

 

The Investor shall sign or seal the Agreement and the other documents required to complete to the transactions set forth in the Agreement by July 15, 2021 (the “Closing Date”) in accordance with Article 5 and other provisions in this Memorandum. The parties hereto acknowledge that at the closing of the transactions set forth in the Agreement, Investor will transfer to HUS the shares of stock that Investor holds in the Company in exchange for shares of common stock, par value $0.0001 per share, of HUS, which shares of common stock of HUS are referred to as the “Shares”).

 

Article 3 [Intentionally Omitted]

 

Article 4 (Representations and Warranties by Management Controller)

 

4.1 The Management Controller represents and warrants as an important basis for the execution of this Memorandum that the following to be true and correct:

 

  (1) The Management Controller has the necessary power and authority to enter into this Memorandum and the Agreement and perform its obligations, is not violating any agreement to which it is a party, and has undergone necessary procedures and is not violating any condition thereof, and has provided a certificate of seal impression to the Investor prior to the execution of this Memorandum.
     
  (2) The Management Controller has not engaged in any act that conflicts with any applicable laws, ordinances, notices, rules, orders, local codes, guidelines and other regulations, including those of Japan, Delaware and the U.S. (collectively, “Laws”) and the certificate of incorporation or articles of incorporation of HUS and the Company.

 

1
 

 

  (3) There is currently no pending or threatened judicial or other legal proceedings or administrative, tax or other proceedings that would affect the credit status of the Management Controller.
     
  (4) Neither the Management Controller nor any Special Interested Parties of the Management Controller is an anti-social force or their equivalent (hereinafter collectively referred to as “Anti-Social Force”), and neither the Management Controller nor any Special Interested Parties of the Management Controller cooperates in or participates in the maintenance or operation of Anti-Social Force through providing funds to Anti-Social Force, doing acts equivalent thereto, or engaging in business transactions. In this Memorandum, “Special Interested Parties” shall mean Officers (including Officers’ Shareholding Association), their spouses and relatives by blood within the second degree of kinship, companies in which the majority of the number of shares issued are held by such Officers, and related companies and their officers.
     
  (5) The information on the career of the Management Controller disclosed by the Company or the Management Controller to the investor is true and accurate, and are not false or misleading in any material respect.
     
  (6) The Management Controller is the representative director of the Company and CEO of HUS and shall not concurrently serve as an officer or employee of any other company, organization or organization, other than subsidiaries or affiliate of the Company or HUS.

 

4.2. The representations and warranties made by the Management Controller in each item of the preceding paragraphs shall remain in force until the termination of this Memorandum.

 

Article 5 (Preconditions for Execution)

 

The Investor’s execution of the Agreement is subject to the satisfaction of all of the following conditions unless waived by the Investor in writing:

 

  (1) The documents delivered and information provided by HUS, the Company and the Management Controller with respect to the representations and warranties set forth in Article 4 and in connection with the execution of this Memorandum are accurate and sufficient as of the Closing Date (as defined in the Agreement; hereinafter the same).
     
  (2) On or after the execution of this Memorandum and before the Closing Date, there will be no event that would have a significant impact on the operations, financial position, operating results, credit status, etc. of HUS or the Company or the Management Controller.
     
  (3) It is reasonably expected that an amendment to the original memorandum between the Company and the Investor, dated July 25, 2018, that is satisfactory for the Investor will be concluded between the Company and the Investor in writing by July 15, 2021.
     
  (4) HUS and the Company has delivered the following documents to the Investor by the Closing Date.

 

  (i) Copies of the minutes of the Board of Directors and the minutes of the General Meeting of Shareholders of the Company that approved the execution of this Memorandum and any document of HUS that are equivalent to the above
     
  (ii) Appropriate certificates, reports or other documents of HUS, the Company and the Management Controller that are reasonably requested by the Investor.

 

2
 

 

Article 6 [Intentionally Omitted]

 

Article 7 (Compliance)

 

7.1 HUS, the Company and the Management Controller shall undertake to comply with the Laws and the Articles of Incorporation of HUS and the Company.

 

7.2 HUS, the Company and the Management Controller shall respectively undertake that it will have no relationship with the Anti-Social Force in the future.

 

Article 8 [Intentionally Omitted]

 

Article 9 (Prior Notice and notification on Important Matters)

 

9.1 HUS and the Company shall give advance notice to the Investor when the corporate organization that makes such decisions makes a decision on any of the following matters (including corresponding matters under the Delaware law) pertaining to HUS or the Company.

 

  (1) Changes to the certificate of incorporation or articles of incorporation (limited to the creation of class shares, changes in the features of common shares as class shares, establishment of or changes in share units, and other changes that may affect the position of common shareholders)
     
  (2) Dissolution, a petition for commencement of bankruptcy proceedings, civil rehabilitation proceedings or corporate reorganization proceedings filed by HUS, the Company or its directors
     
  (3) Approval of demand for sale of the shares by the Management Controller
     
  (4) Loans, capital investment or other investments
     
  (5) Issuance of new shares, stock options, convertible bonds or debentures
     
  (6) Capital reduction
     
  (7) Acquisition, disposition or cancellation of treasury shares, acquisition, disposition or cancellation of treasury stock acquisition rights, or redemption, purchase, cancellation or acquisition of options or other rights
     
  (8) Stock split or reverse stock split
     
  (9) Merger, company split, share exchange (kabushiki koukan), share transfer (kabushiki iten) or share delivery (kabushiki-koufu)
     
  (10) Transfer, acquisition, suspension or abolition of all or a part of a business, consolidation of branch offices or commencement of new business
     
  (11) Significant business alliances or their dissolution
     
  (12) Approval of transfer of shares of HUS or the Company (including sales by HUS of the Company’s shares)

 

3
 

 

  (13) Acquisition or disposition of shares of any Related Party of HUS or the Company (“Related Party” shall mean the Related Party defined in Article 8, paragraph 17 of the Regulation on Terminology, Forms, and Preparation Methods of Financial Statements; hereafter the same)
     
  (14) Appointment and dismissal of Representative Directors, Directors, Executive Officers, Statutory Auditors, Statutory Accounting Advisors, Managers and other important employees
     
  (15) Any transaction between the Company and its director which requires approval by the board of directors under the Japanese Companies Act and any equivalent transaction between HUS and its director
     
  (16) Execution or change of important contracts or other legally significant juridical acts
     
  (17) Establishment of subsidiaries and affiliates
     
  (14) Change of business plan

 

9.2 [Intentionally omitted]

 

9.3 To the extent not in conflict with the laws of the United States or the State of Delaware or the rules and regulations of any securities exchange or securities market on which HUS’ securities are traded or listed for trading, the Management Controller shall notify the Investor in advance when making a decision on the following matters pertaining to the Management Controller.

 

  (1) A petition for bankruptcy or commencement of civil rehabilitation proceedings filed by the Management Controller himself
     
  (2) Transfer or acquisition of shares of the Company or its Related Parties
     
  (3) Loans, debt guarantees or collateral
     
  (4) The filing of a law suit, settlement or conclusion of a suit not based on a judicial decision by the Management Controller pertaining to a claim on property rights
     
  (5) Conclusion or change of important contracts or other important juridical acts
     
  (6) Offering of the Shares held by the Management Controller upon an IPO (as defined below).

 

Article 10 (Report on Important Matters)

 

10.1 To the extent not in conflict with the laws of the United States or the State of Delaware or the rules and regulations of any securities exchange or securities market on which HUS’ securities are traded or listed for trading, and provided that legal counsel to HUS does not advise HUS that any such notification is inadvisable due to such information being material non-public information or due to such disclosure being a breach of the fiduciary duties of the officers or Directors of HUS, HUS or the Company shall, when it becomes aware of the following matters pertaining to HUS or the Company (including corresponding matters under the Delaware law), and the occurrence of other matters that are important in terms of its operations, financial position, operating results, credit status, etc., immediately report to the Investor a summary of the matters that occurred in writing.

 

  (1) Damage arising from disasters or operations
     
  (2) Filing of a law suit by a third party which may affect its financial condition, or becoming subject to a judgment, or any order or award equivalent thereto which may affect its financial condition.

 

4
 

 

  (3) Petition for an injunction of the business or a provisional disposition order equivalent thereto, or conclusion of legal proceedings not based on an order or a judgement by the court.
     
  (4) Revocation of license, suspension of business or other equivalent dispositions by an administrative agency based on laws and regulations, or accusation by an administrative agency for violation of the Laws
     
  (5) Merger or other reorganization involving HUS, the Company, or any of their Related Parties.
     
  (6) Filing of a petition for commencement of bankruptcy proceedings, commencement of civil rehabilitation proceedings, commencement of corporate reorganization proceedings, commencement of special liquidation or enforcement of the corporate security interest by a third party, suspension of payments or dishonor of bills or checks with regard to the Company or HUS
     
  (7) Commencement of bankruptcy proceedings, commencement of civil rehabilitation proceedings, commencement of corporate reorganization proceedings, commencement of special liquidation or petition for exercise of corporate security interest, suspension of payments or dishonor of bills or checks pertaining to HUS, the Company or any of its Related Parties
     
  (8) Suspension of transactions with material customers, suppliers, distributors, agents, or other business partners
     
  (9) Occurrence of risk of default by an obligor of HUS or the Company, or a principal obligor of a guarantee obligation of which HUS or the Company is a guarantor
     
  (10) Cancellation of debts by creditors, reduction or extension of interest or assumption or repayment of debts by third parties.

 

10.2 To the extent permitted by applicable law, and provided that legal counsel to HUS does not advise HUS that any such notification is inadvisable due to such information being material non-public information or due to such disclosure being a breach of the fiduciary duties of the officers or Directors of HUS, if the Management Controller becomes aware of the occurrence of the following matters pertaining to the Management Controller and other matters that are important in terms of credit status, etc., the Management Controller shall immediately report in writing the summary of the matters that occurred to the investors.

 

  (1) Filing of a law suit by a third party which may affect the financial condition of the Management Controller, or becoming subject to a judgement or any order or award equivalent thereto which may affect the financial condition of the Management Controller.
     
  (2) Petition for commencement of bankruptcy or civil rehabilitation proceedings, suspension of payment or dishonor of bill or check by a third party.

 

Article 11 [Intentionally omitted]

 

5
 

 

Article 12 (Purchase of Shares by Management Controller)

 

12.1 In any of the following cases, the Investor shall have the right to demand that Management Controller purchase all or part of the Shares (including any other option rights to acquire the Shares) held by the Investor pursuant to the provisions of this Article. Provided, however, that Management Controller may, with the prior written consent of such Investor, perform the purchase obligations set forth in this Article by arranging for a third party to purchase the Shares.

 

  (1) HUS, the Company or the Management Controller breaches any of its obligations under this Memorandum and the breaching Party fails to remedy such breach within thirty (30) days after receipt of notice from the Investor seeking to remedy such breach.
     
  (2) If the representations and warranties under Article 4 are not true or accurate.
     
  (3) Cases where it is subsequently found that the preconditions for the execution under Article 5 have not been satisfied.

 

12.2 In the case where the Investor transfers the Shares to the Management Controller and / or a third party pursuant to Article 12.1, the per share transfer price for the Shares shall be the purchase price paid by the Investor for the acquisition of shares of the Company, subject to appropriate adjustments for stock splits, stock consolidations, and similar events involving the Shares. For the avoidance of doubt, the aggregate purchase price paid by the Investor for the acquisition of shares of the Company was 50,040,000 yen for 278 shares of the Company (180,000 yen per share).

 

12.3. In the event that a request is made by Investor pursuant to Article 12.1, without requiring any further acceptance, Management Controller who received the request and / or the third party designated by the Management Controller pursuant to Article 12.1 (hereinafter referred to as the “Purchaser” in this Article 12.3 through Article 12.6) shall be deemed to have accepted the request, and shall be obligated to purchase, in accordance with the provisions of this Article 12, the requested number of Shares from the Investor. The Purchaser shall pay to the Investor the full price of the Shares pursuant to the Article 12.1 immediately after the request pursuant to Article 12.1 has been made, and the following provisions shall apply after such payment.

 

  (1) In the event that the delivery of a certificate is required under the Laws for the transfer of the Shares, the Investor shall deliver to the Purchaser the certificate representing the Shares promptly after the receipt of the transfer price in full. The Purchaser shall promptly complete procedures required for the transfer of the Shares, including changing the name registered with the register of shareholders and other registers relating to the Shares.
     
  (2) In the event that the delivery of a certificate is not required under the Laws for the transfer of the Shares, the transfer of the rights in and to the Shares shall become effective upon the completion of the payment of the full amount of the transfer price, and the Investor shall cooperate with the procedures required for the transfer of the Shares, including changing the name registered with the register of shareholders or other registers related to the Shares upon the request of the Purchaser.
     
  (3) Even in cases where approval for transfer of the Shares is required, the presence or absence of such approval shall not affect the obligations set forth in the preceding paragraph of the Purchaser to the Investor. Any request for approval of transfer to HUS or the Company and any other procedures relating to such approval of transfer shall be executed by the Purchaser at its own expense and responsibility.

 

6
 

 

  (4) Prior to the completion of payment of the transfer price in full by the Purchaser pursuant to Article 12.3, the Investor may withdraw the demand under Article 12.1 by giving notice to the Management Controller, and if the Investor expresses its intention to withdraw, the purchase of the Shares set forth in Article 12.3 shall be cancelled without prejudice without the consent of the Purchaser. The Investor may make the demand pursuant to Article 12.1 again after such withdrawal.

 

12.4 In the event any withholding tax is imposed upon the transfer price of the Shares pursuant to this Article, the amount equivalent to such withholding tax shall be borne by the Purchaser and the Purchaser shall pay to the Investor the entire amount of the transfer amount set forth in Article 12.2 so that the amount the Investor receives after withholding shall be the transfer price set forth in Article 12. 2.

 

12.5 HUS shall carry out the procedures necessary for the transfer of the Shares under this Article, and the Management Controller shall cooperate fully with such procedures of HUS.

 

Article 13 (Business Report Meeting)

 

HUS and the Company shall hold regular business briefings at least once a quarter (briefings by HUS and the Company can be held at the same time), and shall provide the Investor with reports on the business execution of HUS and the Company and monthly trial balances of HUS and the Company (including balance sheets, profit and loss statements, and cash flow statements).

 

Article 14 [Intentionally omitted]

 

Article 15 (Transfer of the Shares, etc. by Management Controller)

 

The Management Controller shall not transfer, pledge or otherwise dispose of the shares of HUS held by the Management Controller to third parties including HUS without following the procedures provided for in Article 16.

 

Article 16 (Tag Along)

 

16.1 If the Management Controller wishes to transfer all or part of the shares of HUS held by the Management Controller (hereinafter referred to as the “Shares Subject to Transfer” in this Article) to a third party (hereinafter referred to as the “Other Party” in this Article), the Management Controller shall notify the Investor in writing containing all of the matters set forth in each of the following items (hereinafter referred to as the “Explanation of the Transfer Conditions” in this Article), at least forty (40) business days prior to the scheduled date of payment of the transfer price of such shares, after sufficient prior consultation with the Investor:

 

  (i) the Shares Subject to Transfer are scheduled to be transferred, and the Other Party has a genuine intent to purchase the Shares Subject to Transfer;
     
  (ii) the total number of Shares Subject to Transfer to be transferred;
     
  (iii) the transfer price per share;
     
  (iv) the name and address of the Other Party;
     
  (v) the scheduled payment date and method; and
     
  (vi) other material terms for the transfer.

 

7
 

 

16.2 In the case referred to in Article 16.1, the Investor may request the Management Controller that the Investor will participate in the transfer under the same terms and conditions as those stated in the Explanation of the Transfer Conditions and to transfer all of the Shares held by the Investor to the Other Party to the transfer (hereinafter referred to as the “Request for Participation in Transfer”). The Investor making a Request for Participation in Transfer shall submit a notice (hereinafter referred to as the “Notice of Desire to Co-Sell”) within thirty (30) days after receipt of the notice set forth in Article 16.1 to the Management Controller, stating that the Investor wishes to transfer the Shares to the Other Party.

 

16.3 The Management Controller shall not consummate such transfer until the period set forth in Article 16.2 has elapsed. In addition, if the Request for Transfer in Participation is made, the Management Controller shall promptly negotiate with the Other Party and take all necessary measures to transfer the Shares that the Investor desires to transfer in accordance with the Request for Participation in Transfer. If the Investor delivers a Notice of Desire to Co-Sell, the Management Controller shall not sell any Shares Subject to Transfer until a sale and purchase agreement is executed between the Investor and the Other Party under terms and conditions not less favorable than those stated in the Explanation of the Transfer Conditions.

 

16.4 HUS and the Management Controller shall promptly obtain the approval of the Board of Directors, the General Meeting of Shareholders or any other decision making body for the transfer of shares under this Article 16, if necessary, and shall take necessary measures relating to such transfer, including the entry of items to be entered in the register of shareholders, and the Investor shall provide reasonably necessary cooperation.

 

16.5 This Article 16 shall not apply to the offering of the shares of HUS made in the course of the contemplated IPO.

 

Article 17 (Damages, etc.)

 

17.1 HUS, the Company and the Management Controller shall be jointly and severally liable for any damages incurred by the Investor as a result of a breach of their obligations under this Memorandum (including breach of representations and warranties under Article 4). The damages in this paragraph shall include damages, losses and expenses (including reasonable attorneys’ fees).

 

172 Any information learned by the Investor through due diligence or other means undertaken in connection with the execution and performance of this Memorandum shall have no effect on the validity, effectiveness, etc. of any representations and warranties made hereunder and any compensation or remedy therefor.

 

17.3 The Management Controller shall not exercise any right to reimbursement against HUS and the Company acquired by the Management Controller as a result of the performance of his joint and several liability under this Article without the prior written consent of the Investor while the Investor is a shareholder of HUS.

 

8
 

 

Article 18 (Voluntary Resignation and Expiration of Term of Directors)

 

In the event that the Management Controller voluntary resigns from the Representative Director of HUS or the Company or its term of office expires, HUS or the Company shall immediately add another person who shall be concurrently responsible for the obligations incurred by the Management Controller in connection with this Memorandum upon approval of the Investor.

 

Article 19 (Confidentiality Obligation)

 

19.1 Other than in connection with the IPO or as required by applicable law, the parties hereto shall not divulge the contents of this Memorandum to any third party except with the consent of all other parties.

 

19.2. The Investor shall not divulge to any third party, without the consent of HUS or the Company, any information HUS or the Company provided to the Investor as confidential in writing (hereinafter referred to as “Confidential Information”) under this Memorandum. However, the following information shall not be Confidential Information.

 

  (1) Information known or publicly available at the time of disclosure by HUS or the Company.
     
  (2) Information already held by Investor at the time of disclosure by HUS or the Company.
     
  (3) Information disclosed after disclosure by HUS or the Company or information that has become publicly known without being attributable to the Investor.
     
  (4) Information appropriately obtained from a third party with legitimate authority.
     
  (5) Information required to be disclosed by public institutions, etc. pursuant to the Laws.

 

19.3 Notwithstanding the preceding paragraph, the Investor may disclose the Confidential Information only to the officers and employees of the Investor, attorneys, certified public accountants and tax accountants of the Investor, the Specified Related Parties (as defined in the Financial Instruments and Exchange Act of Japan and other related laws and regulations, etc.) of the Investor, and the intended recipient or transferee of the Shares held by the Investor, and shall have such recipients of Confidential Information comply with the obligations equivalent to this Article 19.

 

19.4 The confidentiality obligations set forth in Article 19.1 through Article 19.3 above shall remain in force for a period of one (1) year from the termination of this Memorandum in the event of termination pursuant to Article 22, Paragraph 1, Item 1, item 3 or item 4 and shall expire upon such termination in the event of termination pursuant to Paragraph1, Item 2.

 

19.5 The provisions in this Article do not apply to disclosures to the lead managing underwriter of HUS in connection with the IPO (as defined below).

 

Article 20 (Publication)

 

With respect to any public announcement regarding this Memorandum, the nature of the announcement, the timing of the announcement and the method of the announcement shall be made as agreed upon through consultation between the parties hereto. Provided, however, that this shall not apply to cases where publication is obligatory based on applicable laws and regulations, etc. or the rules of a stock exchange.

 

9
 

 

Article 21. (Assignment of Contract)

 

The parties hereto shall not assign or transfer to any third party any and all rights and obligations of the parties hereto arising under or in connection with their positions hereunder.

 

Article 22. (Termination)

 

22.1 This Memorandum shall terminate:

 

  (1) if the parties hereto unanimously agree to terminate this Memorandum;
     
  (2) if the Investor ceases to be a shareholder of HUS;
     
  (3) if an application by HUS to NASDAQ Capital Market for the listing of its shares is approved by NASDAQ; or
     
  (4) upon the effectiveness of a registration statement filed by HUS under the Securities Act of 1933, as amended, for an initial public offering of its stock (the “IPO”).

 

22.2. Termination of this Memorandum shall be effective only for the future and, except as otherwise provided herein, any rights and obligations arising under this Memorandum prior to such termination shall not be affected by such termination.

 

22.3 The Investor, the Company and the Management Controller confirms that (i) the Investment Agreement dated July 25, 2018, entered into among the Investor, the Company and the Management Controller (the “Investment Agreement”), shall terminate among the Investor, the Company and the Management Controller upon the Investor’s acquisition of the Shares pursuant to the Agreement, and (ii) the Investment Agreement shall only henceforth terminate and the rights and the obligations which arose pursuant to the Investment Agreement before the termination shall not be affected by the termination, unless otherwise specified in the Investment Agreement.

 

Article 23 (Burden of Costs)

 

23.1 Except for taxes on the income of Investor, HUS shall bear and pay all stamp taxes and other taxes and public charges payable in connection with the execution of this Memorandum.

 

23.2 Except as otherwise provided in the preceding paragraph and elsewhere in this Memorandum, the parties hereto shall each bear all costs and expenses incurred by them in connection with the negotiation, execution, execution and performance of their obligations under this Memorandum. Provided, however, that this shall not apply to expenses incurred in seeking compensation for default or damage caused by a breach of this Memorandum.

 

Article 24 (Governing Law)

 

This Memorandum and all rights and obligations of the parties hereto arising under or in connection with this Memorandum shall be governed by and construed in accordance with the laws of Japan.

 

Article 25 (Arbitration)

 

Any dispute, controversy or claim arising from or in connection with this Memorandum shall be finally settled under the Commercial Arbitration Rules of the Japan Commercial Arbitration Association. The place of arbitration shall be Tokyo, Japan.

 

Article 26 (Sincere Consultation)

 

Matters not stipulated in this Memorandum shall be amicably resolved through mutual consultation between the parties in good faith.

 

Article 27

 

27.1 This Memorandum shall be prepared by counterparts and all the counterparts shall be deemed to constitute one original.

 

27.2 PDF version of the original signed page and sending the same by electronic means shall be deemed as exchange of original signed page.

 

[Signatures appear on following page]

 

10
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in two (2) copies and have hereunto affixed their names and seals, each party retaining one (1) copy.

 

Information Services International-Dentsu Ltd.  
     
By: /s/ Shinichi Ogane  
Name: Shinichi Ogane  
Title: Senior Managing Director  
     
Heartcore Co., Ltd.  
     
By: /s/ Sumitaka Yamamoto  
Name: Sumitaka Yamamoto  
Title: CEO and President  
     
Mr. Sumitaka Yamamoto  
     
By: /s/ Sumitaka Yamamoto  
Name: Sumitaka Yamamoto  
     
Heartcore Enterprises Inc.  
     
By: /s/ Sumitaka Yamamoto  
Name: Sumitaka Yamamoto  
Title: Chief Executive Officer  

 

11

 

 

 

Exhibit 10.2

 

 

 

Share Exchange Agreement

 

by and among

 

HeartCore Enterprises, Inc.;

 

All of the Shareholders of Heartcore Inc.;

 

And

 

Sumitaka Yamamoto as the Shareholders’ Representative.

 

 

 

 
 

 

TABLE OF CONTENTS

 

        PAGE
         
Article I.   DEFINITIONS 1
  Section 1.01   Definitions. 1
  Section 1.02   Interpretive Provisions. 4
         
Article II.   SHARE EXCHANGE 4
  Section 2.01   The Exchange. 4
  Section 2.02   Closing. 4
  Section 2.03   Issuance. 5
  Section 2.04   HeartCore Shareholders’ Deliverables at the Closing. 5
  Section 2.05   Company Actions at the Closing. 5
  Section 2.06   Tax Consequences. 5
  Section 2.07   Additional Documents. 5
         
Article III.   REPRESENTATIONS AND WARRANTIES OF THE HEARTCORE SHAREHOLDERS 5
  Section 3.01   Existence and Power. 5
  Section 3.02   Due Authorization. 6
  Section 3.03   Valid Obligation 6
  Section 3.04   Governmental Authorization. 6
  Section 3.05   Title to HeartCore Shares. 6
  Section 3.06   No Conflict With Other Instruments 6
  Section 3.07   Investment Representations 6
         
Article IV.   REPRESENTATIONS AND WARRANTIES OF THE COMPANY 9
  Section 4.01   Corporate Existence and Power 9
  Section 4.02   Due Authorization. 9
  Section 4.03   Valid Obligation 9
  Section 4.04   Governmental Authorization. 9
  Section 4.05   No Conflict With Other Instruments 9
  Section 4.06   Approval of Agreement 9
         
Article V.   INDEMNIFICATION 9
  Section 5.01   Indemnification of Company. 9
  Section 5.02   Indemnification of the HeartCore Shareholders. 10
  Section 5.03   Procedure. 10
  Section 5.04   Periodic Payments. 11
  Section 5.05   Insurance. 12
  Section 5.06   Limitations. 12
  Section 5.07   Exclusive Remedy. 12
         
Article VI.   MISCELLANEOUS 13
  Section 6.01   Governing Law 13
  Section 6.02   Waiver of Jury Trial. 13
  Section 6.03   Limitation on Damages. 13
  Section 6.04   Brokers 13
  Section 6.05   Notices 14
  Section 6.06   Attorneys’ Fees 14
  Section 6.07   Confidentiality 14

 

i
 

 

  Section 6.08   Third Party Beneficiaries 14
  Section 6.09   Expenses 15
  Section 6.10   Entire Agreement 15
  Section 6.11   Survival 15
  Section 6.12   Amendment; Waiver 15
  Section 6.13   HeartCore Shareholders’ Representative. 16
  Section 6.14   Arm’s Length Bargaining; No Presumption Against Drafter. 16
  Section 6.15   Headings. 16
  Section 6.16   No Assignment or Delegation. 16
  Section 6.17   Commercially Reasonable Efforts 17
  Section 6.18   Further Assurances. 17
  Section 6.19   Specific Performance. 17
  Section 6.20   Counsel. 17
  Section 6.21   Counterparts 17

 

Exhibit A HeartCore Shareholders’ HeartCore Shares and Shares of Company Stock to be Issued

 

ii
 

 

SHARE EXCHANGE AGREEMENT

 

Dated as of July 16, 2021

 

This Share Exchange Agreement (this “Agreement”) is entered into as of the date first set forth above (the “Closing Date”) by and between (i) HeartCore Enterprises, Inc., a Delaware corporation (the “Company”); (ii) the shareholders of HeartCore Inc., a Japanese corporation (“HeartCore”) as set forth on the signature pages hereto (the “HeartCore Shareholders”) and (ii) Sumitaka Yamamoto as the representative of the HeartCore Shareholders (the “Shareholders’ Representative”). Each of the Company, each HeartCore Shareholder and the Shareholders’ Representative may be referred to herein collectively as the “Parties” and separately as a “Party.”

 

WHEREAS, the Company agrees to acquire from the HeartCore Shareholders all of the shares of stock of HeartCore held by the HeartCore Shareholders in exchange for the issuance by the Company to HeartCore Shareholders of shares of the Company’s common stock, par value $0.0001 per share (the “Company Common Stock”); and

 

NOW THEREFORE, on the stated premises and for and in consideration of the mutual covenants and agreements hereinafter set forth and the mutual benefits to the Parties to be derived herefrom, and intending to be legally bound hereby, it is hereby agreed as follows:

 

Article I. DEFINITIONS

 

Section 1.01 Definitions. The following terms, as used herein, have the following meanings

 

  (a) “Action” means any legal action, suit, claim, investigation, hearing or proceeding, including any audit, claim or assessment for Taxes or otherwise.
     
  (b) “Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by, or under common Control with such Person.
     
  (c) “Agreement” has the meaning set forth in the introductory paragraph hereto.
     
  (d) “Authority” means any governmental, regulatory or administrative body, agency or authority, any court or judicial authority, any arbitrator, or any public, private or industry regulatory authority, whether international, national, Federal, state, or local.
     
  (e) “Business Day” means any day that is not a Saturday, Sunday or other day on which banking institutions in Delaware are authorized or required by law or executive order to close.
     
  (f) “Certificate” means the Certificate of Incorporation of the Company as in effect from time to time.
     
  (g) “Closing Date” has the meaning set forth in the introductory paragraph hereto.
     
  (h) “Closing” has the meaning set forth in Section 2.02.
     
  (i) “Companies Act” means the Japanese Companies Act.

 

 1

 

 

  (j) “Company Common Stock” has the meaning set forth in the recitals hereto.
     
