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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2022

 

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

 

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

 

Commission File Number 001-41272

 

HeartCore Enterprises, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

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

(I.R.S. Employer

Identification Number)

 

1-2-33, Higashigotanda, Shinagawa-ku

Tokyo, Japan

(Address of Principal Executive Offices) (Zip Code)

 

(206) 385-0488, ext. 100

(Registrant’s Telephone Number, Including Area Code)

 

N/A

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of November 14, 2022, there were 17,649,886 shares of outstanding common stock, par value $0.0001 per share, of the registrant.

 

 

 

 
 

 

HeartCore Enterprises, Inc.

 

Contents

 

  Page
PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
     
Item 4. Controls and Procedures 34
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 35
     
Item 1A. Risk Factors 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 3. Defaults Upon Senior Securities 35
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 36
     
Signatures 37

 

2
 

 

Item 1. Financial Statements.

 

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

 

           
   September 30,   December 31, 
   2022   2021 
    (unaudited)      
ASSETS          
Current assets:          
Cash and cash equivalents  $7,843,208   $3,136,839 
Accounts receivable, net   621,345    960,964 
Prepaid expenses   618,955    444,405 
Due from related party   43,900    50,559 
Loan receivable from employee   -    8,341 
Other current assets   143,999    15,654 
Total current assets   9,271,407    4,616,762 
           
Non-current assets:          
Property and equipment, net   199,329    261,414 
Operating lease right-of-use assets   2,458,485    3,319,749 
Deferred tax assets   242,358    297,990 
Security deposits   221,460    278,237 
Long-term loan receivable from related party   234,316    335,756 
Loan receivable from employee, non-current   -    4,518 
Other non-current assets   2,188    8,737 
Total non-current assets   3,358,136    4,506,401 
           
Total assets  $12,629,543   $9,123,163 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)          
           
Current liabilities:          
Accounts payable and accrued expenses  $445,752   $646,425 
Accrued payroll and other employee costs   245,113    255,082 
Due to related party   3,622    1,110 
Current portion of long-term debts   622,937    849,995 
Insurance premium financing   89,652    - 
Operating lease liabilities, current   264,387    332,277 
Finance lease liabilities, current   19,502    37,459 
Income tax payables   1,867    10,919 
Deferred revenue   1,386,559    1,690,917 
Mandatorily redeemable financial interest   -    447,986 
Other current liabilities   42,475    281,673 
Total current liabilities   3,121,866    4,553,843 
           
Non-current liabilities:          
Long-term debts   1,133,945    1,871,580 
Operating lease liabilities, non-current   2,259,284    3,076,204 
Finance lease liabilities, non-current   3,573    23,861 
Other non-current liabilities   124,963    156,627 
Total non-current liabilities   3,521,765    5,128,272 
           
Total liabilities:   6,643,631    9,682,115 
           
Shareholders’ equity (deficit):          
Preferred shares ($0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of September 30, 2022 and December 31, 2021)   -    - 
Common shares ($0.0001 par value, 200,000,000 shares authorized; 18,999,276 and 15,819,943 shares issued; 17,649,886 and 15,546,454 shares outstanding as of September 30, 2022 and December 31, 2021, respectively)   1,899    1,554 
Additional paid-in capital   18,220,206    3,350,779 
Treasury shares, at cost (1,349,390 and 0 shares as of September 30, 2022 and December 31, 2021, respectively)   (3,500,000)   - 
Accumulated deficit   (9,149,139)   (3,896,113)
Accumulated other comprehensive income (loss)   412,946    (15,172)
Total shareholders’ equity (deficit)   5,985,912    (558,952)
           
Total liabilities and shareholders’ equity (deficit)  $12,629,543   $9,123,163 

 

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

 

3
 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

                     
  

For the Three Months

Ended

September 30,

  

For the Nine Months

Ended

September 30,

 
   2022   2021   2022   2021 
Revenues  $1,872,476   $3,470,510   $6,818,774   $8,446,011 
                     
Cost of revenues   1,543,256    1,786,125    3,935,908    4,369,144 
                     
Gross profit   329,220    1,684,385    2,882,866    4,076,867 
                     
Operating expenses:                    
Selling expenses   771,496    79,438    1,706,250    226,903 
General and administrative expenses   1,513,028    1,202,701    5,832,276    2,986,291 
Research and development expenses   58,275    189,686    583,762    321,857 
                     
Total operating expenses   2,342,799    1,471,825    8,122,288    3,535,051 
                     
Income (loss) from operations   (2,013,579)   212,560    (5,239,422)   541,816 
                     
Other income (expenses):                    
Interest income   21,707    1,598    32,256    5,446 
Interest expense   (10,500)   (6,695)   (39,361)   (29,927)
Other income   15,195    1,341    40,645    16,536 
Other expenses   (2,826)   (3,933)   (58,050)   (21,608)
Total other income (expenses)   23,576    (7,689)   (24,510)   (29,553)
                     
Income (loss) before income tax provision   (1,990,003)   204,871    (5,263,932)   512,263 
                     
Income tax expense (benefit)   (19,069)   13,522    (10,906)   97,437 
                     
Net income (loss)   (1,970,934)   191,349    (5,253,026)   414,826 
                     
Less: net income attributable to non-controlling interest   -    5,176    -    11,112 
                     
Net income (loss) attributable to HeartCore Enterprises, Inc.  $(1,970,934)  $186,173   $(5,253,026)  $403,714 
                     
Other comprehensive income (loss):                    
Foreign currency translation adjustment   128,705    (15,309)   428,118    68,365 
                     
Total comprehensive income (loss)   (1,842,229)   176,040    (4,824,908)   483,191 
Less: comprehensive income attributable to non-controlling interest   -    4,770    -    12,923 
Comprehensive income (loss) attributable to HeartCore Enterprises, Inc.  $(1,842,229)  $171,270   $(4,824,908)  $470,268 
                     
Net earnings (loss) per common share attributable to HeartCore Enterprises, Inc.                    
Basic  $(0.11)  $0.01   $(0.29)  $0.03 
Diluted  $(0.11)  $0.01   $(0.29)  $0.03 
Weighted average common shares outstanding                    
Basic   17,835,027    15,242,454    18,014,483    15,242,454 
Diluted   17,835,027    15,515,943    18,014,483    15,515,943 

 

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

 

4
 

 

HEARTCORE ENTERPRISES, INC.