  (k) “Company Indemnified Party” has the meaning set forth in Section 5.01.
     
  (l) “Company Organizational Documents” means the Certificate and the Bylaws of the Company.
     
  (m) “Company” has the meaning set forth in the introductory paragraph hereto.
     
  (n) “Control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. “Controlled”, “Controlling” and “under common Control with” have correlative meanings. Without limiting the foregoing a Person (the “Controlled Person”) shall be deemed Controlled by (a) any other Person (the “10% Owner”) (i) owning beneficially, as meant in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, securities entitling such Person to cast 10% or more of the votes for election of directors or equivalent governing authority of the Controlled Person or (ii) entitled to be allocated or receive 10% or more of the profits, losses, or distributions of the Controlled Person; (b) an officer, director, general partner, partner (other than a limited partner), manager, or member (other than a member having no management authority that is not a 10% Owner ) of the Controlled Person; or (c) a spouse, parent, lineal descendant, sibling, aunt, uncle, niece, nephew, mother-in-law, father-in-law, sister-in-law, or brother-in-law of an Affiliate of the Controlled Person or a trust for the benefit of an Affiliate of the Controlled Person or of which an Affiliate of the Controlled Person is a trustee.
     
  (o) “Counsel” has the meaning set forth in Section 6.20.
     
  (p) “Direct Claim” has the meaning set forth in Section 5.03(c).
     
  (q) “Exchange Shares” has the meaning set forth in Section 2.03.
     
  (r) “Exchange” has the meaning set forth in Section 2.01(b).
     
  (s) “HeartCore Indemnified Party” has the meaning set forth in Section 5.02.
     
  (t) “HeartCore Shareholders” has the meaning set forth in the introductory paragraph hereto.
     
  (u) “HeartCore Shares” has the meaning set forth in Section 2.01(a).
     
  (v) “HeartCore” has the meaning set forth in the introductory paragraph hereto.
     
  (w) “Indemnified Party” has the meaning set forth Section 5.03.
     
  (x) “Indemnifying Party” has the meaning set forth Section 5.03.
     
  (y) “Law” means any domestic or foreign, federal, state, municipality or local law, statute, ordinance, code, rule, or regulation.
     
  (z) “Lien” means any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, and any conditional sale or voting agreement or proxy, including any agreement to give any of the foregoing.

 

 2

 

 

  (aa) “Losses” and “Loss” has the meaning set forth in Section 5.01.
     
  (bb) “Non-U.S. Person” has the meaning set forth in Section 3.07(b).
     
  (cc) “Order” means any decree, order, judgment, writ, award, injunction, rule, injunction, stay, decree, judgment or restraining order or consent of or by an Authority.
     
  (dd) “Party” and “Parties” have the meanings set forth in the introductory paragraph hereto.
     
  (ee) “Person” means an individual, corporation, partnership (including a general partnership, limited partnership or limited liability partnership), limited liability company, association, trust or other entity or organization, including a government, domestic or foreign, or political subdivision thereof, or an agency or instrumentality thereof.
     
  (ff) “Regulation S” has the meaning set forth in Section 3.07(f).
     
  (gg) “Rule 144” has the meaning set forth in Section 3.07(f).
     
  (hh) “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
     
  (ii) “Shareholders’ Representative” has the meaning set forth in the introductory paragraph hereto.
     
  (jj) “Tax(es)” means any federal, state, local or foreign tax, charge, fee, levy, custom, duty, deficiency, or other assessment of any kind or nature imposed by any Taxing Authority (including any income (net or gross), gross receipts, profits, windfall profit, sales, use, goods and services, ad valorem, franchise, license, withholding, employment, social security, workers compensation, unemployment compensation, employment, payroll, transfer, excise, import, real property, personal property, intangible property, occupancy, recording, minimum, alternative minimum, environmental or estimated tax), including any liability therefor as a transferee (including under Section 6901 of the Code or similar provision of applicable Law) or successor, as a result of Treasury Regulation Section 1.1502-6 or similar provision of applicable Law or as a result of any Tax sharing, indemnification or similar agreement, together with any interest, penalty, additions to tax or additional amount imposed with respect thereto.
     
  (kk) “Taxing Authority” means the Internal Revenue Service and any other Authority responsible for the collection, assessment or imposition of any Tax or the administration of any Law relating to any Tax.
     
  (ll) “Third-Party Claim” has the meaning set forth in Section 5.03(a).
     
  (mm) “Transaction Documents” means this Agreement and any other document entered into in connection with the transactions contemplated herein.
     
  (nn) “Transactions” means the transactions contemplated by the Transaction Documents.

 

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Section 1.02 Interpretive Provisions. Unless otherwise indicated (i) all references herein to Articles, Sections, Annexes, Exhibits or Schedules, shall be deemed to refer to Articles, Sections, Annexes, Exhibits or Schedules of or to this Agreement, as applicable; (ii) the words “include,” “includes” and “including,” when used herein, shall be deemed, in each case, to be followed by the words “without limitation”; (iii) the headings set forth in this Agreement are for convenience of reference purposes only and shall not affect or be deemed to affect in any way the meaning or interpretation of this Agreement or any term or provision hereof, (iv) all references herein to the Subsidiaries of a Person shall be deemed to include all direct and indirect Subsidiaries of such Person; (v) whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa; (vi) any dollar or percentage thresholds set forth herein shall not be used as a benchmark for the determination of what is or is not “material” or a “Company Material Adverse Effect” under this Agreement; (vii) the word “extent” and the phrase “to the extent” shall mean the degree to which a subject or other thing extends, and such word or phrase shall not simply mean “if”; (viii) all references in this Agreement to dollar amounts and to “$” are intended to refer to U.S. dollars; (ix) any reference to a law or statute shall include such law or statute, as amended (including by succession of comparable successor statutes), and the rules and regulations promulgated thereunder, or any successor statute, rules or regulations thereto, unless the context requires otherwise; (x) the words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; (xi) unless otherwise expressly provided, wherever the consent of any Person is required or permitted herein, such consent may be withheld in such Person’s sole and absolute discretion; (xii) unless the context otherwise requires “or” is disjunctive but not necessarily exclusive; (xiii) references to any Person include the successors and permitted assigns of that Person; (xiv) references from or through any date mean, unless otherwise specified, from and including or through and including, respectively; and (xv) if any action under this Agreement is required to be done or taken on a day that is not a Business Day, then such action shall be required to be done or taken not on such day but on the first succeeding Business Day thereafter.

 

Article II. SHARE EXCHANGE

 

Section 2.01 The Exchange.

 

  (a) On the terms and subject to the conditions set forth in this Agreement, the HeartCore Shareholders, who hold an aggregate of 10,706 shares of HeartCore’s shares as authorized in the Articles of HeartCore (the “HeartCore Shares”) representing approximately 97.47% of HeartCore’s issued and outstanding capital stock of HeartCore, shall sell, assign, transfer and deliver to the Company, free and clear of all liens, pledges, encumbrances, charges, restrictions or known claims of any kind, nature, or description, all of the HeartCore Shares held by them, as set forth herein. The number of HeartCore Shares held by each of the HeartCore Shareholders as of the Closing Date is as set forth in on Exhibit A attached hereto, in the column entitled “HeartCore Shares Owned”.
     
  (b) The exchange as set forth in this Article II, subject to the other terms and conditions herein, is referred to collectively herein as the “Exchange.”

 

Section 2.02 Closing. The closing of the transactions as set forth herein shall occur on the Closing Date, immediately following the execution of this Agreement. On the Closing Date the Company shall acquire from each HeartCore Shareholder the number of HeartCore Shares owned by each such HeartCore Shareholder as set forth on Exhibit A in accordance with the provisions herein (the “Closing”). At the Closing the HeartCore Shareholders shall, on transfer of their respective HeartCore Shares to the Company, be recorded in the stock ledger of the Company as the owners of the applicable portion of the total Exchange Shares (as defined below).

 

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Section 2.03 Issuance. In exchange for the HeartCore Shares, the Company shall issue to the HeartCore Shareholders a total of 15,999,994 shares of Company Common Stock, to be apportioned between the HeartCore Shareholders as set forth on Exhibit A in the column entitled “Shares of Company Stock to be Issued”. The shares of Company Common Stock to be issued to the HeartCore Shareholders at the Closing are referred to as the “Exchange Shares”.

 

Section 2.04 HeartCore Shareholders’ Deliverables at the Closing. At the Closing, each of the HeartCore Shareholders shall deliver to the Company stock powers or such other instruments of transfer duly executed in blank and with all required stock transfer stamps affixed, in form and substance satisfactory to the Company as required for the ownership of the HeartCore Shares to be transferred to the Company, free and clear of all Liens, with all necessary transfer Tax and other revenue stamps, acquired at the applicable HeartCore Shareholder’s expense, affixed, and together with such other documents and instruments as required pursuant to the Companies Act to vest ownership of the HeartCore Shares in the Company.

 

Section 2.05 Company Actions at the Closing. At the Closing, the Company shall record each HeartCore Shareholder as the owner of the applicable portion of the Exchange Shares delivered at the Closing, in accordance with Section 2.03, in the books and records of the Company (with the Parties acknowledging that the Exchange Shares shall not be certificated).

 

Section 2.06 Tax Consequences. For U.S. federal income tax purposes, the Exchange is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code and the Treasury Regulations promulgated thereunder. For the avoidance of doubt, the Parties intent to treat this Exchange as a “Type-B” reorganization under Section 368(a)(1)(B) of the Code. The Parties adopt this Agreement as a “plan of reorganization” within the meaning of Treasury Regulations Sections 1.368-2(g) and 1.368-3(a).

 

Section 2.07 Additional Documents. At and following the Closing, the Company, the Shareholders’ Representative and the HeartCore Shareholders shall execute, acknowledge, and deliver (or shall ensure to be executed, acknowledged, and delivered), any and all certificates, opinions, financial statements, schedules, agreements, resolutions, rulings or other instruments required by this Agreement to be so delivered at or prior to the Closing, together with such other items as may be reasonably requested by the Parties and their respective legal counsel in order to effectuate or evidence the transactions contemplated hereby.

 

Article III. REPRESENTATIONS AND WARRANTIES OF THE HEARTCORE SHAREHOLDERS

 

As an inducement to, and to obtain the reliance of the Company, each HeartCore Shareholder, severally and not jointly and severally, and solely with respect to the HeartCore Shares held by such HeartCore Shareholder and with respect to the Exchange Shares to be received in connection therewith) represents and warrants to the Company, as of the Closing Date, as follows:

 

Section 3.01 Existence and Power. Such HeartCore Shareholder is a natural person or is an entity duly organized, validly existing, and in good standing under the Laws of the jurisdiction of organization and has the corporate power and is duly authorized under all applicable Laws, regulations, ordinances, and orders of public authorities to carry on its business in all material respects as it is now being conducted.

 

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Section 3.02 Due Authorization. If such HeartCore Shareholder is an entity, the execution, delivery and performance of this Agreement by such HeartCore Shareholder does not, and the consummation of the transactions contemplated hereby will not, violate any provision of its organizational documents. Such HeartCore Shareholder has taken all actions required by Law, its organizational documents, if applicable, or otherwise to authorize the execution, delivery and performance of this Agreement and to consummate the transactions herein contemplated.

 

Section 3.03 Valid Obligation. This Agreement and all agreements and other documents executed by such HeartCore Shareholder in connection herewith constitute the valid and binding obligations of such HeartCore Shareholder, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar Laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.

 

Section 3.04 Governmental Authorization. Neither the execution, delivery nor performance of this Agreement by such HeartCore Shareholder requires any consent, approval, license or other action by or in respect of, or registration, declaration or filing with any Authority.

 

Section 3.05 Title to HeartCore Shares. Such HeartCore Shareholder is the record and beneficial owner and holder of the HeartCore Shares as set forth in Exhibit A, free and clear of all Liens and none of such HeartCore Shares is subject to pre-emptive or similar rights, either pursuant to any requirement of Law or any contract, and no Person has any pre-emptive rights or similar rights to purchase or receive any such HeartCore Shares or other interests in HeartCore from such HeartCore Shareholder.

 

Section 3.06 No Conflict With Other Instruments. The execution of this Agreement and the consummation of the transactions contemplated by this Agreement by such HeartCore Shareholder will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which such HeartCore Shareholder is a party or to which any of its assets, properties or operations are subject.

 

Section 3.07 Investment Representations. For purposes of this Section 3.07, any reference to the “Exchange Shares” shall be deemed solely to be a reference to the portion of the Exchange Shares being delivered to such applicable HeartCore Shareholder.

 

  (a) Investment Purpose. Such HeartCore Shareholder understands and agrees that the consummation of this Agreement including the delivery of the Exchange Shares to such HeartCore Shareholder in exchange for the HeartCore Shares held by such HeartCore Shareholder as contemplated hereby, constitutes the offer and sale of securities under the Securities Act and applicable state statutes and that the Exchange Shares being acquired by such HeartCore Shareholder are being acquired by such HeartCore Shareholder for such HeartCore Shareholder’s own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the Securities Act.

 

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  (b) Investor Status. Such HeartCore Shareholder is a Non-U.S. Person. A “Non-U.S. Person” means any person who is not (1) any natural person resident in the United States (as defined below); (2) any partnership or corporation organized or incorporated under the laws of the United States; (3) any estate of which any executor or administrator is a United States person; (4) any trust of which any trustee is a United States person; (5) any agency or branch of a foreign entity located in the United States; (6) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a United States person; (7) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident of the United States; or (8) any partnership or corporation if (1) organized or incorporated under the laws of any foreign jurisdiction and (2) formed by a United States person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501 under Regulation D pursuant to the Securities Act) who are not natural persons, estates or trusts.
     
  (c) Reliance on Exemptions. Such HeartCore Shareholder understands that the Exchange Shares are being offered and sold to such HeartCore Shareholder in reliance upon specific exemptions from the registration requirements of United States federal and state securities Laws and that the Company is relying upon the truth and accuracy of, and such HeartCore Shareholder’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such HeartCore Shareholder set forth herein in order to determine the availability of such exemptions and the eligibility of such HeartCore Shareholder to acquire the Exchange Shares.
     
  (d) Information. Such HeartCore Shareholder and such HeartCore Shareholder’s advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Exchange Shares which have been requested by such HeartCore Shareholder or Such HeartCore Shareholder’s advisors. Such HeartCore Shareholder and Such HeartCore Shareholder’s advisors, if any, have been afforded the opportunity to ask questions of the Company. Such HeartCore Shareholder understands that Such HeartCore Shareholder’s investment in the Exchange Shares involves a significant degree of risk. Such HeartCore Shareholder is not aware of any facts that may constitute a breach of any of the Company’s representations and warranties made herein.
     
  (e) Governmental Review. Such HeartCore Shareholder understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Exchange Shares.

 

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  (f) Transfer or Resale. Such HeartCore Shareholder understands that (i) the sale or re-sale of the Exchange Shares has not been and is not being registered under the Securities Act or any applicable state securities Laws, and the Exchange Shares may not be transferred unless (a) the Exchange Shares are sold pursuant to an effective registration statement under the Securities Act, (b) such HeartCore Shareholder shall have delivered to the Company, at the cost of such HeartCore Shareholder, an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in comparable transactions to the effect that the Exchange Shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, which opinion shall be accepted by the Company, (c) the Exchange Shares are sold or transferred to an “affiliate” (as defined in Rule 144 promulgated under the Securities Act (or a successor rule) (“Rule 144”)) of such HeartCore Shareholder who agree to sell or otherwise transfer the Exchange Shares only in accordance with this Section 3.07 and who is an accredited investor (as defined in Rule 501 under Regulation D pursuant to the Securities Act), (d) the Exchange Shares are sold pursuant to Rule 144, or (e) the Exchange Shares are sold pursuant to Regulation S under the Securities Act (or a successor rule) (“Regulation S”), and such HeartCore Shareholder shall have delivered to the Company, at the cost of such HeartCore Shareholder, an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in corporate transactions, which opinion shall be accepted by the Company; (ii) any sale of such Exchange Shares made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any re-sale of such Exchange Shares under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the United States Securities and Exchange Commission thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Exchange Shares under the Securities Act or any state securities Laws or to comply with the terms and conditions of any exemption thereunder (in each case). Notwithstanding the foregoing or anything else contained herein to the contrary, the Exchange Shares may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.
     
  (g) Legends. Such HeartCore Shareholder understands that the Exchange Shares, until such time as the Exchange Shares have been registered under the Securities Act, or may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Exchange Shares may bear a standard Rule 144 legend and a stop-transfer order may be placed against transfer of the certificates for such Exchange Shares.
     
  (h) Removal. The legend(s) referenced in Section 3.07(g) shall be removed and the Company shall issue a certificate without such legend to the holder of any Exchange Shares upon which it is stamped, if, unless otherwise required by applicable state securities Laws, (a) the Exchange Shares are registered for sale under an effective registration statement filed under the Securities Act or otherwise may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Exchange Shares may be made without registration under the Securities Act, which opinion shall be accepted by the Company so that the sale or transfer is effected. Such HeartCore Shareholder agrees to sell all Exchange Shares, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any.

 

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Article IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

As an inducement to, and to obtain the reliance of the HeartCore Shareholders, the Company represents and warrants to the HeartCore Shareholders, as of the Closing Date, as follows:

 

Section 4.01 Corporate Existence and Power. The Company is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Delaware and has the corporate power and is duly authorized under all applicable Laws, regulations, ordinances, and orders of public authorities to carry on its business in all material respects as it is now being conducted. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, violate any provision of the Company Organizational Documents. The Company has taken all action required by Law, the Company Organizational Documents, or otherwise to authorize the execution and delivery of this Agreement, and the Company has full power, authority, and legal right and has taken all action required by Law, the Company Organizational Documents or otherwise to consummate the transactions herein contemplated.

 

Section 4.02 Due Authorization.The execution, delivery and performance of this Agreement does not, and the consummation of the transactions contemplated hereby will not, violate any provision of the Company Organizational Documents. The Company has taken all actions required by Law, the Company Organizational Documents or otherwise to authorize the execution, delivery and performance of this Agreement and to consummate the transactions herein contemplated.

 

Section 4.03 Valid Obligation. This Agreement and all agreements and other documents executed by the Company in connection herewith constitute the valid and binding obligations of the Company, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar Laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.

 

Section 4.04 Governmental Authorization. Neither the execution, delivery nor performance of this Agreement by the Company requires any consent, approval, license or other action by or in respect of, or registration, declaration or filing with any Authority.

 

Section 4.05 No Conflict With Other Instruments. The execution of this Agreement and the consummation of the transactions contemplated by this Agreement will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or to which any of its assets, properties or operations are subject.

 

Section 4.06 Approval of Agreement. The Board of Directors of the Company has authorized the execution and delivery of this Agreement by the Company and has approved this Agreement and the transactions contemplated hereby.

 

Article V. INDEMNIFICATION

 

Section 5.01 Indemnification of Company. Each HeartCore Shareholder, severally and not jointly and severally, hereby agrees to indemnify and hold harmless to the fullest extent permitted by applicable law the Company, each of its Affiliates and each of its and their respective members, managers, partners, directors, officers, employees, stockholders, attorneys and agents and permitted assignees and the Shareholders’ Representative (each a “Company Indemnified Party”), against and in respect of any and all out-of-pocket loss, cost, payments, demand, penalty, forfeiture, expense, liability, judgment, deficiency or damage, and diminution in value or claim (including actual costs of investigation and attorneys’ fees and other costs and expenses) (all of the foregoing collectively, “Losses” and each individually a “Loss”) incurred or sustained by any Company Indemnified Party as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations, warranties, covenants and agreements of such HeartCore Shareholder contained herein or in any of the additional agreements or any certificate or other writing delivered pursuant hereto.

 

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Section 5.02 Indemnification of the HeartCore Shareholders. The Company hereby agrees to indemnify and hold harmless to the fullest extent permitted by applicable law the Shareholders’ Representative and the HeartCore Shareholders (each a “HeartCore Indemnified Party”), against and in respect of any and all Losses incurred or sustained by any HeartCore Indemnified Party as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations, warranties, covenants and agreements of the Company contained herein or in any of the additional agreements or any certificate or other writing delivered pursuant hereto.

 

Section 5.03 Procedure. The following shall apply with respect to all claims by any HeartCore Indemnified Party or Company Indemnified Party for indemnification with respect to actions by third-parties (with any references herein to an “Indemnified Party” being a reference to a HeartCore Indemnified Party or a Company Indemnified Party, as applicable, and any references herein to an “Indemnifying Party” being a reference to the Company or the HeartCore Shareholders, as applicable):

 

  (a) Third-Party Claims. If any Indemnified Party receives notice of the assertion or commencement of any Action made or brought by any Person who is not a party to this Agreement or an Affiliate of a party to this Agreement or a Representative of the foregoing (a “Third-Party Claim”) against such Indemnified Party with respect to which the Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnified Party shall give the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after receipt of such notice of such Third-Party Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Third-Party Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have the right to participate in, or by giving written notice to the Indemnified Party, to assume the defense of any Third-Party Claim at the Indemnifying Party’s expense and by the Indemnifying Party’s own counsel, and the Indemnified Party shall cooperate in good faith in such defense. In the event that the Indemnifying Party assumes the defense of any Third-Party Claim, subject to Section 5.03(b), it shall have the right to take such action as it deems necessary to avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third-Party Claim in the name and on behalf of the Indemnified Party. The Indemnified Party shall have the right to participate in the defense of any Third-Party Claim with counsel selected by it subject to the Indemnifying Party’s right to control the defense thereof, provided that the fees and disbursements of such counsel shall be at the expense of the Indemnified Party.

 

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  (b) Settlement of Third-Party Claims. Notwithstanding any other provision of this Agreement, the Indemnifying Party shall not enter into settlement of any Third-Party Claim without the prior written consent of the Indemnified Party, except as provided in this Section 5.03(b). If a firm offer is made to settle a Third-Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnified Party and provides, in customary form, for the unconditional release of each Indemnified Party from all liabilities and obligations in connection with such Third-Party Claim and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to that effect to the Indemnified Party. If the Indemnified Party fails to consent to such firm offer within ten days after its receipt of such notice, the Indemnified Party may continue to contest or defend such Third-Party Claim and in such event, the maximum liability of the Indemnifying Party as to such Third-Party Claim shall not exceed the amount of such settlement offer. If the Indemnified Party fails to consent to such firm offer and also fails to assume defense of such Third-Party Claim, the Indemnifying Party may settle the Third-Party Claim upon the terms set forth in such firm offer to settle such Third-Party Claim. If the Indemnified Party has assumed the defense pursuant to Section 5.03(a), it shall not agree to any settlement without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed).
     
  (c) Direct Claims. Any Action by an Indemnified Party on account of a Loss which does not result from a Third-Party Claim (a “Direct Claim”) shall be asserted by the Indemnified Party giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after the Indemnified Party becomes aware of such Direct Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have thirty (30) calendar days after its receipt of such notice to respond in writing to such Direct Claim. The Indemnified Party shall allow the Indemnifying Party and its professional advisors to investigate the matter or circumstance alleged to give rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct Claim and the Indemnified Party shall assist the Indemnifying Party’s investigation by giving such information and assistance as the Indemnifying Party or any of its professional advisors may reasonably request. If the Indemnifying Party does not so respond within such thirty (30) calendar day period, the Indemnifying Party shall be deemed to have rejected such claim, in which case the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement.
     
  (d) Cooperation. Upon a reasonable request made by the Indemnifying Party, each Indemnified Party seeking indemnification hereunder in respect of any Direct Claim, hereby agrees to consult with the Indemnifying Party and act reasonably to take actions reasonably requested by the Indemnifying Party in order to attempt to reduce the amount of Losses in respect of such Direct Claim. Any costs or expenses associated with taking such actions shall be included as Losses hereunder.

 

Section 5.04 Periodic Payments. Any indemnification required by this Article V for costs, disbursements or expenses of any Indemnified Party in connection with investigating, preparing to defend or defending any Action shall be made by periodic payments by the Indemnifying Party to each Indemnified Party during the course of the investigation or defense, as and when bills are received or costs, disbursements or expenses are incurred.

 

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Section 5.05 Insurance. Any indemnification payments hereunder shall take into account any insurance proceeds or other third-party reimbursement actually received.

 

Section 5.06 Limitations.

 

  (a) The obligations of the HeartCore Shareholders and the Company under Section 5.01 and Section 5.02 shall expire in two (2) years from the Closing Date, except with respect to (i) an indemnification claim asserted in accordance with the provisions of this Article V which remains unresolved, for which the obligation to indemnify shall continue until such claim is resolved; and (ii) resolved claims for which payment has not yet been paid to the Indemnified Party.
     
  (b) The aggregate amount of all Losses for which each of the HeartCore Shareholders shall be liable pursuant to Section 5.01 shall in no event exceed the value of the HeartCore Shares such HeartCore Shareholder transferred to the Company. Notwithstanding the provisions of Section 5.01, if and to the extent the HeartCore Shares are validly transferred by any of the HeartCore Shareholders to the Company pursuant to the provisions of Article II of this Agreement, such HeartCore Shareholder shall not be required to indemnify any of the Company Indemnified Parties for any Losses incurred or sustained by any of the Company Indemnified Parties as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations and warranties of such HeartCore Shareholder contained herein.
     
  (c) Each Indemnified Party shall take, and cause its Affiliates to take, all reasonable steps to mitigate any Loss upon becoming aware of any event or circumstance that would be reasonably expected to, or does, give rise thereto, including incurring costs only to the minimum extent necessary to remedy the breach that gives rise to such Loss.
     
  (d) The HeartCore Shareholders shall not be liable under the provisions of this for any Losses based upon or arising out of any inaccuracy in or breach of any of the representations or warranties of the HeartCore Shareholders contained herein if any of the Company Indemnified Parties had knowledge of or could have known such inaccuracy or breach prior to the Closing.

 

Section 5.07 Exclusive Remedy. The indemnification provisions contained in this Article V shall be the sole and exclusive remedy of the Parties with respect to the transactions contemplated herein for any and all breaches or alleged breaches of any representations, warranties, covenants or agreements of the Parties hereto or any other provision of this Agreement or arising out of the transactions contemplated herein, except (i) with respect to any equitable remedy to which such Party may be entitled to with respect to any claims or causes of action arising from the breach of any covenants or agreement of a Party that is to be performed subsequent to the Closing Date, or (ii) with respect to a Party, an actual and intentional fraud with respect to this Agreement and the transactions contemplated herein.

 

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Article VI. MISCELLANEOUS

 

Section 6.01 Governing Law. This Agreement shall be governed by, enforced, and construed under and in accordance with the Laws of the State of Delaware, without giving effect to the principles of conflicts of law thereunder. Each of the Parties (a) irrevocably consents and agrees that any legal or equitable action or proceedings arising under or in connection with this Agreement shall be brought exclusively in either (i) the state or federal courts of the United States with jurisdiction in Palm Beach County, Florida or (ii) the Tokyo District Court. By execution and delivery of this Agreement, each Party hereto irrevocably submits to and accepts, with respect to any such action or proceeding, generally and unconditionally, the jurisdiction of the aforesaid courts, and irrevocably waives any and all rights such Party may now or hereafter have to object to such jurisdiction.

 

Section 6.02 Waiver of Jury Trial.

 

  (a) EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREIN (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 6.02(a).
     
  (b) Each of the Parties acknowledge that each has been represented in connection with the signing of this waiver by independent legal counsel selected by the respective Party and that such Party has discussed the legal consequences and import of this waiver with legal counsel. Each of the Parties further acknowledge that each has read and understands the meaning of this waiver and grants this waiver knowingly, voluntarily, without duress and only after consideration of the consequences of this waiver with legal counsel.

 

Section 6.03 Limitation on Damages. In no event will any Party be liable to any other Party under or in connection with this Agreement or in connection with the Transactions for special, general, indirect or consequential damages, including damages for lost profits or lost opportunity, even if the Party sought to be held liable has been advised of the possibility of such damage.

 

Section 6.04 Brokers. The Company and each HeartCore Shareholder agree that there were no finders or brokers involved in bringing the Parties together or who were instrumental in the negotiation, execution or consummation of this Agreement. The Company and each HeartCore Shareholder each agree to indemnify the other against any claim by any third person other than those described above for any commission, brokerage, or finder’s fee arising from the transactions contemplated hereby based on any alleged agreement or understanding between the Indemnifying Party and such third person, whether express or implied from the actions of the Indemnifying Party.

 

 13

 

 

Section 6.05 Notices.

 

  (a) Any notice or other communications required or permitted hereunder shall be in writing and shall be sufficiently given if personally delivered to it or sent by email, overnight courier or registered mail or certified mail, postage prepaid, addressed as follows:

 

If to the Company or to the Shareholders’ Representative, to:

 

HeartCore Enterprises, Inc.

Attn: Sumitaka Yamamoto

1-2-33, Higashigotanda, Shinagawa-ku

Tokyo, Japan

Email: kanno@heartcore.co.jp

 

With a copy, which shall not constitute notice, to:

 

Anthony L.G., PLLC

Attn: John Cacomanolis

625 N. Flagler Drive, Suite 600

West Palm Beach, FL 33401

Email: jcacomanolis@anthonypllc.com

 

If to any HeartCore Shareholder, to the address as set forth on Exhibit A attached hereto.

 

  (b) Any Party may change its address for notices hereunder upon notice to each other Party in the manner for giving notices hereunder.
     
  (c) Any notice hereunder shall be deemed to have been given (i) upon receipt, if personally delivered, (ii) on the day after dispatch, if sent by overnight courier, (iii) upon dispatch, if transmitted by email with return receipt requested and received and (iv) three (3) days after mailing, if sent by registered or certified mail.

 

Section 6.06 Attorneys’ Fees. In the event that any Party institutes any action or suit to enforce this Agreement or to secure relief from any default hereunder or breach hereof, the prevailing Party shall be reimbursed by the losing Party for all costs, including reasonable attorney’s fees, incurred in connection therewith and in enforcing or collecting any judgment rendered therein.

 

Section 6.07 Confidentiality. Each Party agrees that, unless and until the transactions contemplated by this Agreement have been consummated, it and its representatives will hold in strict confidence all data and information obtained with respect to another Party or any subsidiary thereof from any representative, officer, director or employee, or from any books or records or from personal inspection, of such other Party, and shall not use such data or information or disclose the same to others, except (i) to the extent such data or information is published, is a matter of public knowledge, or is required by Law to be published; or (ii) to the extent that such data or information must be used or disclosed in order to consummate the transactions contemplated by this Agreement. In the event of the termination of this Agreement, each Party shall return to the applicable other Party all documents and other materials obtained by it or on its behalf and shall destroy all copies, digests, work papers, abstracts or other materials relating thereto, and each Party will continue to comply with the confidentiality provisions set forth herein.

 

Section 6.08 Third Party Beneficiaries. This contract is strictly between the Company, the HeartCore Shareholders and the Shareholders’ Representative, and except as specifically provided herein, no other Person and no director, officer, stockholder (other than the HeartCore Shareholders), employee, agent, independent contractor or any other Person shall be deemed to be a third-party beneficiary of this Agreement.

 

 14

 

 

Section 6.09 Expenses. Subject to Article V and Section 6.06, whether or not the Exchange is consummated, each of the Company and each HeartCore Shareholder will bear their own respective expenses, including legal, accounting and professional fees, incurred in connection with the Exchange or any of the other transactions contemplated hereby.

 

Section 6.10 Entire Agreement. This Agreement represents the entire agreement between the Parties relating to the subject matter thereof and supersedes all prior agreements, understandings and negotiations, written or oral, with respect to such subject matter.

 

Section 6.11 Survival. The representations, warranties, and covenants of the respective Parties shall survive the Closing Date and the consummation of the Transactions for a period of one year from the latest date thereof.

 

Section 6.12 Amendment; Waiver; Remedies; Agent.

 

  (a) Other than as specifically set forth herein, this Agreement may be amended, modified, superseded, terminated or cancelled, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, only by a written instrument executed by the Company and the Shareholders’ Representative on behalf of the HeartCore Shareholders, provided, however, that in the event that any such amendment, event or action is materially adverse to the rights or obligations of any HeartCore Shareholder(s), such amendment, event or action shall be subject to the written approval of the applicable HeartCore Shareholder(s) to whom such amendment, event or action is materially adverse.
     
  (b) Every right and remedy provided herein shall be cumulative with every other right and remedy, whether conferred herein, at law, or in equity, and may be enforced concurrently herewith, and no waiver by any Party of the performance of any obligation by the other shall be construed as a waiver of the same or any other default then, theretofore, or thereafter occurring or existing.
     
  (c) Neither any failure or delay in exercising any right or remedy hereunder or in requiring satisfaction of any condition herein nor any course of dealing shall constitute a waiver of or prevent any Party from enforcing any right or remedy or from requiring satisfaction of any condition. No notice to or demand on a Party waives or otherwise affects any obligation of that Party or impairs any right of the Party giving such notice or making such demand, including any right to take any action without notice or demand not otherwise required by this Agreement. No exercise of any right or remedy with respect to a breach of this Agreement shall preclude exercise of any other right or remedy, as appropriate to make the aggrieved Party whole with respect to such breach, or subsequent exercise of any right or remedy with respect to any other breach.
     
  (d) Notwithstanding anything else contained herein, no Party shall seek, nor shall any Party be liable for, consequential, punitive or exemplary damages, under any tort, contract, equity, or other legal theory, with respect to any breach (or alleged breach) of this Agreement or any provision hereof or any matter otherwise relating hereto or arising in connection herewith.

 

 15

 

 

Section 6.13 HeartCore Shareholders’ Representative.

 

  (a) Each HeartCore Shareholder constitutes and appoints the Shareholders’ Representative as its representative and its true and lawful attorney in fact, with full power and authority in its name and on its behalf:
       
    (i) to act on such HeartCore Shareholders’ behalf in the absolute discretion of Shareholders’ Representative with respect to all matters relating to this Agreement, including execution and delivery of any amendment, supplement, or modification of this Agreement and any waiver of any claim or right arising out of this Agreement or the provision of any consent or agreement hereunder; and
       
    (ii) in general, to do all things and to perform all acts, including executing and delivering all agreements, certificates, receipts, instructions, and other instruments contemplated by or deemed advisable to effectuate the provisions of this Section 6.13.
       
  (b) This appointment and grant of power and authority is coupled with an interest and is in consideration of the mutual covenants made in this Agreement and is irrevocable and will not be terminated by any act of any HeartCore Shareholder or by operation of law, whether by the death or incapacity of any HeartCore Shareholder or by the occurrence of any other event. Each HeartCore Shareholder hereby consents to the taking of any and all actions and the making of any decisions required or permitted to be taken or made by Shareholders’ Representative pursuant to this Section 6.13. Each HeartCore Shareholder agrees that Shareholders’ Representative shall have no obligation or liability to any Person for any action taken or omitted by Shareholders’ Representative in good faith, even if taken or omitted negligently, and each HeartCore Shareholder shall indemnify and hold harmless Shareholders’ Representative from, and shall pay to Shareholders’ Representative the amount of, or reimburse Shareholders’ Representative for, any Loss that Shareholders’ Representative may suffer, sustain, or become subject to as a result of any claim made or threatened against Shareholders’ Representative in his capacity as such.
       
  (c) The Company shall be entitled to rely upon any document or other paper delivered by Shareholders’ Representative as being authorized by HeartCore Shareholders, and the Company shall not be liable to any HeartCore Shareholder for any action taken or omitted to be taken by the Company based on such reliance.

 

Section 6.14 Arm’s Length Bargaining; No Presumption Against Drafter. This Agreement has been negotiated at arm’s-length by parties of equal bargaining strength, each represented by counsel or having had but declined the opportunity to be represented by counsel and having participated in the drafting of this Agreement. This Agreement creates no fiduciary or other special relationship between the Parties, and no such relationship otherwise exists. No presumption in favor of or against any Party in the construction or interpretation of this Agreement or any provision hereof shall be made based upon which Person might have drafted this Agreement or such provision.

 

Section 6.15 Headings. The headings contained in this Agreement are intended solely for convenience and shall not affect the rights of the Parties.

 

Section 6.16 No Assignment or Delegation. No Party may assign any right or delegate any obligation hereunder, including by merger, consolidation, operation of law, or otherwise, without the written consent of all of the other Parties and any purported assignment or delegation without such consent shall be null and void and of no force or effect, in addition to constituting a material breach of this Agreement. This Agreement shall be binding on the permitted successors and assigns of the Parties.

 

 16

 

 

Section 6.17 Commercially Reasonable Efforts. Subject to the terms and conditions herein provided, each HeartCore Shareholder and the Company shall use their respective commercially reasonable efforts to perform or fulfill all conditions and obligations to be performed or fulfilled by it under this Agreement so that the transactions contemplated hereby shall be consummated as soon as practicable, and to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws and regulations to consummate and make effective this Agreement and the transactions contemplated herein.

 

Section 6.18 Further Assurances. From and after the Closing Date, each Party shall execute and deliver such documents and take such action, as may reasonably be considered within the scope of such Party’s obligations hereunder, necessary to effectuate the transactions contemplated by this Agreement.

 

Section 6.19 Specific Performance. The Parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by them in accordance with the terms hereof or were otherwise breached and that each Party hereto shall be entitled to an injunction or injunctions, specific performance and other equitable relief to prevent breaches of the provisions hereof and to enforce specifically the terms and provisions hereof, without the proof of actual damages, in addition to any other remedy to which they are entitled at law or in equity. Each Party agrees to waive any requirement for the security or posting of any bond in connection with any such equitable remedy, and agrees that it will not oppose the granting of an injunction, specific performance or other equitable relief on the basis that (a) the other Party has an adequate remedy at law, or (b) an award of specific performance is not an appropriate remedy for any reason at law or equity.

 

Section 6.20 Counsel. The Parties acknowledge and agree that Anthony L.G., PLLC (“Counsel”) has acted as legal counsel to the Company and to HeartCore, that Sumitaka Yamamoto is an officer and director of the Company and HeartCore, and that Counsel is not legal counsel to any HeartCore Shareholder or Mr. Yamamoto personally, either in connection with this Agreement and the Transactions, or otherwise. Each of the Parties acknowledges and agrees that they are aware of, and have consented to, the Counsel acting as legal counsel to the Company and to HeartCore notwithstanding the relationship between the Company, HeartCore and Mr. Yamamoto, and that Counsel has advised each of the Parties to retain separate counsel to review the terms and conditions of this Agreement and the other documents to be delivered in connection herewith, and each applicable Party has either waived such right freely or has otherwise sought such additional counsel as it has deemed necessary. Each of the Parties hereby waives any conflict of interest that may arise as a result of the relationship between the Company, HeartCore and Mr. Yamamoto, and confirms that the Parties have previously negotiated the material terms of the agreements as set forth herein.

 

Section 6.21 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which taken together shall be but a single instrument. The execution and delivery of a facsimile or other electronic transmission of a signature to this Agreement shall constitute delivery of an executed original and shall be binding upon the person whose signature appears on the transmitted copy.

 

[Signatures Appear on Following Page]

 

 17

 

 

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Closing Date.

 

  HeartCore Enterprises, Inc.
                                                          
  By: /s/ Sumitaka Yamamoto
  Name: Sumitaka Yamamoto
  Title: Chief Executive Officer
     
  Shareholders’ Representative:
     
  By: /s/ Sumitaka Yamamoto
  Name: Sumitaka Yamamoto

 

HeartCore Shareholders:  
     
Daishin Yasui  
                                     
By: /s/ Daishin Yasui  
Name: Daishin Yasui  
     
Sumitaka Yamamoto  
     
By: /s/ Sumitaka Yamamoto  
Name: Sumitaka Yamamoto  
     
Information Services International-Dentsu, Ltd.  
     
By: /s/ Shinichi Ogane  
Name: Shinichi Ogane  
Title: Senior Managing Director  

 

 18

 

 

Kuniaki Kawaji  
                                     
By: /s/ Kuniaki Kawaji  
Name: Kuniaki Kawaji  
     
Ci:z Investment LLP  
     
By: /s/ Yoshinori Shirono  
Name: Yoshinori Shirono  
Title: Functional Manager  
     
Ryugo Miyake  
     
By: /s/ Ryugo Miyake  
Name: Ryugo Miyake  
     
Kimio Hosaka  
     
By: /s/ Kimio Hosaka  
Name: Kimio Hosaka  
     
Hidekazu Miyata  
     
By: /s/ Hidekazu Miyata  
Name: Hidekazu Miyata  
     
Next Vision Corporation  
     
By: /s/ Takeo Arima  
Name: Takeo Arima  
Title: President  

 

Naoto Ikemura  
     
By: /s/ Naoto Ikemura  
Name: Naoto Ikemura  
     
Keisuke Kuno  

 

 

 19

 

  

By: /s/ Keisuke Kuno  
Name: Keisuke Kuno  
     
Hisashi Yamashiro  
     
By: /s/ Hisashi Yamashiro  
Name: Hisashi Yamashiro  
     
Jin Higa  
     
By: /s/ Jin Higa  
Name: Jin Higa  
     
Toru Ohyama  
     
By: /s/ Toru Ohyama  
Name: Toru Ohyama  
     
Gou Miyazaki  
     
By: /s/ Gou Miyazaki  
Name: Gou Miyazaki  

  

Masami Takasaki  
     
By: /s/ Masami Takasaki  
Name: Masami Takasaki  
     
Kou Shiba  
     
By: /s/ Kou Shiba  
Name: Kou Shiba  
     
Naomi Sato  
     
By: /s/ Naomi Sato  
Name: Naomi Sato  
     
Kaoru Yagasaki  
     
By: /s/ Kaoru Yagasaki    
Name: Kaoru Yagasaki  

 

 20

 

 

Exhibit A

 

HeartCore Shareholders’ HeartCore Shares and Shares of Company Stock to be Issued

 

Shareholder Name   Address for Notices   HeartCore Shares Owned     Shares of Company Stock to be Issued:  
Sumitaka Yamamoto   848 Jordan Ave. #G Los Altos CA 94022 USA     8,119       12,133,752  
Daishin Yasui   387-1301 Koyadocho, Samegai-dori Shijo-sagaru, Shimogyo-ku, Kyoto-shi, Kyoto     1,556       2,325,425  
Information Services International-Dentsu, Ltd.   2-17-1 Konan, Minato-ku     278       415,468  
Kuniaki Kawaji   4-30-7 Nishitsutsujigaoka, Chofu-shi Kassa Forte 406     200       298,898  
Ci:z Investment LLP   13-1-H602 Uguisudani, Shibuya-ku, Tokyo     200       298,898  
Ryugo Miyake   4-23-17-213 Meguro, Meguro-ku, Tokyo     120       179,339  
Kimio Hosaka   2-16-2-312 Oshiage, Sumida-ku, Tokyo     60       89,669  
Hidekazu Miyata   4-6-6-1106, Konan, Minato-ku, Tokyo     40       59,780  
Next Vision Corporation   2-15 Enokimachi, Naka-ku, Hiroshima-shi, Hiroshima     30       44,835  
Naoto Ikemura   1-11-17-101 Matsushima, Naha-shi, Okinawa     30       44,835  
Keisuke Kuno   2-10-1 Horinouchi, Hachioji-shi, Tokyo     25       37,362  
Hisashi Yamashiro   73-73-201 Aja, Naha-shi, Okinawa     15       22,417  
Jin Higa   473-1 Namizato, Motobu-cho, Kunigami-gun, Okinawa     10       14,945  
Toru Ohyama   2-47-23 Imajuku, Asahi-ku, Yokohama-shi, Kanagawa     10       14,945  
Gou Miyazaki   6-23-18-803 Sagamiono, Minami-ku, Sagamihara-shi, Kanagawa     5       7,472  
Masami Takasaki   2-1-4-404 Nakazato, Kita-ku, Tokyo     5       7,472  
Kou Shiba   1783-7 Kamiyugi, Hachioji-shi, Tokyo     1       1,494  
Naomi Sato   3-7-1-S2914, Shimomachi, Oomiya-ku, Saitama-Shi, Saitama     1       1,494  
Kaoru Yagasaki   1428-1-608, Takushi, Urasoe-shi, Okinawa     1       1,494  
Totals:     10,706       15,999,994  

 

Exhibit A – Page 1

 

 

 

Exhibit 10.3

 

 

 

Stock Purchase Agreement

 

by and among

 

Heartcore Enterprises, Inc.

 

And

 

Dentsu Digital Investment Limited Partnership

 

 

 

 
 

 

Table of Contents

 

Article I.      Definitions and Interpretation 1
     
  Section 1.01 Defined Terms. 1
  Section 1.02 Interpretation. 3
       
Article II.     The Transactions 3
       
  Section 2.01 The Purchase. 3
  Section 2.02 Closing. 4
  Section 2.03 Closing Deliverables. 4
  Section 2.04 Additional Closing Events. 4
       
Article III.    Representations and Warranties of the Seller 5
       
  Section 3.01 Existence and Power. 5
  Section 3.02 Due Authorization. 5
  Section 3.03 Valid Obligation. 5
  Section 3.04 Title to Shares. 5
  Section 3.05 No Conflict With Other Instruments. 5
  Section 3.06 Brokers. 5
       
Article IV.    Representations and Warranties of Buyer 5
       
  Section 4.01 Corporate Existence and Power. 5
  Section 4.02 Due Authorization. 6
  Section 4.03 Valid Obligation. 6
  Section 4.04 No Conflict With Other Instruments. 6
  Section 4.05 Brokers. 6
       
Article V.     Covenants and Additional Agreements 6
       
  Section 5.01 Public Announcements. 6
  Section 5.02 Notices of Certain Events. 6
  Section 5.03 Permitted Transfers. 7
       
Article VI.    Conditions Precedent to the Obligations of Buyer 7
       
  Section 6.01 Accuracy of Representations and Performance of Covenants. 7
  Section 6.02 No Governmental Prohibition. 7
  Section 6.03 Absence of Litigation. 7
  Section 6.04 Initial Public Offering. 7
       
Article VII.  Conditions Precedent to the Obligations of the Seller 7
       
  Section 7.01 Accuracy of Representations and Performance of Covenants. 7
  Section 7.02 No Governmental Prohibition. 8
       
Article VIII. Termination 8
       
  Section 8.01 Termination. 8
  Section 8.02 Effect of Termination 8
  Section 8.03 Default by Buyer 9
  Section 8.04 Default by Seller 9

 

i
 

 

Article IX.   Survival and Indemnification 9
       
  Section 9.01 Survival. 8
  Section 9.02 Indemnification by Seller. 9
  Section 9.03 Indemnification by Buyer. 9
  Section 9.04 Indemnification Procedures. 10
  Section 9.05 Payments. 11
  Section 9.06 Exclusive Remedy. 11
  Section 9.07 Limitation on Damages. 12
       
Article X.    Miscellaneous 12
       
  Section 10.01 Notices. 12
  Section 10.02 Governing Law; Arbitration. 13
  Section 10.03 Waiver of Jury Trial. 13
  Section 10.04 Specific Performance. 13
  Section 10.05 Attorneys’ Fees. 13
  Section 10.06 Public Announcements and Filings. 13
  Section 10.07 Third-Party Beneficiaries. 13
  Section 10.08 Expenses. 13
  Section 10.09 Entire Agreement. 14
  Section 10.10 Amendment or Waiver. 14
  Section 10.11 Commercially Reasonable Efforts. 14
  Section 10.12 Successors and Assigns. 14
  Section 10.13 Counterparts. 14

 

ii
 

 

STOCK PURCHASE AGREEMENT

 

Dated as of August 10, 2021

 

This Stock Purchase Agreement (the “Agreement”) is entered into as of the date first set forth above (the “Effective Date”), by and between (i) Heartcore Enterprises, Inc., a Delaware corporation (“Buyer”); and (ii) Dentsu Digital Investment Limited Partnership (“Seller”). Each of Buyer and Seller may be referred to herein collectively as the “Parties” and separately as a “Party.”

 

WHEREAS, the Seller owns shares of stock of HeartCore Inc., a Japanese corporation (“HeartCore”);

 

WHEREAS, Buyer desires to acquire from Seller, and Seller desires to sell and transfer to Buyer, all of the shares of stock of HeartCore held by Seller, in exchange for the payment of certain cash consideration on the terms and subject to the conditions set forth herein (together with the other transactions contemplated herein, the “Transactions”);

 

NOW THEREFORE, on the stated premises and for and in consideration of the mutual covenants and agreements hereinafter set forth and the mutual benefits to the Parties to be derived herefrom, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the Parties hereby agree as follows:

 

Article I. Definitions and Interpretation

 

Section 1.01 Defined Terms. For purposes of this Agreement, the following terms shall have the following meanings:

 

  (a) “Action” means any claim, action, cause of action, demand, lawsuit, arbitration, inquiry, audit, notice of violation, proceeding, litigation, citation, summons, subpoena or investigation of any nature, civil, criminal, administrative, regulatory or otherwise, whether at law or in equity.
     
  (b) “Affiliate” of a Person means any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person, and the term “control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.
     
  (c) “Agreement” has the meaning set forth in the introductory paragraph hereof.
     
  (d) “Business Day” shall mean any day on which commercial banks are generally open for business in Delaware and Japan.
     
  (e) “Buyer Default” has the meaning set forth in Section 8.01(d).
     
  (f) “Buyer” has the meaning set forth in the introductory paragraph hereof.

 

1
 

 

  (g) “Closing Date” has the meaning set forth in Section 2.02.
     
  (h) “Closing” has the meaning set forth in Section 2.02.
     
  (i) “Common Stock” means the common stock, par value $0.0001 per share, of the Buyer.
     
  (j) “Companies Act” means the Japanese Companies Act.
     
  (k) “Direct Claim” has the meaning set forth in Section 9.04(c).
     
  (l) “Governmental Authority” means any federal, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction.
     
  (m) “HeartCore” has the meaning set forth in the introductory paragraph hereof.
     
  (n) “Indemnified Party” has the meaning set forth in Section 9.04.
     
  (o) “Indemnifying Party” has the meaning set forth in Section 9.04.
     
  (p) “Law” means any statute, law, ordinance, regulation, rule, code, order, constitution, treaty, common law, judgment, decree, other requirement or rule of law of any Governmental Authority.
     
  (q)  “Liens” means any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, and any conditional sale or voting agreement or proxy, including any agreement to give any of the foregoing.
     
  (r)  “Losses” means losses, damages, liabilities, deficiencies, Actions, judgments, interest, awards, penalties, fines, costs or expenses of whatever kind, including reasonable attorneys’ fees and the cost of enforcing any right to indemnification hereunder and the cost of pursuing any insurance providers; provided, however, that “Losses” shall not include (i) punitive damages, except in the case of fraud or to the extent actually awarded to a Governmental Authority or other third party or (ii) lost profits or consequential damages, in any case.
     
  (s) “Parties” and “Party” have the meanings set forth in the introductory paragraph hereof.
     
  (t) “Person” means an individual, corporation, partnership, joint venture, limited liability company, Governmental Authority, unincorporated organization, trust, association or other entity.
     
  (u) “Purchase Price” has the meaning set forth in Section 2.01(b).
     
  (v) “Representative” means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person.

 

2
 

 

  (w) “Seller Default” has the meaning set forth in Section 8.01(c).
     
  (x)  “Seller” has the meaning set forth in the introductory paragraph hereof.
     
  (y) “Shares” has the meaning set forth in Section 2.01(a).
     
  (z) “Third-Party Claim” has the meaning set forth in Section 9.04(a).
     
  (aa) “Transaction Documents” means this Agreement and any other document, certificate or agreement to be delivered hereunder or in connection with the Transactions.
     
  (bb) “Transactions” has the meaning set forth in the recitals hereto.

 

Section 1.02 Interpretation. Unless the express context otherwise requires (i) the words “hereof,” “herein,” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; (ii) terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa; (iii) the terms “Dollars” and “$” mean United States Dollars; (iv) references herein to a specific Section, Subsection, Recital or Exhibit shall refer, respectively, to Sections, Subsections, Recitals or Exhibits of this Agreement; (v) wherever the word “include,” “includes,” or “including” is used in this Agreement, it shall be deemed to be followed by the words “without limitation”; (vi) references herein to any gender shall include each other gender; (vii) references herein to any Person shall include such Person’s heirs, executors, personal Representatives, administrators, successors and assigns; provided, however, that nothing contained in this Section 1.02 is intended to authorize any assignment or transfer not otherwise permitted by this Agreement; (viii) references herein to a Person in a particular capacity or capacities shall exclude such Person in any other capacity; (ix) references herein to any contract or agreement (including this Agreement) mean such contract or agreement as amended, supplemented or modified from time to time in accordance with the terms thereof; (x) with respect to the determination of any period of time, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding”; (xi) references herein to any Law or any license mean such Law or license as amended, modified, codified, reenacted, supplemented or superseded in whole or in part, and in effect from time to time; and (xii) references herein to any Law shall be deemed also to refer to all rules and regulations promulgated thereunder.

 

Article II. THE TRANSACTIONS

 

Section 2.01 The Purchase.

 

  (a) On the terms and subject to the conditions set forth in this Agreement, on the Closing Date, the Seller shall sell, assign, transfer and deliver to Buyer, free and clear of all Liens, 278 shares of stock of HeartCore held by the Seller (the “Shares”).
     
  (b) In exchange for the sale, assignment, transfer and delivery of the Shares to Buyer, Buyer shall pay to the Seller a total purchase price of Fifty Million Forty Thousand Japanese Yen (¥50,040,000) (the “Purchase Price”).
     
  (c) At the Closing, the Purchase Price shall be paid in cash in Japanese Yen to the Seller pursuant to wire instructions provided to Buyer at least three Business Days prior to the Closing Date.

 

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Section 2.02 Closing. The closing of the Transactions (the “Closing”) shall occur on the earlier of (i) the third Business Day following the satisfaction, or waiver by the Party or Parties for whose benefit the condition(s) exist, of the conditions to Closing as set forth in Article VI and Article VII, or (ii) December 20, 2022, but subject to the satisfaction, or waiver by the Party or Parties for whose benefit the condition(s) exist, of the conditions to closing as set forth in Article VI and Article VII as of such date, other than the conditions to Closing as set forth in Section 6.04 (which, if the Closing is occurring on December 20, 2022 pursuant to this clause (ii), shall be deemed to have been satisfied); or on such other date as the Parties shall agree (such date, the “Closing Date”).

 

Section 2.03 Closing Deliverables.

 

  (a) At the Closing, the Seller shall deliver to the Buyer:
       
    (i) a certificate of a duly authorized officer of the Seller, dated as of the Closing Date, in form and substance satisfactory to Buyer, certifying that the matters set forth in Section 6.01 are true and correct;
       
    (ii) a written request for registration of the Transactions with the shareholders registry (kabunushi meibo meigi kakikae seikyu sho) of HeartCore, duly executed by Seller; and
       
    (iii) such other documents as Buyer may reasonably request for the purpose of evidencing the accuracy of any of Seller’s representations and warranties; evidencing the performance by Seller of, or the compliance by the Seller with, any covenant or obligation required to be performed or complied with by the Seller; or otherwise facilitating the consummation or performance of any of the Transactions.
       
  (b) At the Closing, Buyer:
       
    (i) Shall deliver to the Seller a certificate of a duly authorized officer of the Buyer, dated as of the Closing Date, in form and substance satisfactory to the Seller certifying that the matters set forth in Section 7.01 are true and correct;
       
    (ii) Shall pay the Purchase Price to the Seller via wire transfer to an account as designated by the Seller; and
       
    (iii) Shall deliver such other documents as the Seller may reasonably request for the purpose of evidencing the accuracy of any of Buyer’s representations and warranties; evidencing the performance by Buyer of, or the compliance by Buyer with, any covenant or obligation required to be performed or complied with by Buyer; or otherwise facilitating the consummation or performance of any of the Transactions.

 

Section 2.04 Additional Closing Events. At and following the Closing, Buyer and the Seller shall execute, acknowledge, and deliver (or shall ensure to be executed, acknowledged, and delivered), any and all certificates, financial statements, schedules, agreements, resolutions, rulings or other instruments required by this Agreement to be so delivered at or prior to the Closing, together with such other items as may be reasonably requested by the Parties hereto and their respective legal counsel in order to effectuate or evidence Transactions.

 

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Article III. REPRESENTATIONS AND WARRANTIES OF THE SELLER

 

The Seller hereby represents and warrants to Buyer, as follows.

 

Section 3.01 Existence and Power. Seller is an investment limited partnership (toushi jigyou yugen sekinin kumiai) in good standing under the Laws of Japan and has the power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Transactions contemplated hereby.

 

Section 3.02 Due Authorization. The execution, delivery and performance of this Agreement by Seller does not, and the consummation of the transactions contemplated hereby will not, violate any provision of its organizational documents. Seller has taken all actions required by its organizational documents, if applicable, or otherwise to authorize the execution, delivery and performance of this Agreement and to consummate the transactions herein contemplated.

 

Section 3.03 Valid Obligation. This Agreement and all agreements and other documents executed by Seller in connection herewith constitute the valid and binding obligations of Seller, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar Laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.

 

Section 3.04 Title to Shares. Seller is the record and beneficial owner and holder of the Shares, free and clear of all Liens and none of such Shares is subject to pre-emptive or similar rights, either pursuant to any requirement of Law or any contract, and no Person has any pre-emptive rights or similar rights to purchase or receive any such Shares.

 

Section 3.05 No Conflict With Other Instruments. The execution of this Agreement and the consummation of the transactions contemplated by this Agreement by Seller will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which Seller is a party or to which any of its assets, properties or operations are subject.

 

Section 3.06 Brokers. Seller has not retained any broker or finder in connection with any of the Transactions, and Seller has not incurred or agreed to pay, or taken any other action that would entitle any Person to receive, any brokerage fee, finder’s fee or other similar fee or commission with respect to any of the Transactions as a result of the agreements of Seller.

  

Article IV. REPRESENTATIONS AND WARRANTIES OF BUYER 

 

Buyer represents and warrants to the Seller, as follows:

 

Section 4.01 Corporate Existence and Power. Buyer is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Delaware and has the corporate power and is duly authorized under all applicable Laws, regulations, ordinances, and orders of public authorities to carry on its business in all material respects as it is now being conducted. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, violate any provision of its organizational documents. Buyer has taken all action required by Law, its organizational documents, or otherwise to authorize the execution and delivery of this Agreement, and Buyer has full power, authority, and legal right and has taken all action required by Law its organizational documents or otherwise to consummate the transactions herein contemplated.