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

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

 

       -   -                     
   Common shares*   Additional  -     Accumulated other   Total HeartCore
Enterprises, Inc.		   Non-   Total 
   Number of
shares		   Amount   paid-in
capital*		  - Accumulated
deficit		   comprehensive
loss		   shareholders’
deficit		   controlling
interest		   shareholders’
deficit		 
Balance, December 31, 2020*   15,242,454   $1,524   $2,735,315  - $(3,557,957)  $(136,890)  $(958,008)  $353,825   $(604,183)
Net loss   -    -    -    (183,249)   -    (183,249)   (4,988)   (188,237)
Foreign currency translation adjustment   -    -    -  -  -    94,938    94,938    2,584    97,522 
Balance, March 31, 2021*   15,242,454    1,524    2,735,315  -  (3,741,206)   (41,952)   (1,046,319)   351,421    (694,898)
Net income   -    -    -  -  400,790    -    400,790    10,924    411,714 
Foreign currency translation adjustment   -    -    -  -  -    (13,481)   (13,481)   (367)   (13,848)
Balance, June 30, 2021*   15,242,454    1,524    2,735,315  -  (3,340,416)   (55,433)   (659,010)  361,978    (297,032)
Net income   -    -    -  -  186,173    -    186,173    5,176    191,349 
Foreign currency translation adjustment   -    -    -  -  -    (14,903)   (14,903)   (406)   (15,309)
Reclassification of non-controlling interest to mandatorily redeemable financial interest   -    -    (81,238) -  -    -    (81,238)   (366,748)   (447,986)
Balance, September 30, 2021   15,242,454   $1,524   $2,654,077  - $(3,154,243)  $(70,336)  $(568,978)  $-   $(568,978)

 

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

 

                                         
   Common shares   Additional   Treasury shares       Accumulated other   Total
shareholders’		 
   Number of
shares		   Amount   paid-in
capital		   Number of shares   Amount   Accumulated
deficit		   comprehensive
income (loss)		   equity (deficit) 
Balance, December 31, 2021   15,546,454   $1,554   $3,350,779    -   $-   $(3,896,113)  $(15,172)  $(558,952)
Net loss   -    -    -    -    -    (1,578,451)   -    (1,578,451)
Foreign currency translation adjustment   -    -    -    -    -    -    80,053    80,053 
Issuance of common shares for cash   3,096,000    310    13,643,969    -    -    -    -    13,644,279 
Issuance of common shares from exercise of share options   273,489    27    (11)   -    -    -    -    16 
Share-based compensation   -    -    422,164    -    -    -    -    422,164 
Balance, March 31, 2022   18,915,943    1,891    17,416,901    -    -    (5,474,564)   64,881    12,009,109 
Net loss   -    -    -    -    -    (1,703,641)   -    (1,703,641)
Foreign currency translation adjustment   -    -    -    -    -    -    219,360    219,360 
Share-based compensation   83,333    8    466,654    -    -    -    -    466,662 
Repurchase of common shares   -    -    -    (558,809)   (1,336,762)   -    -    (1,336,762)
Balance, June 30, 2022   18,999,276    1,899    17,883,555    (558,809)   (1,336,762)   (7,178,205)   284,241    9,654,728 
Net loss   -    -    -    -    -    (1,970,934)   -    (1,970,934)
Foreign currency translation adjustment   -    -    -    -    -    -    128,705    128,705 
Share-based compensation   -    -    336,651    -    -    -    -    336,651 
Repurchase of common shares   -    -    -    (790,581)   (2,163,238)   -    -    (2,163,238)
Balance, September 30, 2022   18,999,276   $1,899   $18,220,206   (1,349,390)  $(3,500,000)  $(9,149,139)  $412,946   $5,985,912 

 

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

 

5
 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

           
   For the Nine Months Ended
September 30,		 
   2022   2021 
Cash flows from operating activities:          
Net income (loss)  $(5,253,026)  $414,826 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Depreciation expenses   64,398    80,297 
Amortization of debt issuance costs   3,051    4,358 
Non-cash lease expense   207,549    254,848 
Deferred income taxes   (5,843)   85,004 
Share-based compensation   1,225,477    - 
           
Changes in assets and liabilities:          
Accounts receivable, net   168,021    (634,711)
Prepaid expenses   (56,553)   (177,880)
Other assets   (142,967)   34,568 
Accounts payable and accrued expenses   (96,238)   684,960 
Accrued payroll and other employee costs   59,059    63,126 
Due to related party   3,098    - 
Operating lease liabilities   (213,691)   (265,984)
Finance lease liabilities   (370)   (961)
Income tax payables   (7,704)   2,092 
Deferred revenue   45,938    639,643 
Other liabilities   (206,569)   55,064 
           
Net cash flows provided by (used in) operating activities   (4,206,370)   1,239,250 
           
Cash flows from investing activities:          
Purchases of property and equipment   (41,672)   (24,675)
Advance and loan provided to related parties   -    (126,390)
Repayment of loan provided to related party   33,042    - 
           
Net cash flows used in investing activities   (8,630)   (151,065)
           
Cash flows from financing activities:          
Proceeds from initial public offering, net of issuance cost   13,602,554    - 
Proceeds from issuance of common shares prior to initial public offering   220,572    - 
Repurchase of common shares   (3,500,000)   - 
Payments for finance leases   (29,051)   (42,941)
Proceeds from long-term debt   258,087    - 
Repayment of long-term debts   (699,407)   (770,181)
Repayment of insurance premium financing   (298,886)   - 
Payments for debt issuance costs   (1,030)   (3,033)
Payment for mandatorily redeemable financial interest   (430,489)   - 
           
Net cash flows provided by (used in) financing activities   9,122,350    (816,155)
           
Effect of exchange rate changes   (200,981)   (239,423)
           
Net change in cash and cash equivalents   4,706,369    32,607 
           
Cash and cash equivalents - beginning of the period   3,136,839    3,058,175 
           
Cash and cash equivalents - end of the period  $7,843,208   $3,090,782 
           
Supplemental cash flow disclosure:          
Interest paid  $38,387   $22,100 
Income taxes paid  $3,013   $9,738 
           