 

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Section 4.02 Due Authorization. The execution, delivery and performance of this Agreement does not, and the consummation of the transactions contemplated hereby will not, violate any provision of the Buyer’s organizational documents. Buyer has taken all actions required by Law, its organizational documents or otherwise to authorize the execution, delivery and performance of this Agreement and to consummate the transactions herein contemplated.

 

Section 4.03 Valid Obligation. This Agreement and all agreements and other documents executed by Buyer in connection herewith constitute the valid and binding obligations of Buyer, enforceable in accordance with its or their terms, except as may be limited by bankruptcy, insolvency, moratorium or other similar Laws affecting the enforcement of creditors’ rights generally and subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefore may be brought.

 

Section 4.04 No Conflict With Other Instruments. The execution of this Agreement and the consummation of the transactions contemplated by this Agreement will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which Buyer is a party or to which any of its assets, properties or operations are subject.

 

Section 4.05 Brokers. Buyer has not retained any broker or finder in connection with any of the Transactions, and Seller has not incurred or agreed to pay, or taken any other action that would entitle any Person to receive, any brokerage fee, finder’s fee or other similar fee or commission with respect to any of the Transactions as a result of the agreements of Buyer.

 

Article V. COVENANTS AND ADDITIONAL AGREEMENTS

 

Section 5.01 Public Announcements. Except as required by applicable Law, prior to the Closing the Parties shall consult with each other before issuing any press release or making any public statement with respect to this Agreement or Transactions.

 

Section 5.02 Notices of Certain Events. In addition to any other notice required to be given by the terms of this Agreement, each of the Parties shall promptly notify each of the other Party of (i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with any of the Transactions; (ii) any notice or other communication from any governmental or regulatory agency or authority in connection with the Transactions; and (iii) any actions, suits, claims, investigations or proceedings commenced or, to its knowledge threatened against, relating to or involving or otherwise affecting such Party that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant hereto or that relates to the consummation of the Transactions.

 

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Section 5.03 Permitted Transfers. Notwithstanding any of the provisions herein to the contrary, Seller shall be entitled to transfer all or any part of the Shares to: (i) Dentsu Group Inc. or any of its Affiliates; (ii) Dentsu Ventures Global Fund I; or (iii) Dentsu Ventures Fund II (collectively, “Permitted Transferees”). In connection with such transfer, Seller may assign its rights hereunder to the Permitted Transferees and have the Permitted Transferees assume Seller’s obligations hereunder, thereby relieving the Seller of its obligations. Upon any such assignment, and as a condition thereof, the applicable Permitted Transferee(s) will enter into an agreement with Buyer in form and substance equivalent to this Agreement, with appropriate changes to the number of Shares and the Purchase Price in the event that such assignment is an assignment is in part, and this Agreement shall also be appropriately amended in such case to revise the number of Shares and Purchase Price hereunder. Subject to the foregoing, Buyer hereby consents to any such assignment to any of the Permitted Transferees.

 

 Article VI. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER

 

The obligations of Buyer to consummate the Closing are subject to the satisfaction, or waiver by Buyer in its sole discretion, as of and on the Closing Date, of the following conditions:

 

Section 6.01 Accuracy of Representations and Performance of Covenants. Each of the representations and warranties made by the Seller shall be true and correct in all material respects, other than representations and warranties which are qualified by materiality and the representations and warranties as set forth in Section 3.04 which shall be true and correct in all respects, in each case as of the Closing Date as if made on such date, and the Seller shall have performed or complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing.

 

Section 6.02 No Governmental Prohibition. No order, statute, rule, regulation, executive order, injunction, stay, decree, judgment or restraining order shall have been enacted, entered, promulgated or enforced by any court or governmental or regulatory authority or instrumentality that prohibits the consummation of Transactions, and Buyer shall have obtained the approval of any governmental authorities as required in order to consummate the Transactions.

 

Section 6.03 Absence of Litigation. There shall be no actions, suits, proceedings or governmental investigations or inquiries pending or, to any Party’s knowledge, threatened against Buyer, HeartCore and/or the Seller which would prevent the consummation of the Transactions.

 

Section 6.04 Initial Public Offering. The Buyer shall have filed a registration statement on Form S-1 pursuant to the Securities Act of 1933, as amended, for a firm commitment underwritten initial public offering of the Common Stock (the “IPO”), which registration statement shall have been declared effective; provided, however, that this Section 6.04 shall not apply to the Closing as set forth in clause (ii) of Section 2.02.

 

Article VII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE SELLER

 

The obligations of the Seller to consummate the Closing are subject to the satisfaction, or waiver by the Seller in its sole discretion, as of and on the Closing Date, of the following conditions:

 

Section 7.01 Accuracy of Representations and Performance of Covenants. Each of the representations and warranties made by Buyer shall be true and correct in all material respects as of the Closing Date as if made on such date and Buyer shall have performed or complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing.

 

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Section 7.02 No Governmental Prohibition. No order, statute, rule, regulation, executive order, injunction, stay, decree, judgment or restraining order shall have been enacted, entered, promulgated or enforced by any court or governmental or regulatory authority or instrumentality which prohibits the consummation of Transactions.

 

 Article VIII. TERMINATION

 

Section 8.01 Termination. This Agreement may be terminated at any time before the Closing Date as follows:

 

  (a) by mutual written consent of the Buyer and the Seller;
       
  (b) by either the Seller or Buyer if there shall be in effect a final non-appealable order, judgment, injunction or decree entered by or with any governmental authority restraining, enjoining or otherwise prohibiting the consummation of the Transactions;
       
  (c) by Buyer:
       
    (i) If there shall have been a breach in any material respect of any representation, warranty, covenant or agreement on the part of the Seller set forth in this Agreement and such breach has not been cured within ten (10) days after receipt of notice of such breach the Seller (a “Seller Default”); or
       
    (ii) if the Closing has not occurred by December 21, 2022, provided, however, that if the Closing has not occurred by such date due to an Buyer Default having occurred, Buyer shall not have the right to terminate this Agreement pursuant to this Section 8.01(c)(ii);
       
  (d) by Seller:
       
    (i) if there shall have been a breach in any material respect of any representation, warranty, covenant or agreement on the part of Buyer set forth in this Agreement and such breach has not been cured within ten (10) days after receipt of notice of such breach by Buyer (an “Buyer Default”); or
       
    (ii) if the Closing has not occurred by December 21, 2022, provided, however, that if the Closing has not occurred by such date due to a Seller Default having occurred, the Seller shall not have the right to terminate this Agreement pursuant to this Section 8.01(d)(ii).

 

Section 8.02 Effect of Termination. In the event of termination of this Agreement pursuant to this Article VIII, this Agreement (other than this Article VIII, Article IX and Article X) shall become void and of no further force or effect with no liability on the part of either Party; provided, however, that nothing shall relieve any Party from liability for actual damages to the other Party resulting from a breach of this Agreement by such Party prior to any such termination other than as specifically set forth herein.

 

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Section 8.03 Default by Buyer. If Buyer fails to perform any of its obligations under this Agreement, the Seller shall be entitled to bring an action for specific performance, damages or a combination of specific performance and damages.

 

Section 8.04 Default by Seller. If the Seller fails to perform any of its obligations under this Agreement, Buyer shall be entitled to bring an action for specific performance, damages or a combination of specific performance and damages.

  

Article IX. SURVIVAL AND INDEMNIFICATION

 

Section 9.01 Survival.

 

  (a) Subject to the limitations and other provisions of this Agreement, the representations and warranties of the Parties contained herein shall survive the Closing and shall remain in full force and effect until the date that is one (1) year after the Closing Date. Notwithstanding the preceding sentence, any indemnification claim commenced prior to any such expiration shall remain as a valid claim until finally resolved in accordance with the provisions herein. Any claim, for indemnification or otherwise, based upon or arising out of the breach or alleged breach of a representation or warranty must be brought before the expiration of the applicable survival period, or it will be deemed waived.
     
  (b) All covenants and agreements of the Parties contained herein shall survive the Closing for a period of one (1) year or for the period specified therein. Notwithstanding the preceding sentence, any claim commenced prior to any such expiration shall remain as a valid claim until finally resolved in accordance with the provisions herein.
     
  (c) Any claim arising out of or in connection with this Agreement must be brought, if at all, within one (1) year after the Closing Date, or within such shorter period as may be specified with respect to a particular claim, or it will be deemed waived and released.

 

Section 9.02 Indemnification by Seller. Subject to the provisions of this Article IX, if the Closing occurs, the Seller hereby covenants and agrees with Buyer that the Seller shall indemnify Buyer, and hold Buyer harmless from, against and in respect of any and all Losses incurred by Buyer resulting from any misrepresentation, breach of any representation or warranty of the Seller in this Agreement or the non-fulfillment in any material respect of any agreement, covenant or obligation by the Seller made in this Agreement (including without limitation any certificate or instrument delivered in connection herewith).

 

Section 9.03 Indemnification by Buyer. Subject to the provisions of this Article IX, if the Closing occurs, Buyer hereby covenants and agrees with the Seller that Buyer shall indemnify the Seller and hold Seller harmless from, against and in respect of any and all Losses incurred by the Seller resulting from any misrepresentation, breach of any representation or warranty in this Agreement or the non-fulfillment in any material respect of any agreement, covenant or obligation by Buyer made in this Agreement (including without limitation any certificate or instrument delivered in connection herewith).

 

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Section 9.04 Indemnification Procedures. The Party making a claim under this Article IX is referred to as the “Indemnified Party” and the Party against whom such claims are asserted under this Article IX is referred to as the “Indemnifying Party.”

 

  (a) Third-Party Claims. If any Indemnified Party receives notice of the assertion or commencement of any Action made or brought by any Person who is not a party to this Agreement or an Affiliate of a party to this Agreement or a Representative of the foregoing(a “Third-Party Claim”) against such Indemnified Party with respect to which the Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnified Party shall give the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after receipt of such notice of such Third-Party Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Third-Party Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have the right to participate in, or by giving written notice to the Indemnified Party, to assume the defense of any Third-Party Claim at the Indemnifying Party’s expense and by the Indemnifying Party’s own counsel, and the Indemnified Party shall cooperate in good faith in such defense. In the event that the Indemnifying Party assumes the defense of any Third-Party Claim, subject to Section 9.04(b), it shall have the right to take such action as it deems necessary to avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third-Party Claim in the name and on behalf of the Indemnified Party. The Indemnified Party shall have the right to participate in the defense of any Third-Party Claim with counsel selected by it subject to the Indemnifying Party’s right to control the defense thereof, provided that the fees and disbursements of such counsel shall be at the expense of the Indemnified Party.
     
  (b) Settlement of Third-Party Claims. Notwithstanding any other provision of this Agreement, the Indemnifying Party shall not enter into settlement of any Third-Party Claim without the prior written consent of the Indemnified Party, except as provided in this Section 9.04(b). If a firm offer is made to settle a Third-Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnified Party and provides, in customary form, for the unconditional release of each Indemnified Party from all liabilities and obligations in connection with such Third-Party Claim and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to that effect to the Indemnified Party. If the Indemnified Party fails to consent to such firm offer within ten days after its receipt of such notice, the Indemnified Party may continue to contest or defend such Third-Party Claim and in such event, the maximum liability of the Indemnifying Party as to such Third-Party Claim shall not exceed the amount of such settlement offer. If the Indemnified Party fails to consent to such firm offer and also fails to assume defense of such Third-Party Claim, the Indemnifying Party may settle the Third-Party Claim upon the terms set forth in such firm offer to settle such Third-Party Claim. If the Indemnified Party has assumed the defense pursuant to Section 9.04(a), it shall not agree to any settlement without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed).

 

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  (c) Direct Claims. Any Action by an Indemnified Party on account of a Loss which does not result from a Third-Party Claim (a “Direct Claim”) shall be asserted by the Indemnified Party giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after the Indemnified Party becomes aware of such Direct Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have thirty (30) calendar days after its receipt of such notice to respond in writing to such Direct Claim. The Indemnified Party shall allow the Indemnifying Party and its professional advisors to investigate the matter or circumstance alleged to give rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct Claim and the Indemnified Party shall assist the Indemnifying Party’s investigation by giving such information and assistance as the Indemnifying Party or any of its professional advisors may reasonably request. If the Indemnifying Party does not so respond within such thirty (30) calendar day period, the Indemnifying Party shall be deemed to have rejected such claim, in which case the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement.
     
  (d) Cooperation. Upon a reasonable request made by the Indemnifying Party, each Indemnified Party seeking indemnification hereunder in respect of any Direct Claim, hereby agrees to consult with the Indemnifying Party and act reasonably to take actions reasonably requested by the Indemnifying Party in order to attempt to reduce the amount of Losses in respect of such Direct Claim. Any costs or expenses associated with taking such actions shall be included as Losses hereunder.

 

Section 9.05 Payments. Subject to the terms and conditions herein, once a Loss is agreed to by the Indemnifying Party or finally adjudicated to be payable pursuant to this Article IX or otherwise pursuant to this Agreement, the Indemnifying Party shall satisfy its indemnification obligations within fifteen (15) Business Days of such agreement or adjudication.

 

Section 9.06 Exclusive Remedy. In the event that the Closing occurs, the indemnification provisions contained in this Article IX shall be the sole and exclusive remedy of the Parties with respect to the Transactions for any and all breaches or alleged breaches of any representations, warranties, covenants or agreements of the Parties hereto or any other provision of this Agreement or arising out of the Transactions, except (i) with respect to any equitable remedy to which such Party may be entitled to with respect to any claims or causes of action arising from the breach of any covenants or agreement of a Party that is to be performed subsequent to the Closing Date, or (ii) with respect to a Party, an actual and intentional fraud with respect to this Agreement and the Transactions. In furtherance of the foregoing, each Party hereto, for itself and on behalf of its Affiliates, hereby waives, from and after the Closing, to the fullest extent permitted under applicable Law and except as otherwise specified in this Article IX, any and all rights, claims and causes of action it may have against any other Party hereto relating to the subject matter of this Agreement or any other agreement, certificate or other document or instrument delivered pursuant to this Agreement, arising under or based upon any applicable Law.

 

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Section 9.07 Limitation on Damages.

 

  (a) If the Closing occurs, the aggregate amount of all Losses for which either Party shall be liable pursuant to the provisions of this Article IX shall in no event exceed the aggregate amount of the Purchase Price.
     
  (b) Each Indemnified Party shall take, and cause its Affiliates to take, all reasonable steps to mitigate any Loss upon becoming aware of any event or circumstance that would be reasonably expected to, or does, give rise thereto, including incurring costs only to the minimum extent necessary to remedy the breach that gives rise to such Loss.
     
  (c) In no event will any Party be liable to any other Party under or in connection with this Agreement or in connection with the Transactions for special, general, indirect or consequential damages, including damages for lost profits or lost opportunity, even if the Party sought to be held liable has been advised of the possibility of such damage.

  

Article X. MISCELLANEOUS

 

Section 10.01 Notices. Any notice or other communications required or permitted hereunder shall be in writing and shall be sufficiently given if personally delivered to it or sent by overnight courier or registered mail or certified mail, postage prepaid, or electronic mail with a follow up copy by overnight courier, addressed as follows:

 

If to Buyer:

 

HeartCore Enterprises, Inc.

Attn: Sumitaka Yamamoto

1-2-33, Higashigotanda, Shinagawa-ku

Tokyo, Japan

Email: kanno@heartcore.co.jp

 

with a copy, which shall not constitute notice, to:

 

Anthony L.G., PLLC

Attn: John Cacomanolis

625 N. Flagler Drive, Suite 600

West Palm Beach, FL 33401

Email: jcacomanolis@anthonypllc.com

 

If to the Seller:

 

Dentsu Digital Investment Limited Partnership

Attn: Masaru Yokoyama

1-8-1 Higashi-Shimbashi, Minato-ku, Tokyo

Email: masaru.yokoyama@dentsu.co.jp

 

or such other addresses as shall be furnished in writing by any Party in the manner for giving notices hereunder, and any such notice or communication shall be deemed to have been given (i) upon receipt, if personally delivered or sent by electronic mail, (ii) on the day after dispatch, if sent by overnight courier, and (iii) three (3) days after mailing, if sent by registered or certified mail.

 

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Section 10.02 Governing Law; Arbitration. This Agreement shall be governed by, enforced, and construed under and in accordance with the Laws of Japan. All disputes, controversies or differences arising out of or in connection with this Agreement shall be finally settled by arbitration in accordance with the Commercial Arbitration Rules of The Japan Commercial Arbitration Association. The place of the arbitration shall be Tokyo, Japan.

 

Section 10.03 Waiver of Jury Trial. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREIN. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT SEEK TO ENFORCE THE FOREGOING WAIVER IN THE EVENT OF A LEGAL ACTION, (B) SUCH PARTY HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (D) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 10.03.

 

Section 10.04 Specific Performance. The Parties agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and that the Parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy to which they are entitled at law or in equity.

 

Section 10.05 Attorneys’ Fees. In the event that any Party institutes any arbitration to enforce this Agreement or to secure relief from any default hereunder or breach hereof, the prevailing Party shall be reimbursed by the losing Party for all costs, including reasonable attorneys’ fees, incurred in connection therewith and in enforcing or collecting any judgment rendered therein.

 

Section 10.06 Public Announcements and Filings. Other than as set forth in Section 5.01, unless required by applicable Law or regulatory authority, none of the Parties will issue any report, statement or press release to the general public, trade or trade press, or to any third party (other than its advisors and representatives in connection with Transactions) or file any document, relating to this Agreement and Transactions, except as may be mutually agreed by Buyer and the Seller. Copies of any such filings, public announcements or disclosures, including any announcements or disclosures mandated by Law or regulatory authorities, shall be delivered to each Party prior to the release thereof.

 

Section 10.07 Third-Party Beneficiaries. This Agreement is strictly between the Parties and, except as specifically provided, no director, officer, stockholder (other than the Seller), employee, agent, independent contractor or any other Person shall be deemed to be a third-Party beneficiary of this Agreement.

 

Section 10.08 Expenses. Other than as specifically set forth herein, whether or not the Transactions are consummated, each Party will bear its own respective expenses, including without limitation the fees and expenses of its legal, accounting and financial advisors, incurred in connection with the Transactions.

 

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Section 10.09 Entire Agreement. This Agreement and the other Transaction Documents represent the entire agreement between the Parties relating to the subject matter thereof and supersede all prior agreements, understandings and negotiations, written or oral, with respect to such subject matter. If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that the Transactions be consummated as originally contemplated to the greatest extent possible.

 

Section 10.10 Amendment or Waiver. Other than as specifically set forth herein, every right and remedy provided herein shall be cumulative with every other right and remedy, whether conferred herein, at law, or in equity, and may be enforced concurrently herewith, and no waiver by any Party of the performance of any obligation by the other shall be construed as a waiver of the same or any other default then, theretofore, or thereafter occurring or existing. This Agreement may by amended only by a writing signed by all Parties hereto.

 

Section 10.11 Commercially Reasonable Efforts. Subject to the terms and conditions herein provided, each Party shall use its commercially reasonable efforts to perform or fulfill all conditions and obligations to be performed or fulfilled by it under this Agreement so that Transactions shall be consummated as soon as practicable. Each Party also agrees that it shall use its commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws and regulations to consummate and make effective this Agreement and the Transactions.

 

Section 10.12 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns. Other than as provided for in Section 5.03, no Party may assign its rights or obligations hereunder without the prior written consent of the other Parties. Other than as provided for in Section 5.03, no assignment shall relieve the assigning Party of any of its obligations hereunder.

 

Section 10.13 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which taken together shall be but a single instrument. A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.

 

[Signature Pages Follow]

 

14
 

 

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the Effective Date.

 

  HeartCore Enterprises, Inc.
     
  By: /s/ Sumitaka Yamamoto
  Name: Sumitaka Yamamoto
  Title: Chief Executive Officer
     
  Dentsu Digital Investment Limited Partnership
     
  By: /s/ Jichiro Kubota
  Name: Jichiro Kubota
  Title: President & CEO

 

15

  

 

Exhibit 10.4

 

 

 

HeartCore Enterprises, Inc.

 

2021 Equity Incentive Plan

 

 

 

 

 

 

Table of Contents

 

Article I.       Purposes and Definitions 1
         
  Section 1.01   Purposes of this Plan; Structure. 1
  Section 1.02   Definitions. 1
  Section 1.03   Additional Interpretations. 7
         
Article II.      Stock Subject to this Plan; Administration. 7
         
  Section 2.01   Stock Subject to this Plan. 7
  Section 2.02   Administration of this Plan. 8
  Section 2.03   Eligibility. 10
  Section 2.04   Indemnification. 10
       
Article III.     Awards. 10
       
  Section 3.01   Stock Options. 10
  Section 3.02   Stock Appreciation Rights. 13
  Section 3.03   Restricted Stock. 14
  Section 3.04   Restricted Stock Units. 15
  Section 3.05   Performance Units and Performance Shares. 16
  Section 3.06   Cash-Based Awards and Other Stock-Based Awards. 19
  Section 3.07   Form of Award Agreements. 21
       
Article IV.     Additional Provisions Applicable to this Plan and Awards 21
       
  Section 4.01   Outside Director Limitations. 21
  Section 4.02   Compliance With Code Section 409A. 21
  Section 4.03   Leaves of Absence/Transfer Between Locations. 22
  Section 4.04   Limited Transferability of Awards. 22
  Section 4.05   Adjustments; Dissolution, Merger, Etc. 22
  Section 4.06   Tax Withholding. 25
  Section 4.07   Compliance with Securities Laws. 25
  Section 4.08   Tax Withholding. 26
  Section 4.09   No Effect on Employment or Service. 26
  Section 4.10   Repurchase Rights. 26
  Section 4.11   Fractional Shares. 26
  Section 4.12   Forfeiture Events. 27
  Section 4.13   Date of Grant. 27
  Section 4.14   Term of Plan. 27

 

(i)

 

 

  Section 4.15   Amendment and Termination of this Plan. 27
  Section 4.16   Conditions Upon Issuance of Shares. 28
  Section 4.17   Inability to Obtain Authority. 28
  Section 4.18   Shareholder Approval. 28
  Section 4.19   Retirement and Welfare Plans. 28
  Section 4.20   Beneficiary Designation. 28
  Section 4.21   Severability. 29
  Section 4.22   No Constraint on Corporate Action. 29
  Section 4.23   Unfunded Obligation. 29
  Section 4.24   Choice of Law. 29

 

Exhibits

 

Exhibit A Form of Award Agreement for Options
   
Exhibit B Form of Award Agreement for Stock Appreciation Rights
   
Exhibit C Form of Award Agreement for Restricted Stock
   
Exhibit D Form of Award Agreement for Restricted Stock Units

 

(ii)

 

 

HeartCore Enterprises, Inc.

2021 Equity Incentive Plan

 

Article I. PURPOSES AND DEFINITIONS

 

Section 1.01 Purposes of this Plan; Structure.

 

  (a) The purposes of this Plan are (i) to attract and retain the best available personnel for positions of substantial responsibility, (ii) to provide additional incentive to Employees, Directors and Consultants, and (ii) to promote the success of the Company’s business.
     
  (b) This Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Awards, Cash-Based Awards and Other Stock-Based Awards.

 

Section 1.02 Definitions. As used herein, the following definitions will apply:

 

  (a) “Administrator” means the Board or any of its Committees as will be administering this Plan, in accordance with Section 2.02.
     
  (b) “Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by, or under common Control with such Person.
     
  (c) “Applicable Laws” means the legal and regulatory requirements relating to the administration of equity-based awards, including but not limited to the related issuance of shares of Common Stock, including but not limited to under U.S. federal and state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any non-U.S. country or jurisdiction where Awards are, or will be, granted under this Plan.
     
  (d) “Award” means, individually or collectively, a grant under this Plan of Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Units or Performance Shares, or Cash-Based Award or Other Stock-Based Award granted under this Plan.
     
  (e) “Award Agreement” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under this Plan, which Award Agreement shall be is subject to the terms and conditions of this Plan.
     
  (f) “Board” means the Board of Directors of the Company.
     
  (g) “Cash-Based Award” means an Award denominated in cash and granted pursuant to Section 3.06.

 

1

 

 

  (h) “Cause” means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between a Participant and the Company or its Affiliates applicable to an Award, any of the following: (i) the Participant’s theft, dishonesty, willful misconduct, breach of fiduciary duty for personal profit, or falsification of documents or records of the Company or any of its Affiliates; (ii) the Participant’s material failure to abide by the Company’s or any Affiliate’s code of conduct or other policies (including, without limitation, policies relating to confidentiality and reasonable workplace conduct); (iii) the Participant’s unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of the Company or any of its Affiliates (including, without limitation, the Participant’s improper use or disclosure of the Company’s or any of its Affiliate’s confidential or proprietary information); (iv) any intentional act by the Participant which has a material detrimental effect on the Company’s or any of its Affiliate’s reputation or business; (v) the Participant’s repeated failure to perform any reasonable assigned duties after written notice from the Company or any of its Affiliates, and a reasonable opportunity to cure, such failure; (vi) any material breach by the Participant of any employment, service, non-disclosure, non-competition, non-solicitation or other similar agreement between the Participant and the Company or any of its Affiliates which breach is not cured pursuant to the terms of such agreement; or (vii) the Participant’s conviction (including any plea of guilty or nolo contendere) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or which impairs the Participant’s ability to perform his or her duties with the Company or any of its Affiliates.
     
  (i) “Change in Control” means the occurrence of any of the following events, subject to the provisions of Section 1.03:
         
    (i)   Change in Ownership of the Company. A change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (“Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than fifty percent (50%) of the total voting power of the stock of the Company; provided, however, that for purposes of this Section 1.02(i)(i), the acquisition of additional stock by any one Person, who is considered to own more than fifty percent (50%) of the total voting power of the stock of the Company will not be considered a Change in Control. Further, if the shareholders of the Company immediately before such change in ownership continue to retain immediately after the change in ownership, in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately prior to the change in ownership, direct or indirect beneficial ownership of fifty percent (50%) or more of the total voting power of the stock of the Company or of the ultimate parent entity of the Company, such event shall not be considered a Change in Control under this Section 1.02(i)(i). For this purpose, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company, as the case may be, either directly or through one or more subsidiary corporations or other business entities.
         
    (ii)   Change in Effective Control of the Company. A change in the effective control of the Company which occurs on the date that a majority of members of the Board is replaced during any twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. For purposes of this Section 1.02(i)(ii), if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control.

 

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    (iii)   Change in Ownership of a Substantial Portion of the Company’s Assets. A change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions; provided, however, that for purposes of this Section 1.02(i)(iii), the following will not constitute a change in the ownership of a substantial portion of the Company’s assets: (A) a transfer to an entity that is controlled by the Company’s shareholders immediately after the transfer, or (B) a transfer of assets by the Company to: (1) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock, (2) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company, (3) a Person, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company, or (4) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in clause (B)(3) of this Section 1.02(i)(iii). For purposes of this Section 1.02(i)(iii), gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.
         
  (j) “Code” means the Internal Revenue Code of 1986, as amended, and reference to a specific section of the Code or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.
     
  (k) “Committee” means a committee of Directors or of other individuals satisfying Applicable Laws appointed by the Board, or by a duly authorized committee of the Board, in accordance with Section 2.02.
     
  (l) “Common Stock” means the common stock, par value $0.0001 per share, of the Company.
     
  (m) “Company” means HeartCore Enterprises, Inc., a Delaware corporation, or any successor thereto.
     
  (n) “Consultant” means any natural person, including an advisor, engaged by the Company or a Parent or Subsidiary to render bona fide services to such entity, provided the services (i) are not in connection with the offer or sale of securities in a capital-raising transaction, and (ii) do not directly promote or maintain a market for the Company’s securities, in each case, within the meaning of Form S-8 promulgated under the Securities Act, and provided further, that a Consultant will include only those persons to whom the issuance of Shares may be registered under Form S-8 promulgated under the Securities Act.

 

3

 

 

  (o) “Control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise.” Controlled”, “Controlling” and “under common Control with” have correlative meanings. Without limiting the foregoing a Person (the “Controlled Person”) shall be deemed Controlled by (a) any other Person (the “10% Owner”) (i) owning beneficially, as meant in Rule 13d-3 under the Exchange Act, securities entitling such Person to cast 10% or more of the votes for election of directors or equivalent governing authority of the Controlled Person or (ii) entitled to be allocated or receive 10% or more of the profits, losses, or distributions of the Controlled Person; (b) an officer, director, general partner, partner (other than a limited partner), manager, or member (other than a member having no management authority that is not a 10% Owner ) of the Controlled Person; or (c) a spouse, parent, lineal descendant, sibling, aunt, uncle, niece, nephew, mother-in-law, father-in-law, sister-in-law, or brother-in-law of an Affiliate of the Controlled Person or a trust for the benefit of an Affiliate of the Controlled Person or of which an Affiliate of the Controlled Person is a trustee.
     
  (p) “Director” means a member of the Board.
     
  (q) “Disability” means total and permanent disability as defined in Code Section 22(e)(3), provided that in the case of Awards other than Incentive Stock Options, the Administrator in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Administrator from time to time.
     
  (r) “Dividend Equivalent Right” means the right of a Participant, granted at the discretion of the Administrator or as otherwise provided by this Plan, to receive a credit for the account of such Participant in an amount equal to the cash dividends paid on one Share for each Share represented by an Award held by such Participant.
     
  (s) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company, provided that neither service as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company or any Parent or Subsidiary of the Company.
     
  (t) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
     
  (u) “Exchange Program” means a program under which (i) outstanding Awards are surrendered or cancelled in exchange for awards of the same type (which may have higher or lower exercise prices and different terms), awards of a different type, and/or cash, (ii) Participants would have the opportunity to transfer any outstanding Awards to a financial institution or other person or entity selected by the Administrator, and/or (iii) the exercise price of an outstanding Award is reduced or increased. The Administrator will determine the terms and conditions of any Exchange Program in its sole discretion.

 

4

 

 

  (v) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:
         
    (i)   If the Common Stock is listed on any established stock exchange or a national market system (other than an over-the counter market, which will not be considered an established stock exchange of national market system for the purposes of this definition), including without limitation the New York Stock Exchange, the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market of The Nasdaq Stock Market, its Fair Market Value will be the closing sales price for such stock (or, if no closing sales price was reported on that date, as applicable, on the last trading date such closing sales price was reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
         
    (ii)   If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share will be the mean between the high bid and low asked prices for the Common Stock on the day of determination (or, if no bids and asks were reported on that date, as applicable, on the last trading date such bids and asks were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
         
    (iii)   In the absence of an established market for the Common Stock, the Fair Market Value will be determined in good faith by the Administrator.
         
  (w) “Fiscal Year” means the fiscal year of the Company.
     
  (x) “Incentive Stock Option” means an Option that by its terms qualifies and is otherwise intended to qualify as an incentive stock option within the meaning of Code Section 422 and the regulations promulgated thereunder.
     
  (y) “Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.
     
  (z) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
     
  (aa) “Option” means a stock option granted pursuant to this Plan.
     
  (bb) “Outside Director” means a Director who is not an Employee.
     
  (cc) “Other Stock-Based Award” means an Award denominated in Shares and granted pursuant to Section 3.06.
     
  (dd) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Code Section 424(e).
     
  (ee) “Participant” means the holder of an outstanding Award.
     
  (ff) “Performance Award” means an Award of Performance Shares or Performance Units.
     
  (gg) “Performance Award Formula” means, for any Performance Award, a formula or table established by the Administrator pursuant to Section 3.05 which provides the basis for computing the value of a Performance Award at one or more levels of attainment of the applicable Performance Goal(s) measured as of the end of the applicable Performance Period.

 

5

 

 

  (hh) “Performance Share” means an Award denominated in Shares which may be earned in whole or in part upon attainment of performance goals or other vesting criteria as the Administrator may determine pursuant to Section 3.05.
     
  (ii) “Performance Unit” means an Award which may be earned in whole or in part upon attainment of performance goals or other vesting criteria as the Administrator may determine and which may be settled for cash, Shares or other securities or a combination of the foregoing pursuant to Section 3.05.
     
  (jj) “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as determined by the Administrator.
     
  (kk) “Person” means an individual, corporation, partnership (including a general partnership, limited partnership or limited liability partnership), limited liability company, association, trust or other entity or organization, including a government, domestic or foreign, or political subdivision thereof, or an agency or instrumentality thereof.
     
  (ll) “Plan” means this 2021 Equity Incentive Plan.
     
  (mm) “Restricted Stock” means Shares issued pursuant to an Award of Restricted Stock under Section 3.03, or issued pursuant to the early exercise of an Option.
     
  (nn) “Restricted Stock Unit” means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuant to Section 3.04. Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.
     
  (oo) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to this Plan.
     
  (pp) “Section 16(b)” means Section 16(b) of the Exchange Act.
     
  (qq) “Securities Act” means the Securities Act of 1933, as amended.
     
  (rr) “Service Provider” means an Employee, Director or Consultant.
     
  (ss) “Share” means a share of the Common Stock, as adjusted in accordance with Section 4.05.
     
  (tt) “Stock Appreciation Right” means an Award, granted alone or in connection with an Option, that pursuant to Section 3.02 is designated as a Stock Appreciation Right.
     
  (uu) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Code Section 424(f).

 

6

 

 

Section 1.03 Additional Interpretations. For purposes of Section 1.02(i), persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company. Notwithstanding the foregoing, a transaction will not be deemed a Change in Control unless the transaction qualifies as a change in control event within the meaning of Code Section 409A, as it has been and may be amended from time to time, and any proposed or final Treasury Regulations and Internal Revenue Service guidance that has been promulgated or may be promulgated thereunder from time to time. Further and for the avoidance of doubt, a transaction will not constitute a Change in Control if: (i) its sole purpose is to change the jurisdiction of the Company’s incorporation, or (ii) its sole purpose is to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

 

Article II. Stock Subject to this Plan; Administration.

 

Section 2.01 Stock Subject to this Plan.

 

  (a) Subject to the provisions of Section 2.01(a) and Section 4.05, the maximum aggregate number of Shares that may be subject to Awards and sold under this Plan is 2,400,000 Shares. The Shares may be authorized but unissued, or reacquired Common Stock.
     
  (b) Subject to adjustment as provided in Section 4.05, the maximum aggregate number of shares of Shares that may be issued under this Plan as set forth in Section 2.01(a) shall be cumulatively increased on January 1, 2022 and on each subsequent January 1 through and including January 1, 2022, by a number of shares (the “Annual Increase”) equal to the smaller of (a) three percent (3%) of the number of shares of Common Stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the Board.
     
  (c) If an Award expires or becomes un-exercisable without having been exercised in full, is surrendered pursuant to an Exchange Program, or, with respect to Restricted Stock, Restricted Stock Units, Performance Units or Performance Shares, is forfeited to or repurchased by the Company due to the failure to vest, the unpurchased Shares (or for Awards other than Options or Stock Appreciation Rights the forfeited or repurchased Shares) which were subject thereto will become available for future grant or sale under this Plan (unless this Plan has terminated). With respect to Stock Appreciation Rights, only Shares actually issued pursuant to a Stock Appreciation Right will cease to be available under this Plan; all remaining Shares under Stock Appreciation Rights will remain available for future grant or sale under this Plan (unless this Plan has terminated). Shares that have actually been issued under this Plan under any Award will not be returned to this Plan and will not become available for future distribution under this Plan; provided, however, that if Shares issued pursuant to Awards of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units are repurchased by the Company or are forfeited to the Company due to the failure to vest, such Shares will become available for future grant under this Plan. Shares used to pay the exercise price of an Award or to satisfy the tax withholdings related to an Award will become available for future grant or sale under this Plan. To the extent an Award under this Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under this Plan. Notwithstanding the foregoing and, subject to adjustment as provided in Section 4.05, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share number stated in Section 2.01(a), plus, to the extent allowable under Code Section 422 and the Treasury Regulations promulgated thereunder, any Shares that become available for issuance under this Plan pursuant to Section 2.01(c) and Section 2.01(d).

 

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  (d) The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of this Plan.

 

Section 2.02 Administration of this Plan.

 

  (a) Procedure.
         
    (i)   Multiple Administrative Bodies. Different Committees with respect to different groups of Service Providers may administer this Plan.
         
    (ii)   Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption under Rule 16b-3.
         
    (iii)   Other Administration. Other than as provided above, this Plan will be administered by (A) the Board or (B) a Committee, which Committee will be constituted to satisfy Applicable Laws.
         
  (b) Powers of the Administrator. Subject to the provisions of this Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator will have the authority, in its discretion:
         
    (i)   to determine the Fair Market Value;
         
    (ii)   to select the Service Providers to whom Awards may be granted hereunder;
         
    (iii)   to determine the number of Shares to be covered by each Award granted hereunder;
         
    (iv)   to approve forms of Award Agreements for use under this Plan;
         
    (v)   to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Award granted hereunder, with such terms and conditions including, but not being limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator will determine;
         
    (vi)   to determine whether an Award will be settled in Shares, cash, other property or in any combination thereof;
         
    (vii)   to institute and determine the terms and conditions of an Exchange Program;
         
    (viii)   to construe and interpret the terms of this Plan and Awards granted pursuant to this Plan;

 

8

 

 

    (ix)   to prescribe, amend and rescind rules and regulations relating to this Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable non-U.S. laws or for qualifying for favorable tax treatment under applicable non-U.S. laws;
         
    (x)   to modify or amend each Award (subject to Section 4.15(c)), including but not limited to the discretionary authority to extend the post-termination exercisability period of Awards; provided, however, that in no case will an Option or Stock Appreciation Right be extended beyond its original maximum term;
         
    (xi)   to allow Participants to satisfy tax withholding obligations in a manner prescribed in Section 4.05(d);
         
    (xii)   to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;
         
    (xiii)   to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that otherwise would be due to such Participant under an Award;

 

    (xiv)   to prescribe, amend or rescind rules, guidelines and policies relating to this Plan, or to adopt sub-plans or supplements to, or alternative versions of, this Plan, including, without limitation, as the Administrator deems necessary or desirable to comply with the laws of, or to accommodate the tax policy, accounting principles or custom of, foreign jurisdictions whose residents may be granted Awards;
         
    (xv)   to correct any defect, supply any omission or reconcile any inconsistency in this Plan or any Award Agreement and to make all other determinations and take such other actions with respect to this Plan or any Award as the Administrator may deem advisable to the extent not inconsistent with the provisions of this Plan or applicable law; and
         
    (xvi)   to make all other determinations deemed necessary or advisable for administering this Plan.
         
  (c) Option or Stock Appreciation Right Repricing. The Administrator shall have the authority, without additional approval by the shareholders of the Company, to approve a program providing for either (a) the cancellation of outstanding Options or Stock Appreciation Rights having exercise prices per share greater than the then Fair Market Value of a Share (“Underwater Awards”) and the grant in substitution therefor of new Options or Stock Appreciation Rights covering the same or a different number of shares but with an exercise price per share equal to the Fair Market Value per share on the new grant date or payments in cash, or (b) the amendment of outstanding Underwater Awards to reduce the exercise price thereof to the Fair Market Value per share on the date of amendment.
     
  (d) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations will be final and binding on all Participants and any other holders of Awards and will be given the maximum deference permitted by Applicable Laws

 

9

 

 

Section 2.03 Eligibility. Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares and Performance Units may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.

 

Section 2.04 Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Administrator or as officers or employees of the Company or any of its Affiliates, to the extent permitted by applicable law, members of the Board or the Administrator and any officers or employees of the Company or any of its Affiliates to whom authority to act for the Board, the Administrator or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with this Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.

 

Article III. Awards.

 

Section 3.01 Stock Options.

 

  (a) Grant of Options. Subject to the terms and provisions of this Plan, the Administrator, at any time and from time to time, may grant Options in such amounts as the Administrator, in its sole discretion, will determine.
     
  (b) Option Agreement. Each Award of an Option will be evidenced by an Award Agreement that will specify the exercise price, the term of the Option, the number of Shares subject to the Option, the exercise restrictions, if any, applicable to the Option, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
     
  (c) Limitations. Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. Notwithstanding such designation, however, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand dollars ($100,000), such Options will be treated as Nonstatutory Stock Options. For purposes of this Section 3.01(c), Incentive Stock Options will be taken into account in the order in which they were granted, the Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted, and the calculation will be performed in accordance with Code Section 422 and Treasury Regulations promulgated thereunder.

 

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  (d) Term of Option. The term of each Option will be stated in the Award Agreement. In the case of an Incentive Stock Option, the term will be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.
     
  (e) Option Exercise Price and Consideration.
         
    (i)   Exercise Price. The per Share exercise price for the Shares to be issued pursuant to the exercise of an Option will be determined by the Administrator, subject to the following:

 

    (1)   In the case of an Incentive Stock Option:

 

    (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no less than one hundred ten percent (110%) of the Fair Market Value per Share (or the fair market value per Share as determined in accordance with Treas. Reg. 1.409A-1(b)(5)(iv)(A)) on the date of grant;
       
    (B) granted to any Employee other than an Employee described in paragraph (1) immediately above, the per Share exercise price will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant;

 

      (2)   In the case of a Nonstatutory Stock Option, the per Share exercise price will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant (or the fair market value per Share as determined in accordance with Treas. Reg. 1.409A-1(b)(5)(iv)(A)).
             
      (3)   Notwithstanding the foregoing provisions of this Section 3.01(e), Options may be granted with a per Share exercise price of less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Code Section 424(a).
               
    (ii)   Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will fix the period within which the Option may be exercised and will determine any conditions that must be satisfied before the Option may be exercised.

 

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    (iii)   Form of Consideration. The Administrator will determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator will determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (1) cash; (2) check; (3) promissory note, to the extent permitted by Applicable Laws; (4) other Shares, provided that such Shares have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option will be exercised and provided further that accepting such Shares will not result in any adverse accounting consequences to the Company, as the Administrator determines in its sole discretion; (5) consideration received by the Company under a broker assisted (or other) cashless exercise program (whether through a broker or otherwise) implemented by the Company in connection with this Plan; (6) by net exercise; (7) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or (8) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator will consider if acceptance of such consideration may be reasonably expected to benefit the Company.
         
  (f) Exercise of Option.
         
    (i)   Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder will be exercisable according to the terms of this Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share. An Option will be deemed exercised when the Company receives: (i) notice of exercise (in such form as the Administrator may specify from time to time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with applicable tax withholding). Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and this Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder will exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 4.05. Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of this Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.
         
    (ii)   Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’s termination as the result of the Participant’s death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for three (3) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to this Plan. If after termination the Participant does not exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to this Plan.

 

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    (iii)   Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to this Plan. If after termination the Participant does not exercise his or her Option within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to this Plan.
         
    (iv)   Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised following the Participant’s death within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participant’s designated beneficiary, provided such beneficiary has been designated prior to Participant’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant’s estate or by the person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following Participant’s death. Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will immediately revert to this Plan. If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to this Plan. .

 

Section 3.02 Stock Appreciation Rights.

 

  (a) Grant of Stock Appreciation Rights. Subject to the terms and conditions of this Plan, a Stock Appreciation Right may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion.
     
  (b) Number of Shares. The Administrator will have complete discretion to determine the number of Shares subject to any Award of Stock Appreciation Rights.
     
  (c) Exercise Price and Other Terms. The per Share exercise price for the Shares that will determine the amount of the payment to be received upon exercise of a Stock Appreciation Right as set forth in Section 3.02(f) will be determined by the Administrator and will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. Otherwise, the Administrator, subject to the provisions of this Plan, will have complete discretion to determine the terms and conditions of Stock Appreciation Rights granted under this Plan. Stock Appreciation Rights which have become exercisable may be exercised by delivery of written or electronic notice of exercise to the Company in accordance with the terms of the Award Agreement, specifying the number of Stock Appreciation Rights to be exercised and the date on which such Stock Appreciation Rights were awarded and vested.

 

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  (d) Stock Appreciation Right Agreement. Each Stock Appreciation Right grant will be evidenced by an Award Agreement that will specify the exercise price, the term of the Stock Appreciation Right, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
     
  (e) Expiration of Stock Appreciation Rights. A Stock Appreciation Right granted under this Plan will expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 3.01(d) relating to the maximum term and Section 3.01(f) relating to exercise also will apply to Stock Appreciation Rights.
     
  (f) Payment of Stock Appreciation Right Amount. Upon exercise of a Stock Appreciation Right, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying (i) the difference between the Fair Market Value of a Share on the date of exercise over the exercise price; and (ii) the number of Shares with respect to which the Stock Appreciation Right is exercised. At the discretion of the Administrator, the payment upon Stock Appreciation Right exercise may be in cash, in Shares of equivalent value, or in some combination thereof.
     
  (g) Deemed Exercise of Stock Appreciation Rights. If, on the date on which a Stock Appreciation Rights would otherwise terminate or expire, the Stock Appreciation Right by its terms remains exercisable immediately prior to such termination or expiration and, if so exercised, would result in a payment to the holder of such Stock Appreciation Right, then any portion of such Stock Appreciation Right which has not previously been exercised shall automatically be deemed to be exercised as of such date with respect to such portion.

 

Section 3.03 Restricted Stock.

 

  (a) Grant of Restricted Stock. Subject to the terms and provisions of this Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine.
     
  (b) Restricted Stock Agreement. Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period of Restriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine. Unless the Administrator determines otherwise, the Company as escrow agent will hold Shares of Restricted Stock until the restrictions on such Shares have lapsed.
     
  (c) Transferability. Except as provided in this Section 3.03 or as the Administrator determines, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.

 

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  (d) Other Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.
     
  (e) Removal of Restrictions. Except as otherwise provided in this Section 3.03, Shares of Restricted Stock covered by each Restricted Stock grant made under this Plan will be released from escrow as soon as practicable after the last day of the Period of Restriction or at such other time as the Administrator may determine. The Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.
     
  (f) Voting Rights. During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the Administrator determines otherwise.
     
  (g) Dividends and Other Distributions. During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be entitled to receive all dividends and other distributions paid with respect to such Shares, unless the Administrator provides otherwise. If any such dividends or distributions are paid in Shares, the Shares will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.
     
  (h) Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the Company and again will become available for grant under this Plan.

 

Section 3.04 Restricted Stock Units.

 

  (a) Grant. Restricted Stock Units may be granted at any time and from time to time as determined by the Administrator. After the Administrator determines that it will grant Restricted Stock Units under this Plan, it will advise the Participant in an Award Agreement of the terms, conditions, and restrictions related to the grant, including the number of Restricted Stock Units.
     
  (b) Vesting Criteria and Other Terms. The Administrator will set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. The Administrator may set vesting criteria based upon the achievement of Company-wide, divisional, business unit, or individual goals (including, but not limited to, continued employment or service), applicable federal or state securities laws, or any other basis determined by the Administrator in its discretion.
     
  (c) Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant will be entitled to receive a payout as determined by the Administrator or as set forth in the applicable Award Agreement. Notwithstanding the foregoing, at any time after the grant of Restricted Stock Units, the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.
     
  (d) Form and Timing of Payment. Payment of earned Restricted Stock Units will be made as soon as practicable after the date(s) determined by the Administrator and set forth in the Award Agreement. The Administrator, in its sole discretion, may settle earned Restricted Stock Units in cash, Shares, or a combination of both.

 

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  (e) Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to Shares represented by Restricted Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Administrator, in its discretion, may provide in the Award Agreement evidencing any Restricted Stock Unit Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date such Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date the Award is settled or the date on which it is terminated. Dividend Equivalent Rights, if any, shall be paid by crediting the Participant with a cash amount or with additional whole Restricted Stock Units as of the date of payment of such cash dividends on Stock, as determined by the Administrator. The number of additional Restricted Stock Units (rounded to the nearest whole number), if any, to be credited shall be determined by dividing (a) the amount of cash dividends paid on the dividend payment date with respect to the number of Shares represented by the Restricted Stock Units previously credited to the Participant by (b) the Fair Market Value per Share on such date. Such cash amount or additional Restricted Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time as the Restricted Stock Units originally subject to the Restricted Stock Unit Award. In the event of a dividend or distribution paid in Shares or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.05, appropriate adjustments shall be made in the Participant’s Restricted Stock Unit Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the Shares issuable upon settlement of the Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same vesting conditions as are applicable to the Award.
     
  (f) Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock Units will be forfeited to the Company.

 

Section 3.05 Performance Units and Performance Shares.

 

  (a) Issuance. Performance Awards may be granted to Service Providers at any time and from time to time, as will be determined by the Administrator, in its sole discretion. The Administrator will have complete discretion in determining the number of Performance Units and Performance Shares granted to each Participant.
     
  (b) Value of Performance Units/Shares. Each Performance Unit will have an initial value that is established by the Administrator on or before the date of grant. Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant.

 

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  (c) Performance Objectives and Other Terms. The Administrator will set performance objectives or other vesting provisions (including, without limitation, continued status as a Service Provider) in its discretion which, depending on the extent to which they are met, will determine the number or value of Performance Units/Shares that will be paid out to the Service Providers. The time period during which the performance objectives or other vesting provisions must be met will be called the “Performance Period.” Each Performance Awards will be evidenced by an Award Agreement that will specify the Performance Period, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
     
  (d) Performance Targets and Goals. The Administrator may set performance objectives based upon the achievement of Company-wide, divisional, business unit or individual goals (including, but not limited to, continued employment or service), applicable federal or state securities laws, or any other basis determined by the Administrator in its discretion (“Performance Goals”). Performance Goals shall be established by the Administrator on the basis of targets to be attained (“Performance Targets”) with respect to one or more measures of business or financial performance (each, a “Performance Measure”), subject to the following:
         
    (i)   Performance Measures. Performance Measures shall be calculated in accordance with the Company’s financial statements, or, if such measures are not reported in the Company’s financial statements, they shall be calculated in accordance with generally accepted accounting principles, a method used generally in the Company’s industry, or in accordance with a methodology established by the Administrator prior to the grant of the Performance Award. As specified by the Administrator, Performance Measures may be calculated with respect to the Company and its Subsidiaries consolidated therewith for financial reporting purposes, one or more Subsidiaries or such division or other business unit of any of them selected by the Administrator. Unless otherwise determined by the Administrator prior to the grant of the Performance Award, the Performance Measures applicable to the Performance Award shall be calculated prior to the accrual of expense for any Performance Award for the same Performance Period and excluding the effect (whether positive or negative) on the Performance Measures of any change in accounting standards or any unusual or infrequently occurring event or transaction, as determined by the Administrator, occurring after the establishment of the Performance Goals applicable to the Performance Award. Each such adjustment, if any, shall be made solely for the purpose of providing a consistent basis from period to period for the calculation of Performance Measures in order to prevent the dilution or enlargement of the Participant’s rights with respect to a Performance Award. Performance Measures may be based upon one or more of the following, as determined by the Administrator: (1) revenue; (2) sales; (3) expenses; (4) operating income; (5) gross margin; (6) operating margin; (7) earnings before any one or more of: stock-based compensation expense, interest, taxes, depreciation and amortization; (8) pre-tax profit; (9) net operating income; (10) net income; (11) economic value added; (12) free cash flow; (13) operating cash flow; (14) balance of cash, cash equivalents and marketable securities; (15) stock price; (16) earnings per share; (17) return on shareholder equity; (18) return on capital; (19) return on assets; (20) return on investment; (21) total shareholder return; (22) employee satisfaction; (23) employee retention; (24) market share; (25) customer satisfaction; (26) product development; (27) research and development expenses; (28) completion of an identified special project; and (29) completion of a joint venture or other corporate transaction.

 

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    (ii)   Performance Targets. Performance Targets may include a minimum, maximum, target level and intermediate levels of performance, with the final value of a Performance Award determined under the applicable Performance Award Formula by the Performance Target level attained during the applicable Performance Period. A Performance Target may be stated as an absolute value, an increase or decrease in a value, or as a value determined relative to an index, budget or other standard selected by the Administrator.
         
  (e) Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. After the grant of a Performance Unit/Share, the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such Performance Unit/Share.
     
  (f) Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units or Performance Shares will be made as soon as practicable after the expiration of the applicable Performance Period. The Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in a combination thereof.
     
  (g) Cancellation of Performance Units/Shares. On the date set forth in the Award Agreement, all unearned or unvested Performance Units or Performance Shares will be forfeited to the Company, and again will be available for grant under this Plan.
     
  (h) Qualified Performance-Based Awards. Restricted Stock and Restricted Stock Units granted to officers and Employees of the Company or any Parent or Subsidiary of the Company (within the meaning of Code Section 424) may be granted with the intent that the award satisfy the “Performance-Based Exception” (any such award intended to satisfy the Performance-Based Exception, a “Qualified Performance-Based Award”). The grant, vesting, or payment of a Qualified Performance-Based Awards may depend on the degree of achievement of one or more performance goals relative to a pre-established targeted level or levels using one or more performance targets as determined by the Administrator (on an absolute or relative (including, without limitation, relative to the performance of one or more other companies or upon comparisons of any of the indicators of performance relative to one or more other companies) basis, any of which may also be expressed as a growth or decline measure relative to an amount or performance for a prior date or period) for the Company on a consolidated basis or for one or more of the Company’s Subsidiaries, segments, divisions, or business or operational units, or any combination of the foregoing. The performance period applicable to any Performance Units or Performance Shares may not be less than three (3) months nor more than ten (10) years. To satisfy the Performance-Based Exception, the performance measure(s) applicable to the Qualified Performance-Based Award and specific performance formula, goal or goals (“targets”), including must be established and approved by the Administrator during the first ninety (90) days of the applicable Performance Period (and, in the case of Performance Periods of less than one year, in no event after 25% or more of the Performance Period has elapsed) and while performance relating to such target(s) remains substantially uncertain within the meaning of Section 162(m) of the Code.

 

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  (i) Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to Shares represented by Performance Share Awards until the date of the issuance of such Shares, if any (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Administrator, in its discretion, may provide in the Award Agreement evidencing any Performance Share Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date the Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date on which the Performance Shares are settled or the date on which they are forfeited. Such Dividend Equivalent Rights, if any, shall be credited to the Participant either in cash or in the form of additional whole Performance Shares as of the date of payment of such cash dividends on Stock, as determined by the Administrator. The number of additional Performance Shares (rounded to the nearest whole number), if any, to be so credited shall be determined by dividing (a) the amount of cash dividends paid on the dividend payment date with respect to the number of Shares represented by the Performance Shares previously credited to the Participant by (b) the Fair Market Value per Share on such date. Dividend Equivalent Rights, if any, shall be accumulated and paid to the extent that the related Performance Shares become nonforfeitable. Settlement of Dividend Equivalent Rights may be made in cash, Shares, or a combination thereof as determined by the Administrator, and may be paid on the same basis as settlement of the related Performance Share as provided in Section 3.05(e). Dividend Equivalent Rights shall not be paid with respect to Performance Units. In the event of a dividend or distribution paid in Shares or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.05, appropriate adjustments shall be made in the Participant’s Performance Share Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the Shares issuable upon settlement of the Performance Share Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Performance Goals as are applicable to the Award.

 

Section 3.06 Cash-Based Awards and Other Stock-Based Awards. Cash-Based Awards and Other Stock-Based Awards shall be evidenced by Award Agreements in such form as the Administrator shall establish. Such Award Agreements may incorporate all or any of the terms of this Plan by reference and shall comply with and be subject to the following terms and conditions.

 

  (a) Grant of Cash-Based Awards. Subject to the provisions of this Plan, the Administrator, at any time and from time to time, may grant Cash-Based Awards to Participants in such amounts and upon such terms and conditions, including the achievement of performance criteria, as the Administrator may determine.

 

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  (b) Grant of Other Stock-Based Awards. The Administrator may grant other types of equity-based or equity-related Awards not otherwise described by the terms of this Plan (including the grant or offer for sale of unrestricted securities, stock-equivalent units, stock appreciation units, securities or debentures convertible into common stock or other forms determined by the Administrator) in such amounts and subject to such terms and conditions as the Administrator shall determine. Other Stock-Based Awards may be made available as a form of payment in the settlement of other Awards or as payment in lieu of compensation to which a Participant is otherwise entitled. Other Stock-Based Awards may involve the transfer of actual Shares to Participants, or payment in cash or otherwise of amounts based on the value of a Share and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.
     
  (c) Value of Cash-Based and Other Stock-Based Awards. Each Cash-Based Award shall specify a monetary payment amount or payment range as determined by the Administrator. Each Other Stock-Based Award shall be expressed in terms of Shares or units based on such Shares, as determined by the Administrator. The Administrator may require the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 3.05, as shall be established by the Administrator and set forth in the Award Agreement evidencing such Award. If the Administrator exercises its discretion to establish performance criteria, the final value of Cash-Based Awards or Other Stock-Based Awards that will be paid to the Participant will depend on the extent to which the performance criteria are met. The establishment of performance criteria with respect to the grant or vesting of any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based Compensation shall follow procedures substantially equivalent to those applicable to Performance Awards set forth in Section 3.05.
     
  (d) Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards. Payment or settlement, if any, with respect to a Cash-Based Award or an Other Stock-Based Award shall be made in accordance with the terms of the Award, in cash, Shares or other securities or any combination thereof as the Administrator determines. The determination and certification of the final value with respect to any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based Compensation shall comply with the requirements applicable to Performance Awards set forth in Section 3.05. To the extent applicable, payment or settlement with respect to each Cash-Based Award and Other Stock-Based Award shall be made in compliance with the requirements of Section 409A.
     
  (e) Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to Shares represented by Other Stock-Based Awards until the date of the issuance of such Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), if any, in settlement of such Award. However, the Administrator, in its discretion, may provide in the Award Agreement evidencing any Other Stock-Based Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date such Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date the Award is settled or the date on which it is terminated. Such Dividend Equivalent Rights, if any, shall be paid in accordance with the provisions set forth in Section 3.04(e). Dividend Equivalent Rights shall not be granted with respect to Cash-Based Awards. In the event of a dividend or distribution paid in Shares or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.05, appropriate adjustments shall be made in the Participant’s Other Stock-Based Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the Shares issuable upon settlement of such Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same vesting conditions and performance criteria, if any, as are applicable to the Award.