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  $12,034   $9,399 
Expense paid by related party on behalf of the Company  $-   $107,178 
Reclassification of non-controlling interest to mandatorily redeemable financial interest  $-   $447,986 
Liabilities assumed in connection with purchase of property and equipment  $17,731   $- 
Share repurchase liability settled by issuance of common shares  $16   $- 
Deferred offering costs recognized against the proceeds from the offering  $178,847   $- 
Insurance premium financing  $388,538   $- 

 

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

 

6
 

 

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

 

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

 

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

 

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

 

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

 

On September 6, 2022, HeartCore USA entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51% of the outstanding shares of Sigmaways, Inc. (“Sigmaways”), a company incorporated under the laws of the State of California. The consideration will be determined by the parties prior to the closing of the acquisition. As of the date of this filing, the transaction has not been closed.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

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

 

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

 

7
 

 

Use of Estimates

 

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

 

COVID-19

 

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

 

Asset Retirement Obligations

 

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

   September 30,   December 31, 
   2022   2021 
Beginning balance  $155,666   $173,043 
Accretion expense   350    730 
Foreign currency translation adjustment   (31,053)   (18,107)
Ending balance  $124,963   $155,666 

 

Software Development Costs

 

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

 

8
 

 

In the nine months ended September 30, 2022 and 2021, software development costs expensed as incurred amounted to $583,762 and $321,857, 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, 2022 and 2021.

 

Foreign Currency Translation

 

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

 

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

 

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

 

   September 30,
2022		   September 30,
2021		 
Current JPY: US$1 exchange rate   144.60    111.70 
Average JPY: US$1 exchange rate   128.08    108.52 

 

Revenue Recognition

 

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

 

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

 

9
 

 

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

 

Revenue from On-Premise Software

 

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

 

Revenue from Maintenance and Support Service

 

Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers.

 

Revenue from Software as a Service (“SaaS”)

 

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

 

Revenue from Software Development and other Miscellaneous Services

 

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

 

Revenue from Consulting Service

 

The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents and supporting the listing process. Revenues from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less than one year in length.

 

The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the nine months ended September 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $1.2 million and $2.0 million, respectively.

 

10
 

 

Disaggregation of Revenue

 

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

 

                     
  

For the Three Months

Ended

  

For the Nine Months

Ended

 
   September 30,   September 30, 
   2022   2021   2022   2021 
Revenue from On-Premise Software  $257,121   $1,204,326   $1,775,254   $2,586,542 
Revenue from Maintenance and Support Service   678,521    1,009,640    2,251,137    2,842,407 
Revenue from Software as a Service (“SaaS”)   122,347    323,836    352,251    615,356 
Revenue from Software Development and other Miscellaneous Services   340,742    932,708    1,518,032    2,401,706 
Revenue from Consulting Service   473,745    -    922,100    - 
Total Revenue  $1,872,476   $3,470,510   $6,818,774   $8,446,011 

 

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

 

                     
  

For the Three Months

Ended

  

For the Nine Months

Ended

 
   September 30,   September 30, 
   2022   2021   2022   2021 
Revenue from Customer Experience Management Platform  $1,171,150   $3,000,705   $4,757,369   $7,012,129 
Revenue from Process Mining   68,560    182,629    453,368    588,307 
Revenue from Robotic Process Automation   69,693    134,488    317,110    433,736 
Revenue from Task Mining   66,799    96,106    252,234    228,712 
Revenue from Consulting Service   473,745    -    922,100    - 
Revenue from Others   22,529    56,582    116,593    183,127 
Total Revenue  $1,872,476   $3,470,510   $6,818,774   $8,446,011 

 

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

 

Concentration of Credit Risk

 

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

 

For the nine months ended September 30, 2022, customer A represents 10.0% of the Company’s total revenues. For the nine months ended September 30, 2021, customer B and C represent 18.5% and 10.5%, respectively, of the Company’s total revenues.

 

For the nine months ended September 30, 2022, vendor A, B, C, and D represent 25.9%, 19.7%, 16.3% and 15.5%, respectively, of the Company’s total purchases. For the nine months ended September 30, 2021, vendor A, B, and D represents 30.7%, 33.6%, and 23.2%, respectively, of the Company’s total purchases.

 

11
 

 

Share-based Compensation

 

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

 

NOTE 3 — ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consists of the following:

 

           
   September 30,   December 31, 
   2022   2021 
Accounts receivable  $621,345   $960,964 
Less: allowance for doubtful accounts   -    - 
Accounts receivable, net  $621,345   $960,964 

 

NOTE 4 — PREPAID EXPENSES

 

Prepaid expenses consist of the following:

 

           
   September 30,   December 31, 
   2022   2021 
Prepayments to software vendors  $150,603   $157,060 
Prepaid selling expenses   148,680    - 
Prepaid subscription fees   69,749    53,413 
Deferred offering expenses   -    180,630 
Prepaid insurance premium   186,040    18,252 
Others   63,883    35,050 
Total  $618,955   $444,405 

 

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

 

NOTE 5 — RELATED PARTY TRANSACTIONS

 

As of September 30, 2022 and December 31, 2021, the Company has a due to related party balance of $3,622 and $1,110, respectively, from Sumitaka Yamamoto, the CEO and major shareholder of the Company. The balance is unsecured, non-interest bearing and due on demand. During the nine months ended September 30, 2022, the related party paid operating expenses on behalf of the Company and received the payments in a net amount of $3,098. During the nine months ended September 30, 2021, the Company advanced $70,518 to this related party, and the related party paid expenses of $93,310 on behalf of the Company.

 

12
 

 

As of September 30, 2022 and December 31, 2021, the Company has a loan receivable balance of $278,216 and $386,315, respectively, from Heartcore Technology Inc., a company controlled by the CEO of the Company. The loan was made to the related party to support its operation. The balance is unsecured, bears an annual interest of 1.475%, and requires repayments in installments starting from February 2022. During the nine months ended September 30, 2022 and 2021, the Company loaned nil and $55,872, respectively, to this related party, and the related party paid expenses of nil and $13,868, respectively, on behalf of the Company. During the nine months ended September 30, 2022 and 2021, the Company received repayments of $33,042 and nil, respectively, from this related party.

 

In June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. 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.

 

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

 

NOTE 6 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following:

 

   September 30,   December 31, 
   2022   2021 
Leasehold improvement  $270,611   $320,257 
Machinery and equipment   284,212    316,126 
Vehicle   96,496    121,235 
Software   147,748    185,627 
Subtotal   799,067    943,245 
Accumulated depreciation   (599,738)   (681,831)
Property and equipment, net  $199,329   $261,414 

 

Depreciation expense was $64,398 and $80,297 for the nine months ended September 30, 2022 and 2021, respectively.

 

NOTE 7 — LEASES

 

The Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were classified as finance leases. Right-of-use assets of these finance leases in the amount of $21,741 and $57,167 are included in property and equipment as of September 30, 2022 and December 31, 2021, respectively.

 

13
 

 

The components of lease costs are as follows:

 

   2022   2021 
   For the Nine Months Ended 
   September 30, 
   2022   2021 
Finance lease costs          
Amortization of right-of-use assets  $26,825   $40,100 
Interest on lease liabilities   370    961 
Total finance lease costs   27,195    41,061 
Operating lease costs   244,688    294,946 
Total lease costs  $271,883   $336,007 

 

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

 

   2022   2021 
   For the Nine Months Ended 
   September 30, 
   2022   2021 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows from finance leases  $370   $961 
Operating cash flows from operating leases   243,108    306,082 
Financing cash flows from finance leases   29,051    42,941 
           
Weighted average remaining lease term (years)          
Finance leases   1.1    1.7 
Operating leases   9.4    10.4 
           
Weighted-average discount rate: (per annum)          
Finance leases   1.32%   1.32%
Operating leases   1.32%   1.32%

 

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

 

Year ending December 31, 

Finance

leases

  

Operating

leases

 
Remaining of 2022  $5,243   $71,778 
2023   17,649    287,112 
2024   259    287,112 
2025   -    287,112 
2026   -    287,112 
Thereafter   -    1,469,265 
Total lease payments   23,151    2,689,491 
Less: imputed interest   (76)   (165,820)
Total lease liabilities   23,075    2,523,671 
Less: current portion   19,502    264,387 
Non-current lease liabilities  $3,573   $2,259,284 

 

Pursuant to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $221,460 and $278,237 as of September 30, 2022 and December 31, 2021, respectively.

 

14
 

 

NOTE 8 — LONG-TERM DEBTS

 

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

 

Name of Financial Institutions  Original Amount Borrowed (JPY)     Loan Duration  Annual
Interest Rate		   Balance
as of
September 30,
2022		   Balance
as of
December 31, 2021		 
Bond payable                         
Corporate bond issued through Resona Bank   100,000,000(a)(b)   

1/10/2019—

1/10/2024

   0.430%  $207,469   $434,431 
Loans with banks and other financial institutions                         
Resona Bank, Limited.   30,000,000(a)   

12/29/2017—

12/30/2022

   1.475%   10,373    56,476 
Resona Bank, Limited.   50,000,000(a)(b)   

12/29/2017—

12/29/2024

   0.675%   111,238    191,454 
Resona Bank, Limited.   10,000,000(a)(b)   

9/30/2020—

9/30/2027

   0.000%   49,405    72,411 
Resona Bank, Limited.   40,000,000(a)(b)   

9/30//2020—

9/30/2027

   0.000%   197,621    289,644 
Resona Bank, Limited.   20,000,000(a)(b)   

11/13/2020—

10/31/2027

   1.600%   100,456    146,890 
Sumitomo Mitsui Banking Corporation   100,000,000    

12/28/2018—

12/28/2023

   1.475%   172,787    361,925 
Sumitomo Mitsui Banking Corporation   10,000,000(b)   

12/30/2019—

12/30/2026

   1.975%   41,999    63,105 
The Shoko Chukin Bank, Ltd.   30,000,000    

9/28/2018—

8/31/2023

   1.200%   38,174    92,273 
The Shoko Chukin Bank, Ltd.   50,000,000    

7/27/2020—

6/30/2027

   1.290%   237,898    351,020 
Japan Finance Corporation   40,000,000    

12/15/2017—

11/30/2022

   0.300%   12,517    73,940 
Japan Finance Corporation   80,000,000    

11/17/2020—

11/30/2027

   0.210%   413,831    603,339 
Higashi-Nippon Bank   30,000,000(a)   

3/31/2022—

3/31/2025

   1.400%   172,614    - 
Aggregate outstanding principal balances                  1,766,382    2,736,908 
Less: unamortized debt issuance costs                  (9,500)   (15,333)
Less: current portion                  (622,937)   (849,995)
Non-current portion                 $1,133,945   $1,871,580 

 

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

 

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

 

Interest expense for long-term debts was $19,502 and $24,909 for the nine months ended September 30, 2022 and 2021, respectively.

 

15
 

 

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

 

Year ending December 31,  Loan 
   Payment 
Remaining of 2022  $107,593 
2023   646,715 
2024   400,961 
2025   230,041 
2026   209,315 
Thereafter   171,757 
Total  $1,766,382 

 

NOTE 9 — INSURANCE PREMIUM FINANCING

 

In February 2022, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $388,538 at an annual interest rate of 12.80% for nine months from February 1, 2022, payable in nine monthly installments of principal and interest. As of September 30, 2022, the balance of the insurance premium financing was $89,652. During the nine months ended September 30, 2022, the interest incurred was $19,859.

 

NOTE 10 — INCOME TAXES

 

United States (U.S.)

 

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

 

Japan

 

The Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the local tax authority. Income taxes in Japan applicable to the Company are imposed by the national, prefectural, and municipal governments and in the aggregate resulted in an effective statutory rate of approximately 34.59% and 30.62%, respectively, for the nine months ended September 30, 2022 and 2021.

 

For the nine months ended September 30, 2022 and 2021, the Company’s income tax expenses (benefits) are as follows:

 

   2022   2021 
   For the Nine Months Ended 
   September 30, 
   2022   2021 
Current  $(2,108)  $9,970 
Deferred   (8,798)   87,467 
Income tax expense (benefit)  $(10,906)  $97,437 

 

The effective tax rate was 0.21% and 19.02% for the nine months ended September 30, 2022 and 2021, respectively.

 

16
 

 

NOTE 11 – STOCK BASED COMPENSATION

 

Options

 

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

 

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

 

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

 

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

 

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

 

On August 2, 2022, the Company awarded options to purchase 2,000 shares of common shares at an exercise price of $2.94 per share to an employee of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to 25% of the applicable shares of common shares, with the expiration date on August 2, 2032.