 

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  (f) Nontransferability of Cash-Based Awards and Other Stock-Based Awards. Prior to the payment or settlement of a Cash-Based Award or Other Stock-Based Award, the Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. The Administrator may impose such additional restrictions on any Shares issued in settlement of Cash-Based Awards and Other Stock-Based Awards as it may deem advisable, including, without limitation, minimum holding period requirements, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, or under any state securities laws or foreign law applicable to such Shares.

 

Section 3.07 Form of Award Agreements. A form of Award Agreement for a grant of Options is attached hereto as Exhibit A, a form of Award Agreement for a grant of Stock Appreciation Rights is attached hereto as Exhibit B, a form of Award Agreement for a grant of Restricted Stock is attached hereto as Exhibit C; and a form of Award Agreement for a grant of Restricted Stock Units is attached hereto as Exhibit D, provided that the Administrator shall have the discretion to modify such forms and to replace such forms with any other agreement as determined by the Administrator. In the event of a conflict between the terms of any Award Agreement and the provisions in the body of this Plan, the terms of the Award Agreement shall control.

 

Article IV. ADDITIONAL PROVISIONS APPLICABLE TO THIS PLAN AND AWARDS

 

Section 4.01 Outside Director Limitations. No Outside Director may be granted, in any Fiscal Year, Awards with a grant date fair value (computed as of the date of grant in accordance with U.S. generally accepted accounting principles) of more than $300,000. Any Awards granted to an individual while he or she was an Employee, or while he or she was a Consultant but not an Outside Director, will not count for purposes of the limitations under this Section 4.01.

 

Section 4.02 Compliance With Code Section 409A. Awards will be designed and operated in such a manner that they are either exempt from the application of, or comply with, the requirements of Code Section 409A such that the grant, payment, settlement or deferral will not be subject to the additional tax or interest applicable under Code Section 409A, except as otherwise determined in the sole discretion of the Administrator. This Plan and each Award Agreement under this Plan is intended to meet the requirements of Code Section 409A and will be construed and interpreted in accordance with such intent, except as otherwise determined in the sole discretion of the Administrator. To the extent that an Award or payment, or the settlement or deferral thereof, is subject to Code Section 409A the Award will be granted, paid, settled or deferred in a manner that will meet the requirements of Code Section 409A, such that the grant, payment, settlement or deferral will not be subject to the additional tax or interest applicable under Code Section 409A. In no event will the Company have any obligation under the terms of this Plan to reimburse a Participant for any taxes or other costs that may be imposed on Participant as a result of Section 409A.

 

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Section 4.03 Leaves of Absence/Transfer Between Locations. Unless the Administrator provides otherwise, vesting of Awards granted hereunder will be suspended during any unpaid leave of absence. A Participant will not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, or any Subsidiary. For purposes of Incentive Stock Options, no such leave may exceed three (3) months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then six (6) months following the first (1st) day of such leave, any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option.

 

Section 4.04 Limited Transferability of Awards. Unless determined otherwise by the Administrator, Awards may not be sold, pledged, assigned, hypothecated, or otherwise transferred in any manner other than by will or by the laws of descent and distribution, and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, such Award will contain such additional terms and conditions as the Administrator deems appropriate.

 

Section 4.05 Adjustments; Dissolution, Merger, Etc.

 

  (a) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under this Plan, will adjust the number and class of shares of stock that may be delivered under this Plan and/or the number, class, and price of shares of stock covered by each outstanding Award, and the numerical Share limits of Section 2.01.
     
  (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator will notify each Participant as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.

 

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  (c) Change in Control.
         
    (i)   In the event of a merger of the Company with or into another corporation or other entity or a Change in Control, each outstanding Award will be treated as the Administrator determines (subject to the provisions of the following paragraph) without a Participant’s consent, including, without limitation, that (i) Awards will be assumed, or substantially equivalent awards will be substituted, by the acquiring or succeeding corporation (or an Affiliate thereof) with appropriate adjustments as to the number and kind of shares and prices; (ii) upon written notice to a Participant, that the Participant’s Awards will terminate upon or immediately prior to the consummation of such merger or Change in Control; (iii) outstanding Awards will vest and become exercisable, realizable, or payable, or restrictions applicable to an Award will lapse, in whole or in part prior to or upon consummation of such merger or Change in Control, and, to the extent the Administrator determines, terminate upon or immediately prior to the effectiveness of such merger or Change in Control; (iv) (A) the termination of an Award in exchange for an amount of cash and/or property, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights as of the date of the occurrence of the transaction (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction the Administrator determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment), or (B) the replacement of such Award with other rights or property selected by the Administrator in its sole discretion; or (v) any combination of the foregoing. In taking any of the actions permitted under this Section 4.05(c), the Administrator will not be obligated to treat all Awards, all Awards held by a Participant, or all Awards of the same type, similarly.
         
    (ii)   In the event that the successor corporation does not assume or substitute for the Award (or portion thereof), the Participant will fully vest in and have the right to exercise all of his or her outstanding Options and Stock Appreciation Rights, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on Restricted Stock and Restricted Stock Units will lapse, and, with respect to Awards with performance-based vesting, all performance goals or other vesting criteria will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met, in all cases, unless specifically provided otherwise under the applicable Award Agreement or other written agreement between the Participant and the Company or any of its Subsidiaries or Parents, as applicable. In addition, if an Option or Stock Appreciation Right is not assumed or substituted in the event of a merger or Change in Control, the Administrator will notify the Participant in writing or electronically that the Option or Stock Appreciation Right will be exercisable for a period of time determined by the Administrator in its sole discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.
         
    (iii)   For the purposes of this Section 4.05(c) and Section 4.05(d), an Award will be considered assumed if, following the merger or Change in Control, the Award confers the right to purchase or receive, for each Share subject to the Award immediately prior to the merger or Change in Control, the consideration (whether stock, cash, or other securities or property) received in the merger or Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Restricted Stock Unit, Performance Unit, or Performance Share, for each Share subject to such Award, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or Change in Control.

 

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    (iv)   Notwithstanding anything in this Section 4.05(c) to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more performance goals will not be considered assumed if the Company or its successor modifies any of such performance goals without the Participant’s consent, in all cases, unless specifically provided otherwise under the applicable Award Agreement or other written agreement between the Participant and the Company or any of its Subsidiaries or Parents, as applicable; provided, however, a modification to such performance goals only to reflect the successor corporation’s post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award assumption.
         
    (v)   Notwithstanding anything in this Section 4.05(c) to the contrary, and unless otherwise provided in an Award Agreement, if an Award that vests, is earned or paid-out under an Award Agreement is subject to Code Section 409A and if the change in control definition contained in the Award Agreement does not comply with the definition of “change of control” for purposes of a distribution under Code Section 409A, then any payment of an amount that is otherwise accelerated under this Section 4.05(c) will be delayed until the earliest time that such payment would be permissible under Code Section 409A without triggering any penalties applicable under Code Section 409A.
         
    (vi)   The Administrator may, without affecting the number of Shares reserved or available hereunder, authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate, subject to compliance with Section 409A and any other applicable provisions of the Code.
         
  (d) Outside Director Awards. In the event of a Change in Control, with respect to Awards granted to an Outside Director, the Outside Directors will fully vest in and have the right to exercise Options and/or Stock Appreciation Rights as to all of the Shares underlying such Award, including those Shares which would not otherwise be vested or exercisable, all restrictions on Restricted Stock and Restricted Stock Units will lapse, and, with respect to Awards with performance-based vesting, all performance goals or other vesting criteria will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met, unless specifically provided otherwise under the applicable Award Agreement or other written agreement between the Participant and the Company or any of its Subsidiaries or Parents, as applicable.

 

24

 

 

Section 4.06 Tax Withholding.

 

  (a) Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof) or such earlier time as any tax withholding obligation is due, the Company will have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, non-U.S. or other taxes (including the Participant’s FICA obligation) required to be withheld with respect to such Award (or exercise thereof).
     
  (b) Withholding Arrangements. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or in part by such methods as the Administrator shall determine, including, without limitation, (i) paying cash, (ii) electing to have the Company withhold otherwise deliverable cash or Shares having a fair market value equal to the minimum statutory amount required to be withheld or such greater amount as the Administrator may determine if such amount would not have adverse accounting consequences, as the Administrator determines in its sole discretion, (iii) delivering to the Company already-owned Shares having a fair market value equal to the minimum statutory amount required to be withheld or such greater amount as the Administrator may determine, in each case, provided the delivery of such Shares will not result in any adverse accounting consequences, as the Administrator determines in its sole discretion, (iv) selling a sufficient number of Shares otherwise deliverable to the Participant through such means as the Administrator may determine in its sole discretion (whether through a broker or otherwise) equal to the amount required to be withheld, or (v) any combination of the foregoing methods of payment. The amount of the withholding requirement will be deemed to include any amount which the Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal, state or local marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined or such greater amount as the Administrator may determine if such amount would not have adverse accounting consequences, as the Administrator determines in its sole discretion. The fair market value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.

 

Section 4.07 Compliance with Securities Laws. The grant of Awards and the issuance of Shares pursuant to any Award shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities and the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless (a) a registration statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the shares issuable pursuant to the Award, or (b) in the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares under this Plan shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to issuance of any Stock, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

 

25

 

 

Section 4.08 Tax Withholding.

 

  (a) Tax Withholding in General. The Company shall have the right to deduct from any and all payments made under this Plan, or to require the Participant, through payroll withholding, cash payment or otherwise, to make adequate provision for, the federal, state, local and foreign taxes (including social insurance), if any, required by law to be withheld by the Company or any of its Affiliates with respect to an Award or the Shares acquired pursuant thereto. The Company shall have no obligation to deliver Shares, to release Shares from an escrow established pursuant to an Award Agreement, or to make any payment in cash under this Plan until the Company or its Affiliate’s, as applicable, withholding obligations have been satisfied by the Participant.
     
  (b) Withholding in or Directed Sale of Shares. The Company shall have the right, but not the obligation, to deduct from the Shares issuable to a Participant upon the exercise or settlement of an Award, or to accept from the Participant the tender of, a number of whole Shares having a Fair Market Value, as determined by the Administrator, equal to all or any part of the tax withholding obligations of any the Company or its Affiliates, as applicable. The Fair Market Value of any Shares withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates. The Administrator may require a Participant to direct a broker, upon the vesting, exercise or settlement of an Award, to sell a portion of the shares subject to the Award determined by the Administrator in its discretion to be sufficient to cover the tax withholding obligations of the Company or its Affiliates, as applicable, and to remit an amount equal to such tax withholding obligations to the Company or its Affiliates, as applicable ,in cash.

 

Section 4.09 No Effect on Employment or Service. Neither this Plan nor any Award will confer upon a Participant any right with respect to continuing the Participant’s relationship as a Service Provider with the Company or its Subsidiaries or Parents, as applicable, nor will they interfere in any way with the Participant’s right or the right of the Company and its Subsidiaries or Parents, as applicable to terminate such relationship at any time, with or without cause, to the extent permitted by Applicable Laws.

 

Section 4.10 Repurchase Rights. Shares issued under this Plan may be subject to one or more repurchase options, or other conditions and restrictions as determined by the Administrator in its discretion at the time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of Shares hereunder and shall promptly present to the Company any and all certificates representing Shares acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

 

Section 4.11 Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise or settlement of any Award.

 

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Section 4.12 Forfeiture Events.

 

  (a) All Awards under this Plan will be subject to recoupment under any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other Applicable Laws. In addition, the Administrator may impose such other clawback, recovery or recoupment provisions in an Award Agreement as the Administrator determines necessary or appropriate, including but not limited to a reacquisition right regarding previously acquired Shares or other cash or property. Unless this Section 4.12 is specifically mentioned and waived in an Award Agreement or other document, no recovery of compensation under a clawback policy or otherwise will be an event that triggers or contributes to any right of a Participant to resign for “good reason” or “constructive termination” (or similar term) under any agreement with the Company or a Subsidiary or Parent of the Company.
     
  (b) Notwithstanding any other provision of this Plan, if the Participant’s service to the Company or any of its Affiliates as a Service Provider is terminated for Cause, then any Award which has no vested as of such time in accordance with its terms shall automatically be forfeited and cancelled and shall cease to vest, be exercisable or otherwise provide any benefit to Participant, provided that such provision may be amended in any Award Agreement.
     
  (c) The Administrator may specify in an Award Agreement that the Participant’s rights, payments, and benefits with respect to an Award will be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence additional of specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but will not be limited to, termination of such Participant’s status as Service Provider for Cause or any specified action or inaction by a Participant, whether before or after such termination of service, that would constitute Cause for termination of such Participant’s status as a Service Provider.

 

Section 4.13 Date of Grant. The date of grant of an Award will be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination will be provided to each Participant within a reasonable time after the date of such grant.

 

Section 4.14 Term of Plan. This Plan will become effective upon its adoption by the Board. It will continue in effect for a term of ten (10) years from the date adopted by the Board, unless terminated earlier under Section 4.15.

 

Section 4.15 Amendment and Termination of this Plan.

 

  (a) Amendment and Termination. The Administrator may at any time amend, alter, suspend or terminate this Plan.
     
  (b) Shareholder Approval. The Company will obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

 

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  (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of this Plan will impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of this Plan will not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under this Plan prior to the date of such termination.

 

Section 4.16 Conditions Upon Issuance of Shares.

 

  (a) Legal Compliance. Shares will not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares will comply with Applicable Laws and will be further subject to the approval of counsel for the Company with respect to such compliance.
     
  (b) Investment Representations. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

 

Section 4.17 Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction or to complete or comply with the requirements of any registration or other qualification of the Shares under any state, federal or non-U.S. law or under the rules and regulations of the Securities and Exchange Commission, the stock exchange on which Shares of the same class are then listed, or any other governmental or regulatory body, which authority, registration, qualification or rule compliance is deemed by the Company’s counsel to be necessary or advisable for the issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority, registration, qualification or rule compliance will not have been obtained.

 

Section 4.18 Shareholder Approval. This Plan will be presented for approval by the shareholders of the Company within twelve (12) months after the date this Plan is adopted by the Board. Such shareholder approval will be obtained in the manner and to the degree required under Applicable Laws. No Option granted under this Plan may be treated as an Incentive Stock Option if this Plan is not approved by shareholders of the Company within twelve (12) months after the date this Plan is adopted by the Board.

 

Section 4.19 Retirement and Welfare Plans. Neither Awards made under this Plan nor Shares or cash paid pursuant to such Awards may be included as “compensation” for purposes of computing the benefits payable to any Participant under the Company’s or any of its Affiliates’ retirement plans (both qualified and non-qualified) or welfare benefit plans unless such other plan expressly provides that such compensation shall be taken into account in computing a Participant’s benefit.

 

Section 4.20 Beneficiary Designation. Subject to local laws and procedures, each Participant may file with the Company a written designation of a beneficiary who is to receive any benefit under this Plan to which the Participant is entitled in the event of such Participant’s death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. If a married Participant designates a beneficiary other than the Participant’s spouse, the effectiveness of such designation may be subject to the consent of the Participant’s spouse. If a Participant dies without an effective designation of a beneficiary who is living at the time of the Participant’s death, the Company will pay any remaining unpaid benefits to the Participant’s legal representative.

 

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Section 4.21 Severability. If any one or more of the provisions (or any part thereof) of this Plan shall be held invalid, illegal or unenforceable in any respect, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions (or any part thereof) of this Plan shall not in any way be affected or impaired thereby.

 

Section 4.22 No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (a) limit, impair, or otherwise affect the Company’s or any of its Affiliate’s right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or (b) limit the right or power of the Company any of its Affiliates to take any action which such entity deems to be necessary or appropriate.

 

Section 4.23 Unfunded Obligation. Participants shall have the status of general unsecured creditors of the Company. Any amounts payable to Participants pursuant to this Plan shall be considered unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974. Neither the Company nor any of its Affiliates shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between the Administrator, the Company or any of its Affiliates and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant’s creditors in any assets of the Company or any of its Affiliates. The Participants shall have no claim against the Company or any of its Affiliates for any changes in the value of any assets which may be invested or reinvested by the Company with respect to this Plan.

 

Section 4.24 Choice of Law. Except to the extent governed by applicable federal law, the validity, interpretation, construction and performance of this Plan and each Award Agreement shall be governed by the laws of the State of Delaware, without regard to its conflict of law rules.

 

***

 

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Exhibit A

Form of Option Award Agreement

 

 

 

HeartCore Enterprises, Inc.

Option Award Agreement

 

This grant of an Award to purchase Shares (“Grant”) is made as of [_______________] (the “Effective Date”) by HeartCore Enterprises, Inc., a Delaware corporation (the “Company”) under the HeartCore Enterprises, Inc. 2021Equity Incentive Plan (the “Plan”), to [__________________] (the “Participant”). Under applicable provisions of the Internal Revenue Code of 1986, as amended, the Option is treated as [an incentive option][a non-qualified option].

 

By signing this cover sheet, you hereby accept the Option (as defined below) and agree to all of the terms and conditions described herein and in this Plan.

 

Participant Name:    
Signature:    

 

HeartCore Enterprises, Inc.

 

By:    
Name:    
Title:    

 

This is not a stock certificate or a negotiable instrument. This grant of Option is a

voluntary, revocable grant from the Company and Participant hereby acknowledges

that the Company has no obligation to make additional grants in the future.

 

UPON RECEIPT OF YOUR SIGNED AGREEMENT, A BOOKKEEPING ENTRY

WILL BE ENTERED INTO THE COMPANY’S BOOKS AND RECORDS

TO EVIDENCE THE OPTIONS GRANTED TO YOU.

 

***

 

A-1

 

 

1. Grant. As of the Effective Date, the Company grants to the Participant an option (the “Option”) to purchase on the terms and conditions hereinafter set forth all or any part of an aggregate of [________________] shares of the Company’s Common Stock, par value $0.0001 per share, (the “Option Shares”), at the purchase price of $[____________] per share (the “Option Price”). The Participant shall have the cumulative right to exercise the Option, and the Option is only exercisable, with respect to the following number of Option Shares on or after the following dates:

 

Date   Number of Options Vested and Shares Which May be Acquired
     
     

 

The Administrator may, in its sole discretion, accelerate the date on which the Participant may purchase Option Shares.

 

2. Term. The Option granted hereunder shall expire in all events at 5:00 p.m., Eastern time on [______________], unless sooner terminated as provided in in this Section 2.
   
3. Change in Accounting Treatment. If the Administrator finds that a change in the financial accounting treatment for options granted under this Plan adversely affects the Company or, in the determination of the Administrator, may adversely affect the Company in the foreseeable future, the Administrator may, in its discretion, set an accelerated termination date for the Option. In such event, the Administrator may take whatever other action, including acceleration of any exercise provisions, it deems necessary.
   
4. Blackout Periods. The Administrator reserves the right to suspend or limit the Participant’s rights to exercise and sell Shares acquired through the exercise of Options to comply with Applicable Requirements and any Company’s insider trading policy, any Applicable Law, or at any other times that it deems appropriate.
   
5. Transfers. Except as otherwise provided herein or in any separate provisions applicable to this Option, the Option is transferable by the Participant only by will or pursuant to the laws of descent and distribution in the event of the Participant’s death, in which event the Option may be exercised by the heirs or legal representatives of the Participant as set forth in this Plan. Any attempt at assignment, transfer, pledge or disposition of the Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Option shall be null and void and without effect. Any exercise of the Option by a Person other than the Participant shall be accompanied by appropriate proofs of the right of such person to exercise the Option.

 

A-2

 

 

6. Adjustments on Changes in Common Stock. In the event that, prior to the delivery by the Company of all of the Option Shares in respect of which the Option is granted, there shall be an increase or decrease in the number of issued shares of Common Stock of the Company as a result of a subdivision or consolidation of Shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such Shares, effected without receipt of consideration by the Company, the remaining number of Option Shares still subject to the Option and the Option Price therefor shall be adjusted in a manner determined by the Administrator so that the adjusted number of Option Shares and the adjusted Option Price shall be the substantial equivalent of the remaining number of Option Shares still subject to the Option and the Option Price thereof prior to such change. For purposes of this Section 7 no adjustment shall be made as a result of the issuance of Common Stock upon the conversion of other securities of the Company which are convertible into Shares.
   
7. Legal Requirements. If the listing, registration or qualification of the Option Shares upon any securities exchange or under any federal or state law, or the consent or approval of any governmental regulatory body is necessary as a condition of or in connection with the purchase of such Option Shares, the Company shall not be obligated to issue or deliver the certificates representing the Option Shares as to which the Option has been exercised unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained. If registration is considered unnecessary by the Company or its counsel, the Company may cause a legend to be placed on the Option Shares being issued calling attention to the fact that they have been acquired for investment and have not been registered.
   
8. Administration. The Option has been granted pursuant to, and is subject to the terms and provisions of, this Plan. All questions of interpretation and application of this Plan and the Option shall be determined by the Administrator, and such determination shall be final, binding and conclusive. The Option shall not be treated as an incentive stock option (as such term is defined in section 422(b) of the Code) for federal income tax purposes unless expressly indicated as same hereupon.
   
9. Severability. Should a court of competent jurisdiction deem any of the provisions in this Agreement to be unenforceable in any respect, it is the intention of the parties to this Agreement that this Agreement be deemed, without further action on the part of the parties hereto, modified, amended and limited to the extent necessary to render the same valid and enforceable. It is further the parties’ intent that all provisions not deemed to be overbroad shall be given their full force and effect. You acknowledge that you are freely, knowingly and voluntarily entering into this Agreement after having an opportunity for consultation with your own independent counsel.
   
10. Notices. Any notice to be given to the Company shall be addressed to the Administrator at its principal executive office, and any notice to be given to the Participant shall be addressed to the Participant at the address then appearing on the personnel or other records of the Company, or at such other address as either party hereafter may designate in writing to the other. Any such notice shall be deemed to have been duly given when deposited in the United States mail, addressed as aforesaid, registered or certified mail, and with proper postage and registration or certification fees prepaid.
   
11. Reservation of Right to Terminate. Nothing herein contained shall affect the right of the Company or any Affiliate to terminate the Participant in its applicable capacity as a Service Provider at any time for any reason whatsoever.
   
12. Choice of Law; Jurisdiction. This Grant shall be governed by and construed and interpreted in accordance with the substantive laws of the State of Delaware, without giving effect to any conflicts of law rule or principle that might require the application of the laws of another jurisdiction. ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT SHALL BE INSTITUTED SOLELY IN THE COURTS OF THE STATE OF DELAWARE OR THE FEDERAL COURTS OF THE UNITED STATES LOCATED IN DELAWARE, AND EACH PARTY IRREVOCABLY SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING.
   
13. Taxes. You agree to comply with the appropriate procedures established by the Company, from time to time, to provide for payment or withholding of such income or other taxes as may be required by law to be paid or withheld in connection with the Options and exercise thereof.

 

***

 

A-3

 

 

Exhibit B

 

Form of Stock Appreciation Right Award Agreement

 

 

 

HeartCore Enterprises, Inc.

Stock Appreciation Rights Award Agreement

 

Number of SARs   Grant Date   Vesting Schedule
         
         

 

Exercise Price: $_______________ per share of Common Stock

 

HeartCore Enterprises, Inc., a Delaware corporation (the “Company”), hereby grants to [_________] (the “Participant”, also referred to as “you”) Stock Appreciation Rights (the “SAR”), pursuant to the terms of the attached Stock Appreciation Rights Award Agreement and the HeartCore Enterprises, Inc. 2021 Equity Incentive Plan (the “Plan”).

 

By signing this cover sheet, you agree to all of the terms and conditions described in the attached Stock Appreciation Rights Award Agreement and this Plan.

 

Participant:    
Signature:    

 

HeartCore Enterprises, Inc.

 

By:    
Name:    
Title:  

 

This is not a stock certificate or a negotiable instrument. This grant of SAR is a

voluntary, revocable grant from the Company and Participant hereby acknowledges that the

Company has no obligation to make additional grants in the future.

 

UPON RECEIPT OF YOUR SIGNED AGREEMENT, A BOOKKEEPING ENTRY

WILL BE ENTERED INTO THE COMPANY’S BOOKS AND RECORDS

TO EVIDENCE THE SAR GRANTED TO YOU.

 

B-1

 

 

HeartCore Enterprises, Inc.

 

STOCK APPRECIATION RIGHTS AWARD AGREEMENT

 

1. SAR/Nontransferability. This Stock Appreciation Rights Award Agreement (this “Agreement”) evidences the grant to you on the Grant Date set forth on the cover page of this Agreement the Stock Appreciation Right as set forth therein (the “SAR”) under the HeartCore Enterprises, Inc. 2021 Equity Incentive Plan (the “Plan”). These SARs represent the right to receive, upon exercise thereof, an amount in cash as set forth in this Plan. This SAR will NOT be credited with dividends to the extent dividends are paid on the Common Stock of the Company. Your SAR may not be transferred, assigned, pledged or hypothecated, whether by operation of law or otherwise, nor may the SAR be made subject to execution, attachment or similar process. Any capitalized, but undefined, term used in this Agreement shall have the meaning ascribed to it in this Plan.
   
2. The Plan. The SAR is issued in accordance with and is subject to and conditioned upon all of the terms and conditions of this Agreement and this Plan as amended from time to time; provided, however, that no future amendment or termination of this Plan shall, without your consent, alter or impair any of your rights or obligations under this Plan, all of which are incorporated by reference in this Agreement as if fully set forth herein.
   
3. Cash Value Determination upon Vesting and Exercise. Subject to the terms and conditions set forth in this Agreement, the SARs covered by this grant shall vest on the vesting date set forth on the cover page of this Agreement, provided the Participant is a Service Provider of the Company on the Date of Vesting. The payment of the value of the SARs shall be made no later than ten (10) days following exercise. The payment of amounts with respect to the SARs is subject to the provisions of this Plan and to interpretations, regulations and determinations concerning this Plan as established from time to time by the Administrator in accordance with the provisions of this Plan, including, but not limited to, provisions relating to (i) rights and obligations with respect to withholding taxes, (ii) capital or other changes of the Company and (iii) other requirements of applicable law.
   
4. No Shareholder Rights. SARs are not Shares. Neither the Participant, nor any Person entitled to exercise the Participant’s rights in the event of the Participant’s death, shall have any of the rights and privileges of a holder of Shares.
   
5. Severability. Should a court of competent jurisdiction deem any of the provisions in this Agreement to be unenforceable in any respect, it is the intention of the parties to this Agreement that this Agreement be deemed, without further action on the part of the parties hereto, modified, amended and limited to the extent necessary to render the same valid and enforceable. It is further the parties’ intent that all provisions not deemed to be overbroad shall be given their full force and effect. You acknowledge that you are freely, knowingly and voluntarily entering into this Agreement after having an opportunity for consultation with your own independent counsel.
   
6. Notices. Any notice to be given to the Company shall be addressed to the Administrator at its principal executive office, and any notice to be given to the Participant shall be addressed to the Participant at the address then appearing on the personnel or other records of the Company, or at such other address as either party hereafter may designate in writing to the other. Any such notice shall be deemed to have been duly given when deposited in the United States mail, addressed as aforesaid, registered or certified mail, and with proper postage and registration or certification fees prepaid.
   
7. Reservation of Right to Terminate. Nothing herein contained shall affect the right of the Company or any Affiliate to terminate the Participant in its applicable capacity as a Service Provider at any time for any reason whatsoever.
   
8. Choice of Law; Jurisdiction. This Grant shall be governed by and construed and interpreted in accordance with the substantive laws of the State of Delaware, without giving effect to any conflicts of law rule or principle that might require the application of the laws of another jurisdiction. ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT SHALL BE INSTITUTED SOLELY IN THE COURTS OF THE STATE OF DELAWARE OR THE FEDERAL COURTS OF THE UNITED STATES LOCATED IN DELAWARE AND EACH PARTY IRREVOCABLY SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING.
   
9. Taxes. You agree to comply with the appropriate procedures established by the Company, from time to time, to provide for payment or withholding of such income or other taxes as may be required by law to be paid or withheld in connection with the SARs.

 

***

 

B-2

 

 

Exhibit C

 

Form of Restricted Stock Award Agreement

 

 

 

HeartCore Enterprises, Inc.

Restricted Stock Award Agreement

 

Number of Shares   Grant Date   Vesting Schedule
         
         

 

HeartCore Enterprises, Inc., a Delaware corporation (the “Company”), hereby grants to [_________] (the “Participant”, also referred to as “you”) shares of Restricted Stock (the “Shares”), pursuant to the terms of the attached Restricted Stock Award Agreement and the HeartCore Enterprises, Inc. 2021 Equity Incentive Plan (the “Plan”).

 

By signing this cover sheet, you agree to all of the terms and conditions described in the attached Restricted Stock Award Agreement and this Plan.

 

Participant:    
Signature:    

 

HeartCore Enterprises, Inc.

 

By:    
Name:    
Title:  

 

This is not a stock certificate or a negotiable instrument. This grant of Shares is a

voluntary, revocable grant from the Company and Participant hereby acknowledges that the

Company has no obligation to make additional grants in the future.

 

UPON RECEIPT OF YOUR SIGNED AGREEMENT, A BOOKKEEPING ENTRY

WILL BE ENTERED INTO THE COMPANY’S BOOKS AND RECORDS

TO EVIDENCE THE SHARES GRANTED TO YOU.

 

C-1

 

 

HeartCore Enterprises, Inc.