 

On August 9, 2022, the Company awarded options to purchase 14,500 shares of common shares at an exercise price of $2.48 per share to three prior employees of the Company. The options were fully vested and exercisable on the grant date, with the expiration date on August 9, 2026. As of September 30, 2022, none of the options were exercised.

 

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

 

   Number of
Options/
Warrants		   Weighted
Average
Exercise
Price		   Weighted
Average
Remaining
Term
(Years)		   Intrinsic
Value		 
As of January 1, 2022   1,534,500   $2.50    9.99   $- 
Granted   16,500    2.54    4.59            - 
Exercised   -           -    -    - 
Forfeited   (39,500)   2.50    -    - 
As of September 30, 2022   1,511,500   $2.50    9.19   $- 
Vested and exercisable as of September 30, 2022   14,500   $2.48    3.86   $- 

 

17
 

 

Options granted historically were valued using the binomial model with the assistance of an independent valuation specialist. The Company calculated the fair value of options granted in the nine months ended September 30, 2022 using the Black-Scholes model. Significant assumptions used in the valuations include expected volatility, risk-free interest rate, dividend yield and expected exercise term.

 

For the three and nine months ended September 30, 2022, share-based compensation related to the options totaled $280,883 and $858,633, respectively. For the three and nine months ended September 30, 2021, share-based compensation related to the options was nil. The outstanding unamortized share-based compensation related to options was $1,289,747 (which will be recognized through August 2026) as of September 30, 2022.

 

Restricted Stock Units (“RSUs”)

 

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

 

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

 

The following table summarizes the RSUs activity for the nine months ended September 30, 2022:

 

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

 

For the three and nine months ended September 30, 2022, the Company recognized RSU-related share-based compensation of $55,768 and $366,844, respectively. The outstanding unamortized share-based compensation related to RSUs was $282,964 (which will be recognized through February 2026) as of September 30, 2022.

 

NOTE 12 – SHAREHOLDERS’ EQUITY (DEFICIT)

 

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

 

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

 

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

 

18
 

 

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

 

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

 

Share Repurchase Program

 

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

 

During the period from June 1, 2022 through September 30, 2022, the Company repurchased 1,349,390 shares of common shares at an average price of $2.59 per share totaling approximately $3.5 million (including commissions) under the 2022 Share Repurchase Program. As of September 30, 2022, the Company has used up the entire balance authorized under the 2022 Share Repurchase Program.

 

As of September 30, 2022 and December 31, 2021, there were 18,999,276 and 15,819,943 shares, respectively, of common shares issued; and 17,649,886 and 15,546,454 shares, respectively, of common shares outstanding.

 

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

 

NOTE 13 – MANDATORILY REDEEMABLE FINANCIAL INTEREST

 

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

 

19
 

 

NOTE 14 – EARNINGS (LOSS) PER SHARE

 

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

 

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

 

                     
  

For the Three Months

Ended

  

For the Nine Months

Ended

 
   September 30,   September 30, 
   2022   2021   2022   2021 
Earnings (loss) per share – basic Numerator:                    
Allocation of net income (loss) attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings (loss) per common share — basic  $(1,970,934)  $186,173   $(5,253,026)  $403,714 
Net income (loss) attributable to common shareholders   (1,970,934)   186,173    (5,253,026)   403,714 
Denominator:                    
Weighted average number of common shares outstanding used in calculating basic earnings (loss) per share   17,835,027    15,242,454    18,014,483    15,242,454 
Denominator used for earnings (loss) per share   17,835,027    15,242,454    18,014,483    15,242,454 
Earnings (loss) per share — basic  $(0.11)  $0.01   $(0.29)  $0.03 

 

20
 

 

  

For the Three Months

Ended

  

For the Nine Months

Ended

 
   September 30,   September 30, 
   2022   2021   2022   2021 
Earnings (loss) per share – diluted Numerator:                    
Allocation of net income (loss) attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings (loss) per common share — diluted  $(1,970,934)  $186,173   $(5,253,026)  $403,714 
Net income (loss) attributable to common shareholders   (1,970,934)   186,173    (5,253,026)   403,714 
Denominator:                    
Weighted average number of common shares outstanding used in calculating diluted earnings (loss) per share   17,835,027    15,242,454    18,014,483    15,242,454 
Conversion of share repurchase liability to common shares*   -    273,489    -    273,489 
Denominator used for earnings (loss) per share   17,835,027    15,515,943    18,014,483    15,515,943 
Earnings (loss) per share — diluted  $(0.11)  $0.01   $(0.29)  $0.03 

 

* The share repurchase liability is related to the early exercised stock options that are issued and unvested as of September 30, 2021, see NOTE 11. Each option is convertible into one share of common stock of HeartCore Japan, which is an equivalent of approximately 1,494 shares of common shares of the Company. The liability was settled by issuance of common shares on February 14, 2022.

 

For the three and nine months ended September 30, 2022, the weighted average shares outstanding are the same for basic and diluted loss per share calculations, as the inclusion of common shares equivalents of 1,636,820 would have an anti-dilutive effect.

 

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

 

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

 

Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances.

 

Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

 

Business Overview

 

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

 

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

 

We have made significant investments in our sales and marketing efforts globally. As of September 30, 2022, our sales and marketing organization was comprised of 15 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, 2022, our combined business units (customer experience management business unit and digital transformation business unit) had a total of 889 customers in Japan.

 

We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly-owned subsidiary, HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co”), which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009. We acquired 97.5% of the equity interest of HeartCore Co in July 2021 and acquired the remaining interest in February 2022. HeartCore Co started out with helping companies effectively managing content with its powerful content management system. Since then, HeartCore Co has expanded offerings to help companies manage all forms of business processes.

 

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

 

Recent Developments

 

Amendment No. 1 to SYLA Consulting and Services Agreement

 

As previously disclosed in the Current Report on Form 8-K filed on May 25, 2022 with the SEC, on May 13, 2022, the Company entered into a Consulting and Services Agreement (the “SYLA Consulting Agreement”) by and between the Company and Syla Technologies Co., Ltd. f/k/a SYLA Holdings Co. Ltd. (“SYLA”), pursuant to which the Company agreed to provide SYLA certain services.

 

On August 17, 2022, the Company and SYLA entered into Amendment No. 1 to the SYLA Consulting Agreement (“Amendment No. 1”). In Amendment No. 1, the parties acknowledged and agreed that pursuant to the terms of the SYLA Consulting Agreement, SYLA agreed to pay to the Company, among other things, a cash “services fee” in the amount of $500,000, to be paid at certain times, including $150,000 on August 13, 2022 (the “Second Payment”). Pursuant to the terms of Amendment No. 1, the parties agreed that in lieu of making the Second Payment, SYLA would issue to the Company a warrant to acquire 37,500 shares of SYLA’s capital stock (the “New Warrant”). Upon issuance of the New Warrant, the cash “services fee” will be deemed reduced to $350,000, of which $200,000 was paid on May 13, 2022, and of which the remaining $150,000 will remain due and payable on November 13, 2022.

 

On August 17, 2022, SYLA issued the New Warrant to the Company. Pursuant to the terms of the New Warrant, the Company may, at any time on or after the date (the “IPO Date”) that SYLA completes its first initial public offering of stock in the United States resulting in any class of SYLA’s stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American (the “IPO”) and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the New Warrant to purchase 37,500 shares of SYLA’s common stock for an exercise price per share of $0.01, subject to adjustment as provided in the New Warrant. The number of shares for which the New Warrant will be exercisable will be automatically adjusted on the IPO Date to be 3% of the fully diluted number and class of shares of capital stock of SYLA as of the IPO Date that are listed for trading. The New Warrant contains a 9.99% equity blocker.

 

Sigmaways Share Exchange and Purchase Agreement

 

On September 6, 2022, the Company entered into a Share Exchange and Purchase Agreement (the “Sigmaways Agreement”), dated as of September 6, 2022, by and among the Company, Sigmaways, Inc. (“Sigmaways”) and Prakash Sadasivam (the “Seller”).

 

Pursuant to the terms of the Sigmaways Agreement, the Company agreed to acquire from the Seller, and the Seller agreed to sell to the Company, 229,500 shares of stock of Sigmaways, representing 51% of Sigmaways’ outstanding shares (the “Acquisition”). In exchange therefor, the Company agreed to (i) issue to the Seller 2,000,000 shares of the Company’s common stock; (ii) pay to the Seller cash consideration initially expected to be $1,000,000; provided that the final number of shares of Company common stock and the final cash consideration each will be jointly determined by the parties prior to the closing of the Acquisition (the “Closing”) based on the valuation of Sigmaways as of the Closing; and (iii) issue to the Seller a warrant to acquire 1,500,000 shares of the Company’s common stock (the “Warrant”). The per share exercise price of the Warrant will be the VWAP for the Company’s common stock calculated as of the last trading day prior to the Closing date.

 

In addition, at the Closing, the Company will acquire from Sigmaways additional shares of Sigmaways stock (the “Additional Shares”) to be issued as newly issued shares, for a total investment of $2,000,000. The parties will jointly determine and agree to the following prior to Closing: (i) the valuation of Sigmaways as of immediately prior to the Closing, and (ii) therefore, the number of shares of Sigmaways stock which will constitute the Additional Shares. Prior to Closing, Sigmaways will amend its articles of incorporation to increase the authorized number of shares of Sigmaways stock to a number sufficient that the Additional Shares may be validly issued to the Company.

 

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At the Closing, two persons designated by the Company will be named to Sigmaways’ Board of Directors, and the sole other member of the Sigmaways Board of Directors will be the Seller. In addition, at the Closing, the Seller will be named to the Company’s Board of Directors. At the Closing, Sigmaways will enter into an employment agreement with the Seller and such other persons if agreed upon by the parties.

 

The Sigmaways Agreement contains certain covenants, representations and warranties customary for an agreement of this type. In addition, the Closing is subject to the satisfaction or waiver of certain conditions, including, but not limited to, the following: (i) the parties shall have agreed, in each party’s sole discretion, on the valuation of Sigmaways as of the Closing, the resulting cash purchase price and the number of Additional Shares to be acquired by the Company pursuant to the terms of the Sigmaways Agreement; (ii) the Paycheck Protection Program Loan received by Sigmaways shall have been forgiven.

 

The Sigmaways Agreement may be terminated at any time prior to the Closing as follows:

 

  ●By mutual written consent of all parties;
  ●By the Seller and Sigmaways, acting jointly, or by the Company, 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 that are the subject of the Sigmaways Agreement;
  ●By the Company if there shall have been a breach in any material respect of any representation, warranty, covenant or agreement on the part of Sigmaways or the Seller and such breach has not been cured as set forth in the Sigmaways Agreement;
  ●By the Seller and Sigmaways, acting jointly, if there shall have been a breach in any material respect of any representation, warranty, covenant or agreement on the part of the Company and such breach has not been cured as set forth in the Sigmaways Agreement;
  ●By either the Seller and Sigmaways, acting jointly, or by the Company, if the Closing has not occurred by December 31, 2022; or
  ●By the Company if, its sole discretion, at any time prior to the Closing, the Company determines that its due diligence review of Sigmaways is not satisfactory to the Company.

 

As of the date of this filing, Sigmaways and the Company were still undergoing the process of the share exchange transaction. The transaction has not been closed yet.

 

Metros Consulting and Services Agreement

 

On October 20, 2022 (the “Effective Date”), the Company entered into a Consulting and Services Agreement (the “Metros Consulting Agreement”) by and between the Company and Metros Development Co., Ltd., a Japanese corporation (“Metros”). Pursuant to the terms of the Metros Consulting Agreement, the Company agreed to provide Metros certain services, including the following (collectively, the “Company Services”):

 

  (i)Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm for Metros;
  (ii)Assisting in the preparation of documentation for internal controls required for an initial public offering or de-SPAC transaction or other Fundamental Transaction (as defined below) by Metros;
  (iii)Attend and, if requested by Metros, lead meetings with Metros’ management and employees;
  (iv)Provide Metros with support services related to Metros’ NASDAQ listing;
  (v)Assist in the preparation of S-1 or F-1 filings; and
  (vi)Preparing an investor presentation/deck and executive summary of Metros’ business and operations.