 

RESTRICTED STOCK AWARD AGREEMENT

 

1. Award. This Restricted Stock Award Agreement (this “Agreement”) evidences the grant to Participant on the Grant Date set forth on the cover page of this Agreement the shares of Restricted Stock as set forth therein (the “Shares”) under the HeartCore Enterprises, Inc. 2021 Equity Incentive Plan (the “Plan”). Any capitalized, but undefined, term used in this Agreement shall have the meaning ascribed to it in this Plan.
   
2. Non-Transferability of the Shares. Your Shares may not be transferred, assigned, pledged or hypothecated, whether by operation of law or otherwise, nor may the Shares be made subject to execution, attachment or similar process. Except as may be required by federal income tax withholding provisions or by the tax laws of any state, your interests (and the interests of your beneficiaries, if any) under this Agreement are not subject to the claims of your creditors and may not be voluntarily or involuntarily sold, transferred, alienated, assigned, pledged, anticipated, or encumbered. Any attempt to sell, transfer, alienate, assign, pledge, anticipate, encumber, charge or otherwise dispose of any right to benefits payable hereunder shall be void. Your rights to your Shares are no greater than that of other general, unsecured creditors of the Company.
   
3. Vesting. Subject to the terms and conditions set forth in this Agreement, the Shares covered by this grant shall vest on the vesting date set forth on the cover page of this Agreement, provided the Participant is a Service Provider of the Company or a member of the Company Group on the Date of Vesting.
   
4. Delivery of Shares.
       
  (a) Vesting. Shares that vest (together with any payment due pursuant to the terms herein in respect of such Shares) shall be delivered to Participant (or the person to whom ownership rights may have passed by will or the laws of descent and distribution), on or as soon as administratively practicable after, the date of such vesting.
       
  (b) Certain Limitations. Notwithstanding the foregoing provisions of this Section 3, delivery of Shares, if any, by reason of Participant’s termination of employment shall be delayed until the six (6) month anniversary of the date of Participant’s termination of employment to the extent necessary to comply with Code Section 409A(a)(B)(i), and the determination of whether or not there has been a termination of Participant’s employment with the Company shall be made by the Administrator consistent with the definition of “separation from service” (as that phrase is used for purposes of Code Section 409A, and as set forth in Treasury Regulation Section 1.409A-1(h)).
       
5. Withholding Taxes. Participant shall be responsible to pay to the Company the amount of withholding taxes as determined by the Company with respect to the date the Shares are delivered. If Participant does not arrange for payment of the applicable withholding taxes by providing such amount to the Company in cash prior to the date established by the Company as the deadline for such payment, Participant shall be treated as having elected to relinquish to the Company a portion of the Shares that would otherwise have been transferred to Participant having a fair market value, based on the Fair Market Value of the Common Stock on the business day immediately preceding the date of delivery of the Shares, equal to the amount of such applicable withholding taxes, in lieu of paying such amount to the Company in cash. Participant authorizes the Company to withhold in accordance with applicable law from any compensation payable to him or her any taxes required to be withheld for federal, state or local law in connection with this Agreement.

 

C-2

 

 

6. Legal Requirements. If the listing, registration or qualification of Shares deliverable in respect of an Shares upon any securities exchange or under any federal or state law, or the consent or approval of any governmental regulatory body is necessary as a condition of or in connection with the issuance of such Shares, the Company shall not be obligated to issue or deliver such Shares unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained. If registration is considered unnecessary by the Company or its counsel, the Company may cause a legend to be placed on any Shares being issued calling attention to the fact that they have been acquired for investment and have not been registered. The Administrator may from time to time impose any other conditions on the Shares it deems necessary or advisable to ensure that Shares are issued and resold in compliance with the Securities Act of 1933, as amended.
   
7. Severability. Should a court of competent jurisdiction deem any of the provisions in this Agreement to be unenforceable in any respect, it is the intention of the parties to this Agreement that this Agreement be deemed, without further action on the part of the parties hereto, modified, amended and limited to the extent necessary to render the same valid and enforceable. It is further the parties’ intent that all provisions not deemed to be overbroad shall be given their full force and effect. You acknowledge that you are freely, knowingly and voluntarily entering into this Agreement after having an opportunity for consultation with your own independent counsel.
   
8. Notices. Any notice to be given to the Company shall be addressed to the Administrator at its principal executive office, and any notice to be given to the Participant shall be addressed to the Participant at the address then appearing on the personnel or other records of the Company, or at such other address as either party hereafter may designate in writing to the other. Any such notice shall be deemed to have been duly given when deposited in the United States mail, addressed as aforesaid, registered or certified mail, and with proper postage and registration or certification fees prepaid.
   
9. Reservation of Right to Terminate. Nothing herein contained shall affect the right of the Company or any Affiliate to terminate the Participant in its applicable capacity as a Service Provider at any time for any reason whatsoever.
   
10. Choice of Law; Jurisdiction. This Grant shall be governed by and construed and interpreted in accordance with the substantive laws of the State of Delaware, without giving effect to any conflicts of law rule or principle that might require the application of the laws of another jurisdiction. ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT SHALL BE INSTITUTED SOLELY IN THE COURTS OF THE STATE OF DELAWARE OR THE FEDERAL COURTS OF THE UNITED STATES LOCATED IN DELAWARE AND EACH PARTY IRREVOCABLY SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING.
   
11. Taxes. You agree to comply with the appropriate procedures established by the Company, from time to time, to provide for payment or withholding of such income or other taxes as may be required by law to be paid or withheld in connection with the Restricted Stock.

 

***

 

C-3

 

 

Exhibit D

 

Form of Restricted Unit Award Agreement

 

 

 

HeartCore Enterprises, Inc.

Restricted Unit Award Agreement

 

Number of Restricted Stock Units   Grant Date  

Vesting Schedule/Performance

Period/Performance Vesting Requirements

         
         

 

HeartCore Enterprises, Inc., a Delaware corporation (the “Company”), hereby grants to [_________] (the “Participant”, also referred to as “you”) the Restricted Stock Units (the “Restricted Stock Units” or “RSUs”), pursuant to the terms of the attached Restricted Unit Award Agreement and the HeartCore Enterprises, Inc. 2021 Equity Incentive Plan (the “Plan”).

 

By signing this cover sheet, you agree to all of the terms and conditions described in the attached Restricted Unit Award Agreement and this Plan.

 

Participant:    
Signature:  

 

HeartCore Enterprises, Inc.

 

By:  
Name:  
Title:  

 

This is not a stock certificate or a negotiable instrument. This grant of RSUs is a

voluntary, revocable grant from the Company and Participant hereby acknowledges that the

Company has no obligation to make additional grants in the future.

 

UPON RECEIPT OF YOUR SIGNED AGREEMENT, A BOOKKEEPING ENTRY

WILL BE ENTERED INTO THE COMPANY’S BOOKS AND RECORDS

TO EVIDENCE THE RSUs GRANTED TO YOU.

 

D-1

 

 

HeartCore Enterprises, Inc.

 

RESTRICTED UNIT AWARD AGREEMENT

 

1. Award. This Restricted Unit Award Agreement (this “Agreement”) evidences the grant to Participant on the Grant Date set forth on the cover page of this Agreement the Restricted Stock Units as set forth therein (the “Restricted Stock Units” or “RSUs”) under the HeartCore Enterprises, Inc. 2021 Equity Incentive Plan (the “Plan”). As used herein, the term “Restricted Stock Unit” or “RSU” shall mean a non-voting unit of measurement which is deemed for bookkeeping purposes to be equivalent to one outstanding Share solely for purposes of this Plan and this Agreement. The Restricted Stock Units shall be used solely as a device for the determination of the payment to eventually be made to the Participant if such Restricted Stock Units vest pursuant to this Award Agreement. The Restricted Stock Units shall not be treated as property or as a trust fund of any kind. Any capitalized, but undefined, term used in this Agreement shall have the meaning ascribed to it in this Plan.
   
2. Non-Transferability of the RSUs. Your RSUs may not be transferred, assigned, pledged or hypothecated, whether by operation of law or otherwise, nor may the RSUs be made subject to execution, attachment or similar process. Except as may be required by federal income tax withholding provisions or by the tax laws of any state, your interests (and the interests of your beneficiaries, if any) under this Agreement are not subject to the claims of your creditors and may not be voluntarily or involuntarily sold, transferred, alienated, assigned, pledged, anticipated, or encumbered. Any attempt to sell, transfer, alienate, assign, pledge, anticipate, encumber, charge or otherwise dispose of any right to benefits payable hereunder shall be void. Your rights to your RSUs are no greater than that of other general, unsecured creditors of the Company.
   
3. Vesting. Subject to the terms and conditions set forth in this Agreement, the RSUs covered by this grant shall vest on the vesting date set forth on the cover page of this Agreement and subject to the satisfaction or attainment of the performance criteria set forth therein, if any, provided the Participant is employed by the Company on the date of vesting. The Administrator may not accelerate vesting of Restricted Stock Units for any reason.
   
4. Dividends. Participant shall not be entitled to any cash, securities or property that would have been paid or distributed as dividends with respect to the RSUs subject to this Agreement prior to the date the RSUs are delivered to Participant; provided, however, that the Company shall keep a hypothetical account in which any such items shall be recorded, and shall pay to Participant the amount of such dividends (in cash or in kind as determined by the Company) on the same date that the RSUs to which such payments or distributions relate are required to be delivered under this Agreement.
   
5. Timing and Manner of Payment on RSUs.
       
  (a) On or as soon as administratively practical following the vesting event pursuant to this Agreement (and in all events not later than two and one-half (2½) months after such vesting event), the Company shall deliver to the Participant a number of Shares (either by delivering one or more certificates for such Shares or by entering such Shares in book entry form, as determined by the Company in its discretion) equal to the number of Shares subject to the RSU that vest on the Vesting Date, less any withholding or expenses as set forth herein, or may settle the RSU in cash or other payment as provided in this Plan, as determined by the Administrator. The Company’s obligation to deliver Shares or otherwise make payment with respect to vested RSUs is subject to the condition precedent that the Participant or other person entitled under this Plan to receive any Shares or payment with respect to the vested RSUs deliver to the Company any representations or other documents or assurances required pursuant to this Plan. The Participant shall have no further rights with respect to any RSUs that are paid or that terminate pursuant to this Agreement or this Plan.

 

D-2

 

 

  (b) Certain Limitations. Notwithstanding the foregoing provisions of this Section 3, delivery of Shares or other payment, if any, with respect to RSUs by reason of Participant’s termination of employment shall be delayed until the six (6) month anniversary of the date of Participant’s termination of employment to the extent necessary to comply with Code Section 409A(a)(B)(i), and the determination of whether or not there has been a termination of Participant’s employment with the Company shall be made by the Administrator consistent with the definition of “separation from service” (as that phrase is used for purposes of Code Section 409A, and as set forth in Treasury Regulation Section 1.409A-1(h)).
       
6. Rights of Participant. Participant shall have none of the rights of a shareholder at any time prior to the delivery of any Shares pursuant to the RSUs subject to this Agreement, except as expressly set forth in this Plan or herein.
   
7. Withholding Taxes. Participant shall be responsible to pay to the Company the amount of withholding taxes as determined by the Company with respect to the date the RSUs are settled. If Participant does not arrange for payment of the applicable withholding taxes by providing such amount to the Company in cash prior to the date established by the Company as the deadline for such payment, Participant shall be treated as having elected to relinquish to the Company a portion of the Shares that would otherwise have been transferred to Participant having a fair market value, based on the Fair Market Value of the Common Stock on the business day immediately preceding the date of delivery of the Shares, equal to the amount of such applicable withholding taxes, in lieu of paying such amount to the Company in cash, or an amount in cash if the RSU is settled in cash. Participant authorizes the Company to withhold in accordance with applicable law from any compensation payable to him or her any taxes required to be withheld for federal, state or local law in connection with this Agreement.
   
8. Legal Requirements. If the listing, registration or qualification of Shares deliverable in respect of an RSU upon any Securities Exchange or any Applicable Requirement, or the consent or approval of any governmental regulatory body is necessary as a condition of or in connection with the issuance of such Shares, the Company shall not be obligated to issue or deliver such Shares unless and until such Applicable Requirements shall have been effected or obtained. If registration is considered unnecessary by the Company or its counsel, the Company may cause a legend to be placed on any Shares being issued calling attention to the fact that they have been acquired for investment and have not been registered. The Administrator may from time to time impose any other conditions on the Shares it deems necessary or advisable to ensure that Shares are issued and resold in compliance with the Securities Act of 1933, as amended.
   
9. Severability. Should a court of competent jurisdiction deem any of the provisions in this Agreement to be unenforceable in any respect, it is the intention of the parties to this Agreement that this Agreement be deemed, without further action on the part of the parties hereto, modified, amended and limited to the extent necessary to render the same valid and enforceable. It is further the parties’ intent that all provisions not deemed to be overbroad shall be given their full force and effect. You acknowledge that you are freely, knowingly and voluntarily entering into this Agreement after having an opportunity for consultation with your own independent counsel.

 

D-3

 

 

10. Notices. Any notice to be given to the Company shall be addressed to the Administrator at its principal executive office, and any notice to be given to the Participant shall be addressed to the Participant at the address then appearing on the personnel or other records of the Company, or at such other address as either party hereafter may designate in writing to the other. Any such notice shall be deemed to have been duly given when deposited in the United States mail, addressed as aforesaid, registered or certified mail, and with proper postage and registration or certification fees prepaid.
   
11. Reservation of Right to Terminate. Nothing herein contained shall affect the right of the Company or any Affiliate to terminate the Participant in its applicable capacity as a Service Provider at any time for any reason whatsoever.
   
12. Choice of Law; Jurisdiction. This Grant shall be governed by and construed and interpreted in accordance with the substantive laws of the State of Delaware, without giving effect to any conflicts of law rule or principle that might require the application of the laws of another jurisdiction. ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT SHALL BE INSTITUTED SOLELY IN THE COURTS OF THE STATE OF DELAWARE OR THE FEDERAL COURTS OF THE UNITED STATES LOCATED IN DELAWARE AND EACH PARTY IRREVOCABLY SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING.
   
13. Taxes. You agree to comply with the appropriate procedures established by the Company, from time to time, to provide for payment or withholding of such income or other taxes as may be required by law to be paid or withheld in connection with the RSUs.

 

***

 

D-4

 

 

Exhibit 10.10

 

HeartCore Enterprises, Inc.

 

Independent Director Agreement

 

(Director Name: ________________)

 

Dated as of [_________], 2021

 

This Independent Director Agreement (this “Agreement”), dated and made effective as of the date first set forth above (the “Effective Date”), is entered into by and between HeartCore Enterprises, Inc., a Delaware Corporation (“Company”), and [_____________], an individual resident of [____________] (“Director”). The Company and Director may be referred to herein individually as a “Party” or collectively as the “Parties”.

 

WHEREAS, the Company has appointed the Director to the Board of Directors of Company (the “Board”) on the Effective Date and now desires to enter into an agreement with the Director with respect to Director’s continuing service as a director of Company; and

 

WHEREAS, the Director is willing to continue serving as a director of Company upon the terms and conditions set forth herein and in accordance with the provisions of this Agreement.

 

NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged. the Parties hereby agree as follows:

 

1. Defined Terms. Wherever the following terms are used in this Agreement, they shall have the meanings ascribed to them below, unless the context clearly indicates otherwise. Other capitalized terms in this Agreement are defined in the text hereof.
       
    (a) “Affiliate” means, with reference to Company, any other Person controlling, controlled by or under the common control of Company. For purposes hereof, the term “control” (or any equivalent term) means having ownership of more than fifty percent (50%) of the voting securities of a Person or the power, whether through voting power or otherwise, to control the management policies of such Person.
       
    (b) “Common Stock” means the common stock, par value $0.001 per share, of Company.
       
    (c) “Person” means any natural person, corporation, company, partnership (including both general and limited partnerships), limited liability company, sole proprietorship, association, joint stock company, firm, trust, trustee, joint venture, unincorporated organization, executor, administrator, legal representative or other legal entity, including any governmental authority, entity or instrumentality.

 

1

 

 

2. Duties.
       
    (a) Director agrees to serve as an independent Director of the Company and to be available to perform the duties consistent with such position pursuant to the Certificate of Incorporation and Bylaws of the Company, and any additional codes, guidelines or policies of the Company that may be effective now or in the future (collectively, the “Governance Documents”) and the laws of the state of Delaware. The Company acknowledges that Director currently holds other positions (“Other Employment”) and agrees that Director may maintain such positions, provided that such Other Employment shall not materially interfere with Director’s obligations under this Agreement. Director confirms that Director expects Director will be able to devote sufficient time and attention to the Company as is necessary to fulfill Director’s responsibilities as a Director of the Company and that Director expects the Other Employment will not in any way impact Director’s independence, and if Director determines that is no longer the case, Director will promptly notify the Company. Such time and attention shall include, without limitation, participation in telephonic and/or in-person meetings of the Board; provided, that Director is given reasonable advance notice of such meetings and they are scheduled at times when Director is available. Director also represents that the Other Employment shall not materially and unreasonably interfere with Director’s obligations under this Agreement. Subject to the forgoing, Director will use Director’s best efforts to promote the interests of Company and its shareholders.
       
    (b) Without limiting the generality of the foregoing, Director confirms that Director is independent (as such term has been construed under Delaware law with respect to directors of Delaware corporations and the OTC Markets, the NASDAQ Stock Exchange and the New York Stock Exchange). Director also confirms that, to Director’s knowledge, (a) Director does not possess material business, close personal relationships or other affiliations, or any history of any such material business, close personal relationships or other affiliations, with the Company’s significant equity or debt holders or any of their respective corporate affiliates that would cause Director to be unable to (i) exercise independent judgment based on the best interests of the Company or (ii) make decisions and carry out Director’s responsibilities as a Director of the Company, in each case in accordance with the terms of the Governance Documents and applicable law, and (b) Director has no existing relationship or affiliation of any kind with any entity Director knows to be a competitor of the Company.
       
    (c) [In addition to Director’s service on the Board, Director agrees that, if so selected by the Board, Director shall serve on the [Compensation Committee, Audit Committee/Nomination Committee] of the Board].
       
    (d) By execution of this Agreement, Director accepts Director’s appointment or election as an independent Director of the Company, and agrees to serve in such capacity, subject to the terms of this Agreement, until Director’s successor is duly elected and qualified or until Director’s earlier death, resignation or removal. The Parties acknowledge and agree that Director is being engaged to serve as an independent Director of the Company only and is not being engaged to serve, and shall not serve, the Company in any other capacity.

 

2

 

 

    (e) Director’s status during the Term (as defined below) shall be that of an independent contractor and not, for any purpose, that of an employee or agent with authority to bind the Company in any respect. All payments and other consideration made or provided to the Director hereunder shall be made or provided without withholding or deduction of any kind, and the Director shall assume sole responsibility for discharging all tax or other obligations associated therewith.
       
3. Term. The term of this Agreement shall continue until the earliest of (a) such time as Director resigns or is removed in accordance with the Governance Documents, and (b) the death of the Director (the “Term”).
   
4. Compensation. For all services to be rendered by Director hereunder, and so long as Director remains a Director of the Company, the Company shall, during the Term, pay to Director the compensation and reimbursement of expenses as set forth in this Section 3.
       
    (a) Director shall be paid the sum of $50,000 annually for Director’s service as a director of the Company, to be paid $12,500 each calendar quarter, payable within 5 business days of the end of each calendar quarter, and with such amount for any partial calendar quarter being appropriately prorated.
       
    (b) Director shall be paid the following compensation for service on committees of the Board:

 

    (i) For as long as the Director serves as a member of the Compensation Committee, the Director shall be paid the sum of $7,500 annually for such service, to be paid $1,875 each calendar quarter, payable within 5 business days of the end of each calendar quarter, and with such amount for any partial calendar quarter being appropriately prorated.
       
    (ii) For as long as the Director serves as the Chairman of the Compensation Committee, the Director shall be paid an additional sum of $7,500 annually for such service, to be paid $1,875 each calendar quarter, payable within 5 business days of the end of each calendar quarter, and with such amount for any partial calendar quarter being appropriately prorated.
       
    (iii) For as long as the Director serves as a member of the Audit Committee, the Director shall be paid the sum of $7,500 annually for such service, to be paid $1,875 each calendar quarter, payable within 5 business days of the end of each calendar quarter, and with such amount for any partial calendar quarter being appropriately prorated.
       
    (iv) For as long as the Director serves as the Chairman of the Audit Committee, the Director shall be paid an additional sum of $7,500 annually for such service, to be paid $1,875 each calendar quarter, payable within 5 business days of the end of each calendar quarter, and with such amount for any partial calendar quarter being appropriately prorated.

 

3

 

 

    (v) For as long as the Director serves as a member of the Nominating Committee, the Director shall be paid the sum of $5,000 annually for such service, to be paid $1,250 each calendar quarter, payable within 5 business days of the end of each calendar quarter, and with such amount for any partial calendar quarter being appropriately prorated.
       
    (vi) For as long as the Director serves as the Chairman of the Nominating Committee, the Director shall be paid an additional sum of $5,000 annually for such service, to be paid $1,250 each calendar quarter, payable within 5 business days of the end of each calendar quarter, and with such amount for any partial calendar quarter being appropriately prorated.

 

    (c) During the Term, Company shall reimburse Director for all reasonable out-of-pocket expenses incurred by Director in attending any in-person meetings, provided that Director complies with the generally applicable policies, practices and procedures of the Company for submission of expense reports, receipts or similar documentation of such expenses. Any reimbursements for allocated expenses (as compared to out-of-pocket expenses of the Director in excess of $500.00) must be approved in advance by the Company.
       
5. Confidentiality.
       
    (a) Definition. For purposes of this Agreement, “Confidential Information” shall mean all Company Work Product (as hereinafter defined) and all non-public written, electronic, and oral information or materials of Company communicated to or otherwise obtained by Director in connection with this Agreement, which is related to the products, business and activities of Company, its Affiliates, and subsidiaries, and their respective customers, clients, suppliers, and other entities with which such party does business, including: (i) all costing, pricing, technology, software, documentation, research, techniques, procedures, processes, discoveries, inventions, methodologies, data, tools, templates, know how, intellectual property and all other proprietary information of Company; (ii) the terms of this Agreement; and (iii) any other information identified as confidential in writing by Company. Confidential Information shall not include information that: (a) was lawfully known by Director without an obligation of confidentiality before its receipt from Company; (b) is independently developed by Director without reliance on or use of Confidential Information; (c) is or becomes publicly available without a breach by Director of this Agreement; or (d) is disclosed to Director by a third party which is not required to maintain its confidentiality. An “Affiliate” of a Party shall mean any entity directly or indirectly controlling, controlled by, or under common control with, such Party at any time during the Term for so long as such control exists.
       
    (b) Company Ownership. Company shall retain all right, title, and interest to the Confidential Information, including all copies thereof and all rights to patents, copyrights, trademarks, trade secrets and other intellectual property rights inherent therein and appurtenant thereto. Subject to the terms and conditions of this Agreement, Company hereby grants Director a non-exclusive, non-transferable, license during the Term to use any Confidential Information solely to the extent that such Confidential Information is necessary for the performance of Director’s duties hereunder. Director shall not, by virtue of this Agreement or otherwise, acquire any proprietary rights whatsoever in Confidential Information, which shall be the sole and exclusive property and confidential information of Company. No identifying marks, copyright or proprietary right notices may be deleted from any copy of Confidential Information. Nothing contained herein shall be construed to limit the rights of Company from performing similar services for, or delivering the same or similar deliverable to, third parties using the Confidential Information and/or using the same personnel to provide any such services or deliverables.

 

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    (c) Confidentiality Obligations. Director agrees to hold the Confidential Information in confidence and not to copy, reproduce, sell, assign, license, market, transfer, give or otherwise disclose such Confidential Information to any person or entity or to use the Confidential Information for any purposes whatsoever, without the express written permission of Company, other than disclosure to Director’s, partners, principals, directors, officers, employees, subcontractors and agents on a “need-to-know” basis as reasonably required for the performance of Director’s obligations hereunder or as otherwise agreed to herein. Director shall be responsible to Company for any violation of this Section 5 by Director’s employees, subcontractors, and agents. Director shall maintain the Confidential Information with the same degree of care, but no less than a reasonable degree of care, as Director employs concerning its own information of like kind and character.
       
    (d) Required Disclosure. If Director is requested to disclose any of the Confidential Information as part of an administrative or judicial proceeding, Director shall, to the extent permitted by applicable law, promptly notify Company of that request and cooperate with Company, at Company’s expense, in seeking a protective order or similar confidential treatment for the Confidential Information. If no protective order or other confidential treatment is obtained, Director shall disclose only that portion of Confidential Information which is legally required and will exercise all reasonable efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information which is required to be disclosed.
       
    (e) Enforcement. Director acknowledges that the Confidential Information is unique and valuable, and that remedies at law will be inadequate to protect Company from any actual or threatened breach of this Section 5 by Director and that any such breach would cause irreparable and continuing injury to Company. Therefore, Director agrees that Company shall be entitled to seek equitable relief with respect to the enforcement of this Section 5 without any requirement to post a bond, including, without limitation, injunction and specific performance, without proof of actual damages or exhausting other remedies, in addition to all other remedies available to Company at law or in equity. For greater clarity, in the event of a breach or threatened breach by Director of any of the provisions of this Section 5, in addition to and not in limitation of any other rights, remedies or damages available at law or in equity, Company shall be entitled to a permanent injunction or other like remedy in order to prevent or restrain any such breach or threatened breach by Director, and Director agrees that an interim injunction may be granted against Director immediately on the commencement of any action, claim, suit or proceeding by Company to enforce the provisions of this Section 5, and Director further irrevocably consents to the granting of any such interim or permanent injunction or any like remedy. If any action at law or in equity is necessary to enforce the terms of this Section 5, Director, if it is determined to be at fault, shall pay Company’s reasonable legal fees and expenses on a substantial indemnity basis.

 

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    (f) Related Duties. Director shall: (i) promptly deliver to Company upon Company’s request all materials in Director’s possession which contain Confidential Information; (ii) use its best efforts to prevent any unauthorized use or disclosure of the Confidential Information; (iii) notify Company in writing immediately upon discovery of any such unauthorized use or disclosure; and (iv) cooperate in every reasonable way to regain possession of any Confidential Information and to prevent further unauthorized use and disclosure thereof.
       
    (g) Legal Exceptions. Further notwithstanding the foregoing provisions of this Section 5, Director may disclose confidential information as may be expressly required by law, governmental rule, regulation, executive order, court order, or in connection with a dispute between the Parties; provided that prior to making any such disclosure, subject to applicable law, Director shall use its best efforts to: (i) provide Company with at least fifteen (15) days’ prior written notice setting forth with specificity the reason(s) for such disclosure, supporting documentation therefor, and the circumstances giving rise thereto; and (ii) limit the scope and duration of such disclosure to the strictest possible extent.
       
    (h) Limitation. Except as specifically set forth herein, no licenses or rights under any patent, copyright, trademark, or trade secret are granted by Company to Director hereunder, or are to be implied by this Agreement. Except for the restrictions on use and disclosure of Confidential Information imposed in this Agreement, no obligation of any kind is assumed or implied against either Party or their Affiliates by virtue of meetings or conversations between the Parties hereto with respect to the subject matter stated above or with respect to the exchange of Confidential Information. Each Party further acknowledges that this Agreement and any meetings and communications of the Parties and their affiliates relating to the same subject matter shall not: (i) constitute an offer, request, invitation or contract with the other Party to engage in any research, development or other work; (ii) constitute an offer, request, invitation or contract involving a buyer-seller relationship, joint venture, teaming or partnership relationship between the Parties and their affiliates; or (iii) constitute a representation, warranty, assurance, guarantee or inducement with respect to the accuracy or completeness of any Confidential Information or the non-infringement of the rights of third persons.
       
6. Intellectual Property Rights.
       
    (a) Disclosure of Work Product. As used in this Agreement, the term “Work Product” means any invention, whether or not patentable, know-how, designs, mask works, trademarks, formulae, processes, manufacturing techniques, trade secrets, ideas, artwork, software or any copyrightable or patentable works. Director agrees to disclose promptly in writing to Company, or any person designated by Company, all Work Product that is solely or jointly conceived, made, reduced to practice, or learned by Director in the course of any work performed for Company (“Company Work Product”). Director agrees (a) to use Director’s best efforts to maintain such Company Work Product in trust and strict confidence; (b) not to use Company Work Product in any manner or for any purpose not expressly set forth in this Agreement; and (c) not to disclose any such Company Work Product to any third party without first obtaining Company’s express written consent on a case-by-case basis.

 

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    (b) Ownership of Company Work Product. Director agrees that any and all Company Work Product conceived, written, created or first reduced to practice in the performance of work under this Agreement shall be deemed “work for hire” under applicable law and shall be the sole and exclusive property of Company.
       