 

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

 

24
 

 

Pursuant to the terms of the Metros Consulting Agreement, Metros agreed to compensate the Company as follows in return for the provision of the Company Services during the nine-month term (the “Term”):

 

  (a)$300,000, to be paid as follows: (i) $100,000 on the Effective Date; (ii) $100,000 on the three-month anniversary of the Effective Date; and (iii) $100,000 on the six-month anniversary of the Effective Date; and

 

  (b)Issuance by Metros to the Company of a warrant (the “Company Warrant”), deemed fully earned and vested as of the Effective Date, to acquire a number of shares of capital stock of Metros, to initially be equal to 2% of the fully diluted share capital of Metros as of the Effective Date (980 shares), subject to adjustment as set forth in the Company Warrant.

 

For any services performed by the Company beyond the Term, Metros will compensate the Company for such Company Services at the rate of $150 per hour, based on the hours spent by personnel of the Company.

 

The Term of the Metros Consulting Agreement will expire unless renewed upon mutual written agreement of the parties.

 

As provided in the Metros Consulting Agreement, on the Effective Date, Metros issued the Company Warrant to the Company. Pursuant to the terms of the Company Warrant, the Company may, at any time on or after the date (the “Metros IPO Date”) that either (i) Metros completes its first initial public offering of stock in the United States resulting in any class of Metros’ stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American (the “Metros IPO”), or (ii) Metros undertakes any other Fundamental Transaction, and on or prior to the close of business on the tenth anniversary of the Metros IPO Date, exercise the Company Warrant to purchase 980 shares of capital stock of Metros for an exercise price per share of $0.01, subject to adjustment as provided in the Company Warrant. The Company Warrant contains a 9.99% equity blocker.

 

Amendment No. 1 to Metros Consulting and Services Agreement

 

On October 26, 2022, the Company entered into Amendment No. 1 to Consulting and Services Agreement by and between the Company and Metros (“Metros Amendment No. 1”). Pursuant to the terms of Metros Amendment No. 1, the Company and Metros agreed to amend the Metros Consulting Agreement such that Metros agreed to compensate the Company as follows in return for the provision of the Company Services during the nine-month Term:

 

  (a)$500,000, to be paid as follows: (i) $200,000 on the Effective Date; (ii) $150,000 on the three-month anniversary of the Effective Date; and (iii) $150,000 on the six-month anniversary of the Effective Date; and

 

  (b)Issuance by Metros to the Company of a warrant (the “New Company Warrant”), deemed fully earned and vested as of the Effective Date, to acquire a number of shares of capital stock of Metros, to initially be equal to 3% of the fully diluted share capital of Metros as of the Effective Date (1,440 shares), subject to adjustment as set forth in the New Company Warrant.

 

In addition, pursuant to the terms of Metros Amendment No. 1, the Company Warrant was terminated as of October 26, 2022.

 

Except as set forth in Metros Amendment No. 1, the Metros Consulting Agreement remains in full force and effect.

 

As provided in Metros Amendment No. 1, on October 26, 2022, Metros issued the New Company Warrant to the Company. Pursuant to the terms of the New Company Warrant, the Company may, at any time on or after the Metros IPO Date, and on or prior to the close of business on the tenth anniversary of the Metros IPO Date, exercise the New Company Warrant to purchase 1,440 shares of capital stock of Metros for an exercise price per share of $0.01, subject to adjustment as provided in the New Company Warrant. The New Company Warrant contains a 9.99% equity blocker.

 

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Stock Repurchase Program

 

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

 

The Repurchase Program was terminated on September 23, 2022. The Company has repurchased an aggregate of 1,349,390 shares of its common stock pursuant to the Repurchase Program.

 

Financial Overview

 

For the three months ended September 30, 2022 and 2021, we generated revenues of $1,872,476 and $3,470,510, respectively, and reported net losses of $1,970,934 and net income of $191,349, respectively. For the nine months ended September 30, 2022 and 2021, we generated revenues of $6,818,774 and $8,446,011, respectively, and reported net losses of $5,253,026 and net income of $414,826, respectively, and cash out flow used in operating activities of $4,206,370 and cash in flow provided by operating activities of $1,239,250, respectively. As noted in our unaudited consolidated financial statements, as of September 30, 2022, we had an accumulated deficit of $9,149,139.

 

Results of Operations

 

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

 

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

 

   For the Three Months ended September 30, 
   2022   2021   Variance 
       % of       % of         
   Amount   revenue   Amount   revenue   Amount   % of 
                         
REVENUES  $1,872,476    100.0%  $3,470,510    100.0%  $(1,598,034)   -46.0%
COST OF REVENUES   1,543,256    82.4%   1,786,125    51.5%   (242,869)   -13.6%
GROSS PROFIT   329,220    17.6%   1,684,385    48.5%   (1,355,165)   -80.5%
                               
Operating expenses                              
Selling expenses   771,496    41.2%   79,438    2.3%   692,058    871.2%
General and administrative expenses   1,513,028    80.8%   1,202,701    34.6%   310,327    25.8%
Research and development expenses   58,275    3.1%   189,686    5.5%   (131,411)   -69.3%
Total operating expenses   2,342,799    125.1%   1,471,825    42.4%   870,974    59.2%
                               
Income (loss) from operations   (2,013,579)   -107.5%   212,560    6.1%   (2,226,139)   -1,047.3%
                               
Other income (expenses), net   23,576    1.2%   (7,689)   -0.2%   31,265    -406.6%
                               
Income (loss) before income tax provision   (1,990,003)   -106.3%   204,871    5.9%   (2,194,874)   -1,071.3%
                               
Income taxes expense (benefit)   (19,069)   -1.0%   13,522    0.4%   (32,591)   -241.0%
                               
Net income (loss)   (1,970,934)   -105.3%   191,349    5.5%   (2,162,283)   -1,130.0%
                               
Less: net income attributable to non-controlling interest   -    -    5,176    0.1%   (5,176)   -100.0%
                               
NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC.  $(1,970,934)   -105.3%  $186,173    5.4%  $(2,157,107)   -1,158.7%

 

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Revenues

 

Our total revenues decreased by $1,598,034, or 46.0%, to $1,872,476 for the three months ended September 30, 2022 from $3,470,510 for the three months ended September 30, 2021, mainly attributable to the decrease in revenue from sales of on-premise software, because an important customer renewed its software license in July 2021, and decrease in revenue from software development, offset by revenue from newly established consulting services.