    (c) Assignment of Company Work Product. Director irrevocably assigns to Company all right, title and interest worldwide in and to the Company Work Product and all applicable intellectual property rights related to the Company Work Product, including without limitation, copyrights, trademarks, trade secrets, patents, moral rights, contract and licensing rights (the “Proprietary Rights”). Except as set forth below, Director retains no rights to use the Company Work Product and agrees not to challenge the validity of Company’s ownership in the Company Work Product. Director hereby grants to Company a perpetual, non-exclusive, fully paid-up, royalty-free, irrevocable and world-wide right, with rights to sublicense through multiple tiers of sublicensees, to reproduce, make derivative works of, publicly perform, and display in any form or medium whether now known or later developed, distribute, make, use and sell any and all Director owned or controlled Work Product or technology that Director uses to complete the services and which is necessary for Company to use or exploit the Company Work Product.
       
    (d) Assistance. Director agrees to cooperate with Company or its designee(s), both during and after the Term, in the procurement and maintenance of Company’s rights in Company Work Product and to execute, when requested, any other documents deemed necessary by Company to carry out the purpose of this Agreement. Director will assist Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Work Product in any and all countries. Director’s obligation to assist Company with respect to Proprietary Rights relating to such Company Work Product in any and all countries shall continue beyond the termination of this Agreement, but Company shall compensate Director at a reasonable rate to be mutually agreed upon after such termination for the time actually spent by Director at Company’s request on such assistance.
       
    (e) Execution of Documents. In the event Company is unable for any reason, after reasonable effort, to secure Director’s signature on any document requested by Company pursuant to this Section 6 within seven (7) days of the Company’s initial request to Director, Director hereby irrevocably designates and appoints Company and its duly authorized officers and agents as its agent and attorney in fact, which appointment is coupled with an interest, to act for and on its behalf solely to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of this Section 6 with the same legal force and effect as if executed by Director. Director hereby waives and quitclaims to Company any and all claims, of any nature whatsoever, which Director now or may hereafter have for infringement of any Proprietary Rights assignable hereunder to Company.

 

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    (f) Director Representations and Warranties. Director hereby represents and warrants that: (i) Company Work Product will be an original work of Director or all applicable third parties will have executed assignments of rights reasonably acceptable to Company; (ii) neither the Company Work Product nor any element thereof will infringe the intellectual property rights of any third party; (iii) neither the Company Work Product nor any element thereof will be subject to any restrictions or to any mortgages, liens, pledges, security interests, encumbrances or encroachments; (iv) Director will not grant, directly or indirectly, any rights or interest whatsoever in the Company Work Product to any third party; (v) Director has full right and power to enter into and perform Director’s obligations under this Agreement without the consent of any third party; (vi) Director will use best efforts to prevent injury to any person (including employees of Company) or damage to property (including Company’s property) during the Term; and (vii) should Company permit Director to use any of Company’s equipment, tools, or facilities during the Term, such permission shall be gratuitous and Director shall be responsible for any injury to any person (including death) or damage to property (including Company’s property) arising out of use of such equipment, tools or facilities.
       
7. Director’s Representation and Acknowledgment. Director represents to the Company that Director’s execution and performance of this Agreement shall not be in violation of any agreement or obligation (whether or not written) that Director may have with or to any person or entity, including without limitation, any prior or current employer. The Director hereby acknowledges and agrees that this Agreement (and any other agreement or obligation referred to herein) shall be an obligation solely of the Company, and the Director shall have no recourse whatsoever against any shareholder of Company or any of any of its affiliate or subsidiary companies with respect to any matter arising under this Agreement.
   
8. Effect of Waiver. The waiver by either Party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach hereof. No waiver shall be valid unless in writing.
   
9. Assignment. No Party shall have any power or any right to assign or transfer, in whole or in part, this Agreement, or any of its rights or any of its obligations hereunder, including, without limitation, any right to pursue any claim for damages pursuant to this Agreement or the transactions contemplated herein, or to pursue any claim for any breach or default of this Agreement, or any right arising from the purported assignor’s due performance of its obligations hereunder, without the prior written consent of the other Party and any such purported assignment in contravention of the provisions herein shall be null and void and of no force or effect, provided that, notwithstanding the foregoing, the Company may transfer, assign or delegate to any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company any of Company’s rights, obligations or duties hereunder.
   
10. No Third-Party Rights. Except as expressly provided in this Agreement, this Agreement is intended solely for the benefit of the Parties hereto and is not intended to confer any benefits upon, or create any rights in favor of, any person or entity other than the Parties hereto.

 

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11. Entire Agreement; Effectiveness of Agreement. This Agreement sets forth the entire agreement of the Parties hereto and shall supersede any and all prior agreements and understandings concerning the Director’s employment by the Company. This Agreement may be changed only by a written document signed by the Director and the Company.
   
12. Survival. The provisions of Section 5, Section 6, and Section 9 through Section 23, inclusive, shall survive any termination or expiration of this Agreement, and provided that any expiration or termination of this Agreement shall not excuse a Party from compliance with, or fulfillment of, any obligations or conditions which arose prior to such expiration or termination.
   
13. Severability. If any one or more of the provisions, or portions of any provision, of the Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions or parts hereof shall not in any way be affected or impaired thereby.
   
14. Governing Law and Waiver of Jury Trial.
       
    (a) All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be determined, and this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, and for all purposes shall be construed in accordance with the laws of such state, without giving effect to the choice of law provisions of such state.
       
    (b) Subject to Section 15, each Party agrees that all legal proceedings concerning this Agreement shall be commenced in the state and federal courts sitting in SANTA CLARA COUNTY, CALIFORNIA (the “Selected Courts”). Each Party hereto hereby irrevocably submits to the exclusive jurisdiction of the Selected Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the rights of a Party under this Agreement), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such Selected Courts, or such Selected Courts are improper or inconvenient venue for such proceeding. Each Party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such Party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law.

 

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    (c) TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 14(c).
       
    (d) Subject to the provisions of Section 15, if any Party shall commence an action or proceeding to enforce any provisions of this Agreement, then the prevailing Party in such action or proceeding shall be reimbursed by the other Party for its attorney’s fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.
       
15. Arbitration. Any controversy, claim or dispute arising out of or relating to this Agreement or the Director’s employment by the Company, including, but not limited to, common law and statutory claims for discrimination, wrongful discharge, and unpaid wages, shall be resolved by arbitration in Los Altos, California pursuant to then-prevailing National Rules for the Resolution of Employment Disputes of the American Arbitration Association. The arbitration shall be conducted by three arbitrators, with one arbitrator selected by each Party and the third arbitrator selected by the two arbitrators so selected by the Parties. The arbitrators shall be bound to follow the applicable Agreement provisions in adjudicating the dispute. It is agreed by both Parties that the arbitrators’ decision is final, and that no Party may take any action, judicial or administrative, to overturn such decision. The judgment rendered by the arbitrators may be entered in the Selected Courts. Each Party will pay its own expenses of arbitration and the expenses of the arbitrators will be equally shared provided that, if in the opinion of the arbitrators any claim, defense, or argument raised in the arbitration was unreasonable, the arbitrators may assess all or part of the expenses of the other Party (including reasonable attorneys’ fees) and of the arbitrators as the arbitrators deem appropriate. The arbitrators may not award either Party punitive or consequential damages.
   
16. General Remedies. Each Party acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the other Party, and thus each Party acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by such Party of the provisions of this Agreement, that the other Party shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.

 

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17. Indemnification. During the Term, the Director shall be entitled to indemnification and insurance coverage for officers’ liability, fiduciary liability and other liabilities arising out of the Director’s position with the Company in any capacity, in an amount not less than the highest amount available to any other director, and such coverage and protections, with respect to the various liabilities as to which the Director has been customarily indemnified prior to termination of employment, shall continue for at least six years following the end of the Term. Any indemnification agreement entered into between the Company and the Director shall continue in full force and effect in accordance with its terms following the termination of this Agreement.
   
18. Expenses. Other than as specifically set forth herein, each of the Parties will bear their own respective expenses, including legal, accounting and professional fees, incurred in connection with this Agreement and the transactions contemplated herein.
   
19. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other Party, or by registered or certified mail, return receipt requested, postage prepaid, or by email with return receipt requested and received or nationally recognized overnight courier service, addressed as set forth below or to such other address as either Party shall have furnished to the other in writing in accordance herewith. All notices, requests, demands and other communications shall be deemed to have been duly given (i) when delivered by hand, if personally delivered, (ii) when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail, and (iii) on receipt of confirmed delivery, if sent by email.

 

If to the Company:

 

HeartCore Enterprises, Inc.

Attn: Sumitaka Yamamoto

848 Jordan Ave. Apt. G

Los Altos CA 94022

Email: kanno@heartcore.co.jp

 

With a copy, which shall not constitute notice, to:

 

Anthony L.G., PLLC

Attn: John Cacomanolis

625 N. Flagler Drive, Suite 600

West Palm Beach, FL 33401

Email: JCacomanolis@anthonypllc.com

 

If to Director, to:

 

[____________]

[____________]

[____________]

Email: [____________]

 

20. Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

 

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21. Counsel. The Parties acknowledge and agree that Anthony L.G., PLLC (“Counsel”) has acted as legal counsel to the Company, and that Counsel has prepared this Agreement at the request of the Company, and that Counsel is not legal counsel to Director individually. Each of the Parties acknowledges and agrees that they are aware of, and have consented to, the Counsel acting as legal counsel to the Company and preparing this Agreement, and that Counsel has advised each of the Parties to retain separate counsel to review the terms and conditions of this Agreement and the other documents to be delivered in connection herewith, and each Party has either waived such right freely or has otherwise sought such additional counsel as it has deemed necessary. Each of the Parties acknowledges and agrees that Counsel does not owe any duties to Director in Director’s individual capacity in connection with this Agreement and the transactions contemplated herein. Each of the Parties hereby waives any conflict of interest which may apply with respect to Counsel’s actions as set forth herein, and the Parties confirm that the Parties have previously negotiated the material terms of the agreements as set forth herein.
   
22. Rule of Construction. The general rule of construction for interpreting a contract, which provides that the provisions of a contract should be construed against the Party preparing the contract, is waived by the Parties hereto. Each Party acknowledges that such Party was represented by separate legal counsel in this matter who participated in the preparation of this Agreement or such Party had the opportunity to retain counsel to participate in the preparation of this Agreement but elected not to do so.
   
23. Execution in Counterparts, Electronic Transmission. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. The signature of any Party which is transmitted by any reliable electronic means such as, but not limited to, a photocopy, electronically scanned or facsimile machine, for purposes hereof, is to be considered as an original signature, and the document transmitted is to be considered to have the same binding effect as an original signature or an original document.

 

[Signatures appear on following page]

 

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.

 

  HeartCore Enterprises, Inc.
                                                                    
  By:
  Name: Sumitaka Yamamoto
  Title: Chief Executive Officer
     
  [_____________________]
     
  By:
  Name: [_________________]
     
  Address for notices:
   
 
 
 
 
 

 

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Exhibit 10.11

 

HeartCore Enterprises, Inc.

 

Indemnification Agreement

 

Dated as of [____________], 2021

 

This Indemnification Agreement (the “Agreement”) dated as of the date first set forth above (the “Effective Date”) is entered into by and between HeartCore Enterprises, Inc., a Delaware corporation (the “Company”) and [____________] (the “Indemnitee”). The Company and Indemnitee may collective be referred to as the “Parties” and each individually as a “Party”.

 

WHEREAS, Indemnitee’s service to the Company substantially benefits the Company;

 

WHEREAS, Individuals are reluctant to serve as directors or officers of corporations or in certain other capacities unless they are provided with adequate protection through insurance or indemnification against the risks of claims and actions against them arising out of such service;

 

WHEREAS, Indemnitee does not regard the protection currently provided by applicable law, the Company’s governing documents and any insurance as adequate under the present circumstances, and Indemnitee may not be willing to serve as a director or officer without additional protection;

 

WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, it is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify, and to advance expenses on behalf of, Indemnitee as permitted by applicable law; and

 

WHEREAS, this Agreement is a supplement to and in furtherance of the indemnification provided in the Company’s Certificate of Incorporation and Bylaws, and any resolutions adopted pursuant thereto, and this Agreement shall not be deemed a substitute therefor, nor shall this Agreement be deemed to limit, diminish or abrogate any rights of Indemnitee thereunder;

 

NOW, THEREFORE, in consideration of the promises and of the mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Indemnitee hereby agree as follows:

 

1. Definitions.

 

(a) A “Change in Control” shall be deemed to occur upon the earliest to occur after the Effective Date of any of the following events:

 

(i) Acquisition of Stock by Third Party. Any Person (as defined below) becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; provided, that any acquisition that occurs as a result of any transaction that has been approved by a majority of the Company’s board of directors shall be excluded from the definition of Change in Control;

 

 
 

 

(ii) Change in Board Composition. During any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Company’s board of directors, and any new directors (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Section 1(a)(i), Section 1(a)(iii) or Section 1(a)(iv)) whose election by the board of directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the members of the Company’s board of directors; provided, that changes in the composition of the Company’s board of directors as a result of any transaction that has been approved by a majority of the Company’s board of directors shall be excluded from the definition of Change in Control;

 

(iii) Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity;

 

(iv) Liquidation. The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; or

 

(v) Other Events. Any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended, whether or not the Company is then subject to such reporting requirement.

 

(b) “Person” shall have the meaning as set forth in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended; provided, however, that “Person” shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

 

(c) “Beneficial Owner” shall have the meaning given to such term in Rule 13d-3 under the Securities Exchange Act of 1934, as amended; provided, however, that “Beneficial Owner” shall exclude any Person otherwise becoming a Beneficial Owner by reason of (i) the stockholders of the Company approving a merger of the Company with another entity or (ii) the Company’s board of directors approving a sale of securities by the Company to such Person.

 

(d) “Corporate Status” describes the status of a person who is or was a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise.

 

(e) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee and who meets the requirements of a “disinterested director” as set forth in the DGCL.

 

(f) “Enterprise” means the Company and any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary.

 

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(g) “Expenses” include all reasonable and actually incurred attorneys’ fees, retainers, court costs, transcript costs, fees and costs of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also include (i) Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond or other appeal bond or their equivalent, and (ii) for purposes of Section 12(d), Expenses incurred by Indemnitee in connection with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

 

(h) “DGCL” means the Delaware General Corporation Law.

 

(i) “Independent Counsel” means a law firm, or a partner or member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent (i) the Company or Indemnitee in any matter material to either such Party (other than as Independent Counsel with respect to matters concerning Indemnitee under this Agreement, or other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

 

(j) “Proceeding” means any threatened, pending or completed action, suit, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, including any appeal therefrom and including without limitation any such Proceeding pending as of the Effective Date, in which Indemnitee was, is or will be involved as a party, a potential party, a non-party witness or otherwise by reason of (i) the fact that Indemnitee is or was a director or officer of the Company, (ii) any action taken by Indemnitee or any action or inaction on Indemnitee’s part while acting as a director or officer of the Company, or (iii) the fact that he or she is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise, in each case whether or not serving in such capacity at the time any liability or Expense is incurred for which indemnification or advancement of expenses can be provided under this Agreement.

 

(k) Reference to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.

 

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2. Indemnity in Third-Party Proceedings. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 2 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 2, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.

 

3. Indemnity in Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company. No indemnification for Expenses shall be made under this Section 3 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged by a court of competent jurisdiction to be liable to the Company, unless and only to the extent that the or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such Expenses as such court shall deem proper.

 

4. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. To the extent that Indemnitee is a party to or a participant in and is successful (on the merits or otherwise) in defense of any Proceeding or any claim, issue or matter therein, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. For purposes of this section, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

 

5. Indemnification for Expenses of a Witness. To the extent that Indemnitee is, by reason of his or her Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, Indemnitee shall be indemnified to the extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.

 

6. Additional Indemnification.

 

(a) Notwithstanding any limitation in Section 2, Section 3 or Section 4, the Company shall indemnify Indemnitee to the fullest extent permitted by applicable law if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with the Proceeding or any claim, issue or matter therein.

 

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(b) For purposes of Section 6(a), the meaning of the phrase “to the fullest extent permitted by applicable law” shall include, but not be limited to:

 

(i) the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL; and

 

(ii) the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the Effective Date that increase the extent to which a corporation may indemnify its officers and directors.

 

7. Exclusions. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any Proceeding (or any part of any Proceeding):

 

(a) for which payment has actually been made to or on behalf of Indemnitee under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyond the amount paid;

 

(b) for an accounting or disgorgement of profits pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of federal, state or local statutory law or common law, if Indemnitee is held liable therefor (including pursuant to any settlement arrangements);

 

(c) for any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Securities Exchange Act of 1934, as amended (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act), if Indemnitee is held liable therefor (including pursuant to any settlement arrangements);

 

(d) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees, agents or other indemnitees, unless (i) the Company’s board of directors authorized the Proceeding (or the relevant part of the Proceeding) prior to its initiation, (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law, (iii) otherwise authorized in Section 12(d) or (iv) otherwise required by applicable law; or

 

(e) if prohibited by applicable law.

 

8. Advances of Expenses. The Company shall advance the Expenses incurred by Indemnitee in connection with any Proceeding prior to its final disposition, and such advancement shall be made as soon as reasonably practicable, but in any event no later than 90 days, after the receipt by the Company of a written statement or statements requesting such advances from time to time (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditure made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice). Advances shall be unsecured and interest free and made without regard to Indemnitee’s ability to repay such advances. Indemnitee hereby undertakes to repay any advance to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. This Section 8 shall not apply to the extent advancement is prohibited by law and shall not apply to any Proceeding (or any part of any Proceeding) for which indemnity is not permitted under this Agreement, but shall apply to any Proceeding (or any part of any Proceeding) referenced in Section 7(b) or Section 7(c) prior to a determination that Indemnitee is not entitled to be indemnified by the Company.

 

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9. Procedures for Notification and Defense of Claim.

 

(a) Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification or advancement of Expenses as soon as reasonably practicable following the receipt by Indemnitee of notice thereof. The written notification to the Company shall include, in reasonable detail, a description of the nature of the Proceeding and the facts underlying the Proceeding. The failure by Indemnitee to notify the Company will not relieve the Company from any liability which it may have to Indemnitee hereunder or otherwise than under this Agreement, and any delay in so notifying the Company shall not constitute a waiver by Indemnitee of any rights, except to the extent that such failure or delay materially prejudices the Company.

 

(b) If, at the time of the receipt of a notice of a Proceeding pursuant to the terms hereof, the Company has directors’ and officers’ liability insurance in effect that may be applicable to the Proceeding, the Company shall give prompt notice of the commencement of the Proceeding to the insurers in accordance with the procedures set forth in the applicable policies. The Company shall thereafter take all commercially-reasonable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.

 

(c) In the event the Company may be obligated to make any indemnity in connection with a Proceeding, the Company shall be entitled to assume the defense of such Proceeding with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, conditioned or delayed, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee for any fees or expenses of counsel subsequently incurred by Indemnitee with respect to the same Proceeding. Notwithstanding the Company’s assumption of the defense of any such Proceeding, the Company shall be obligated to pay the fees and expenses of Indemnitee’s separate counsel to the extent (i) the employment of separate counsel by Indemnitee is authorized by the Company, (ii) counsel for the Company or Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense such that Indemnitee needs to be separately represented, (iii) the Company is not financially or legally able to perform its indemnification obligations or (iv) the Company shall not have retained, or shall not continue to retain, counsel to defend such Proceeding. The Company shall have the right to conduct such defense as it sees fit in its sole discretion. Regardless of any provision in this Agreement, Indemnitee shall have the right to employ counsel in any Proceeding at Indemnitee’s personal expense. The Company shall not be entitled, without the consent of Indemnitee, to assume the defense of any claim brought by or in the right of the Company.

 

(d) Indemnitee shall give the Company such information and cooperation in connection with the Proceeding as may be reasonably appropriate.

 

(e) The Company shall not be liable to indemnify Indemnitee for any settlement of any Proceeding (or any part thereof) without the Company’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed.

 

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(f) The Company shall not settle any Proceeding (or any part thereof) in a manner that imposes any penalty or liability on Indemnitee without Indemnitee’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed.

 

10. Procedures upon Application for Indemnification.

 

(a) To obtain indemnification, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and as is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of the Proceeding. Any delay in providing the request will not relieve the Company from its obligations under this Agreement, except to the extent such failure is prejudicial.

 

(b) Upon written request by Indemnitee for indemnification pursuant to Section 10(a), a determination with respect to Indemnitee’s entitlement thereto shall be made in the specific case (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of two or more of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (B) by a committee of two or more of the Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (C) if there are less than two Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee or (D) if so directed by the Company’s board of directors, by the stockholders of the Company. If it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making the determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys’ fees and disbursements) actually and reasonably incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company, to the extent permitted by applicable law.

 

(c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 10(b), the Independent Counsel shall be selected as provided in this Section 10(c). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Company’s board of directors, and the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Company’s board of directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within ten days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 1(i), and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after the later of (i) submission by Indemnitee of a written request for indemnification pursuant to Section 10(a) and (ii) the final disposition of the Proceeding, the Parties have not agreed upon an Independent Counsel, either the Company or Indemnitee may petition a court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 10(b). Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 12(a), the Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

 

(d) The Company agrees to pay the reasonable fees and expenses of any Independent Counsel.

 

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11. Presumptions and Effect of Certain Proceedings.

 

(a) In making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall, to the fullest extent not prohibited by law, presume that Indemnitee is entitled to indemnification under this Agreement, and the Company shall, to the fullest extent not prohibited by law, have the burden of proof to overcome that presumption.

 

(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his or her conduct was unlawful.

 

(c) Neither the knowledge, actions nor failure to act of any other director, officer, agent or employee of the Enterprise shall be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

 

12. Remedies of Indemnitee.

 

(a) Subject to Section 12(e), in the event that (i) a determination is made pursuant to Section 10 that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 8 or Section 12(d), (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 10 within 90 days after the later of the receipt by the Company of the request for indemnification or the final disposition of the Proceeding, (iv) payment of indemnification pursuant to this Agreement is not made (A) within ten days after a determination has been made that Indemnitee is entitled to indemnification or (B) with respect to indemnification pursuant to Section 4, Section 5 and Section 12(d), within 30 days after receipt by the Company of a written request therefor, or (v) the Company or any other person or entity takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of competent jurisdiction of his or her entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his or her option, may seek an award in arbitration with respect to his or her entitlement to such indemnification or advancement of Expenses, to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 12(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his or her rights under Section 4. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration in accordance with this Agreement.

 

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(b) Neither (i) the failure of the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or stockholders to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor (ii) an actual determination by the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or stockholders that Indemnitee has not met the applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. In the event that a determination shall have been made pursuant to Section 10 that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 12 shall be conducted in all respects as a de novo trial, or arbitration, on the merits, and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 12, the Company shall, to the fullest extent not prohibited by law, have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

 

(c) To the fullest extent not prohibited by law, the Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 12 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. If a determination shall have been made pursuant to Section 10 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 12, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statements not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.

 

(d) To the extent not prohibited by law, the Company shall indemnify Indemnitee against all Expenses that are incurred by Indemnitee in connection with any action for indemnification or advancement of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company to the extent Indemnitee is successful in such action, and, if requested by Indemnitee, shall (as soon as reasonably practicable, but in any event no later than 90 days, after receipt by the Company of a written request therefor) advance such Expenses to Indemnitee, subject to the provisions of Section 8.

 

(e) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification shall be required to be made prior to the final disposition of the Proceeding.

 

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13. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amounts incurred by Indemnitee, whether for Expenses, judgments, fines or amounts paid or to be paid in settlement, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the events and transactions giving rise to such Proceeding; and (ii) the relative fault of Indemnitee and the Company (and its other directors, officers, employees and agents) in connection with such events and transactions.

 

14. Non-exclusivity. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company’s Certificate of Incorporation or Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Company’s Certificate of Incorporation and Bylaws and this Agreement, it is the intent of the Parties that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change, subject to the restrictions expressly set forth herein or therein. Except as expressly set forth herein, no right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. Except as expressly set forth herein, the assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

 

15. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received payment for such amounts under any insurance policy, contract, agreement or otherwise.

 

16. Insurance. To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, trustees, general partners, managing members, officers, employees, agents or fiduciaries of the Company or any other Enterprise, Indemnitee shall be covered by such policy or policies to the same extent as the most favorably-insured persons under such policy or policies in a comparable position.

 

17. Subrogation. In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

 

18. Services to the Company. Indemnitee agrees to serve as a director or officer of the Company or, at the request of the Company, as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of another Enterprise, for so long as Indemnitee is duly elected or appointed or until Indemnitee tenders his or her resignation or is removed from such position. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that any employment with the Company (or any of its subsidiaries or any Enterprise) is at will, and Indemnitee may be discharged at any time for any reason, with or without cause, with or without notice, except as may be otherwise expressly provided in any executed, written employment contract between Indemnitee and the Company (or any of its subsidiaries or any Enterprise), any existing formal severance policies adopted by the Company’s board of directors or, with respect to service as a director or officer of the Company, the Company’s Certificate of Incorporation or Bylaws or the DGCL. No such document shall be subject to any oral modification thereof.

 

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19. Duration. This Agreement shall continue until and terminate upon the later of (a) ten years after the date that Indemnitee shall have ceased to serve as a director or officer of the Company or as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of any other Enterprise, as applicable; or (b) one year after the final termination of any Proceeding, including any appeal, then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 12 relating thereto.

 

20. Successors. This Agreement shall be binding upon the Company and its successors and assigns, including any direct or indirect successor, by purchase, merger, consolidation or otherwise, to all or substantially all of the business or assets of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s heirs, executors and administrators. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by written agreement, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by written agreement, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Other than as set forth herein, no Party shall have any power or any right to assign or transfer, in whole or in part, this Agreement, or any of its rights or any of its obligations hereunder, including, without limitation, any right to pursue any claim for damages pursuant to this Agreement or the transactions contemplated herein, or to pursue any claim for any breach or default of this Agreement, or any right arising from the purported assignor’s due performance of its obligations hereunder, without the prior written consent of the other Party and any such purported assignment in contravention of the provisions herein shall be null and void and of no force or effect.

 

21. Severability; Limitation. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. All obligations of the Company hereunder shall be subject to any limitations in, and any requirements of, the DGCL as it may be in place at the applicable time. The Company’s inability, pursuant to court order or other applicable law, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (ii) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the Parties; and (iii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

 

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22. Enforcement. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.

 

23. Entire Agreement. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the Parties with respect to the subject matter hereof; provided, however, that this Agreement is a supplement to and in furtherance of the Company’s Certificate of Incorporation and Bylaws and applicable law.

 

24. Modification and Waiver. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by the Parties. No amendment, alteration or repeal of this Agreement shall adversely affect any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his or her Corporate Status prior to such amendment, alteration or repeal. No waiver of any of the provisions of this Agreement shall constitute or be deemed a waiver of any other provision of this Agreement nor shall any waiver constitute a continuing waiver.

 

25. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail or otherwise delivered by hand, messenger or courier service addressed:

 

(a) if to Indemnitee, to Indemnitee’s address, facsimile number or electronic mail address as shown in the Company’s records, as may be updated in accordance with the provisions hereof; or if to the Company, to:

 

HeartCore Enterprises, Inc.

Attn: Sumitaka Yamamoto

848 Jordan Ave. Apt. G

Los Altos CA 94022

Email: kanno@heartcore.co.jp

 

(b) Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given (i) if delivered by hand, messenger or courier service, when delivered (or if sent via a nationally-recognized overnight courier service, freight prepaid, specifying next-business-day delivery, one business day after deposit with the courier), (ii) if sent via mail, at the earlier of its receipt or five days after the same has been deposited in a regularly-maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or (iii) if sent via facsimile, upon confirmation of facsimile transfer or, if sent via electronic mail, upon confirmation of delivery when directed to the relevant electronic mail address, if sent during normal business hours of the recipient, or if not sent during normal business hours of the recipient, then on the recipient’s next business day.

 

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26. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the Parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 12(a), the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the courts of the State of Delaware or the United States District Courts located in the State of Delaware (the “Selected Courts”), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Selected Courts for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such Party is not otherwise subject to service of process in the State of Delaware, the Company’s registered agent, as registered with the Delaware Secretary of State, as its agent in the State of Delaware as such Party’s agent for acceptance of legal process in connection with any such action or proceeding against such Party with the same legal force and validity as if served upon such Party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Selected Courts, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Selected Courts has been brought in an improper or inconvenient forum.

 

27. Captions. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

 

28. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the Party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

 

[Signatures appear on following page]

 

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In witness whereof, the Parties have signed this Agreement as of the Effective Date.

 

  HeartCore Enterprises, Inc.
     
  By:  
  Name: Sumitaka Yamamoto
  Title: Chief Executive Officer
     
  Indemnitee: [________________]
     
  By:  
  Name: [________________]

 

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Exhibit 21.1

 

List of Subsidiaries of

HeartCore Enterprises, Inc.

 

Entity Name   Place of Organization
     
HeartCore Co., Ltd.*   Japan
     

 

* 97.5% owned subsidiary of HeartCore Enterprises, Inc.

 

 

 

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the inclusion in this Registration Statement on Form S-1 of our report dated November 12, 2021 with respect to the audited consolidated financial statements of HeartCore Enterprises, Inc. as of December 31, 2020 and 2019 and for the years ended December 31, 2020 and 2019.

 

We also consent to the references to us under the heading “Experts” in such Registration Statement.

 

/s/ MaloneBailey, LLP

www.malonebailey.com

Houston, Texas

January 3, 2022