 

Cost of Revenues

 

Our total costs of revenues decreased by $242,869, or 13.6%, to $1,543,256 for the three months ended September 30, 2022 from $1,786,125 for the three months ended September 30, 2021, in light of the decrease in sales of on-promise software and software development, offset by the costs related to the consulting services.

 

Gross Profit

 

Our total gross profit decreased by $1,355,165, or 80.5%, to $329,220 for the three months ended September 30, 2022 from $1,684,385 for the three months ended September 30, 2021. Our overall gross profit margin decreased by 30.9% to 17.6% in the three months ended September 30, 2022 from 48.5% in the three months ended September 30, 2021.

 

Selling Expenses

 

Our selling expenses increased by $692,058, or 871.2%, to $771,496 in the three months ended September 30, 2022 from $79,438 in the three months ended September 30, 2021, primarily attributable to an increase in advertising expenses, as the U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company went public in the U.S. In addition, the Company increased advertising expenses for its newly established consulting services in Japan.

 

As a percentage of revenues, our selling expenses accounted for 41.2% and 2.3% of our total revenue for the three months ended September 30, 2022 and 2021, respectively.

 

General and Administrative Expenses

 

Our general and administrative expenses increased by $310,327 or 25.8%, to $1,513,028 in the three months ended September 30, 2022 from $1,202,701 in the three months ended September 30, 2021, primarily attributable to the increase in stock-based compensation, the U.S. parent company’s office expenses, and D&O indemnity insurance premiums, offset by the decrease in consulting and professional fees as we finished the process of going public in early 2022.

 

As a percentage of revenues, general and administrative expenses were 80.8% and 34.6% of our revenue for the three months ended September 30, 2022 and 2021, respectively.

 

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Research and Development Expenses

 

Our research and development expenses decreased by $131,411 or 69.3%, to $58,275 in the three months ended September 30, 2022 from $189,686 in the three months ended September 30, 2021, primarily attributable to the decrease in outsourcing expenses relating to the development of a high quality 12K VR camera and related data compression system, which was completed in June 2022.

 

As a percentage of revenues, research and development expenses were 3.1% and 5.5% of our revenue for the three months ended September 30, 2022 and 2021, respectively.

 

Other Income (Expenses), net

 

Our other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. We recorded other income, net of $23,576 in the three months ended September 30, 2022, as compared to other expense, net of $7,689 in the three months ended September 30, 2021, primarily attributable to the increase in interest income and other income.

 

Income Tax Expense (Benefit)

 

Our income taxes benefit was $19,069 in the three months ended September 30, 2022, as compared to the income taxes expense of $13,522 in the three months ended September 30, 2021, mainly due to the increase in the net loss and the decrease in deferred tax expense.

 

Net Income (Loss)

 

As a result of the foregoing, we reported a net loss of $1,970,934 for the three months ended September 30, 2022, representing a $2,162,283 or 1,130.0% decrease from a net income of $191,349 for the three months ended September 30, 2021.

 

Net Income attributable to Non-controlling Interest

 

We owned 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of September 30, 2021. Accordingly, we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $5,176 in the three months ended September 30, 2021.

 

On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022.

 

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

 

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

 

As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,970,934 for the three months ended September 30, 2022, representing a $2,157,107 or 1,158.7% decrease from a net income attributable to HeartCore Enterprises, Inc. of $186,173 for the three months ended September 30, 2021.

 

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Comparison of Results of Operations for the Nine Months ended September 30, 2022 and 2021

 

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

 

   For the Nine Months ended September 30, 
   2022   2021   Variance 
       % of       % of         
   Amount   revenue   Amount   revenue   Amount   % of 
                         
REVENUES  $6,818,774    100.0%  $8,446,011    100.0%  $(1,627,237)   -19.3%
COST OF REVENUES   3,935,908    57.7%   4,369,144    51.7%   (433,236)   -9.9%
GROSS PROFIT   2,882,866    42.3%   4,076,867    48.3%   (1,194,001)   -29.3%
                               
Operating expenses                              
Selling expenses   1,706,250    25.0%   226,903    2.7%   1,479,347    652.0%
General and administrative expenses   5,832,276    85.5%   2,986,291    35.4%   2,845,985    95.3%
Research and development expenses   583,762    8.6%   321,857    3.8%   261,905    81.4%
Total operating expenses   8,122,288    119.1%   3,535,051    41.9%   4,587,237    129.8%
                               
Income (loss) from operations   (5,239,422)   -76.8%   541,816    6.4%   (5,781,238)   -1,067.0%
                               
Other expenses, net   (24,510)   -0.4%   (29,553)   -0.3%   5,043    -17.1%
                               
Income (loss) before income tax provision   (5,263,932)   -77.2%   512,263    6.1%   (5,776,195)   -1,127.6%
                               
Income taxes expense (benefit)   (10,906)   -0.2%   97,437    1.2%   (108,343)   -111.2%
                               
Net income (loss)   (5,253,026)   -77.0%   414,826    4.9%   (5,667,852)   -1,366.3%
                               
Less: net income attributable to non-controlling interest   -    -   11,112    0.1%   (11,112)   -100.0%
                               
NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC.  $(5,253,026)   -77.0%  $403,714    4.8%  $(5,656,740)   -1,401.2%

 

Revenues

 

Our total revenues decreased by $1,627,237, or 19.3%, to $6,818,774 for the nine months ended September 30, 2022 from $8,446,011 for the nine months ended September 30, 2021, primarily attributable to the decrease in revenue from sales of on-premise software, because an important customer renewed its software license in July 2021, and the decrease in revenue from software development, offset by revenue from newly established consulting services. In addition, the ongoing depreciation of Japanese Yen in 2022 also caused the decrease in our revenue.

 

Cost of Revenues

 

Our total costs of revenues decreased by $433,236 or 9.9%, to $3,935,908 for the nine months ended September 30, 2022 from $4,369,144 for the nine months ended September 30, 2021, in light of the decrease in sales of on-promise software and software development, offset by the costs related to the consulting services.

 

29
 

 

Gross Profit

 

Our total gross profit decreased by $1,194,001, or 29.3%, to $2,882,866 for the nine months ended September 30, 2022 from $4,076,867 for the nine months ended September 30, 2021. Our overall gross profit margin decreased by 6.0% to 42.3% in the nine months ended September 30, 2022 from 48.3% in the nine months ended September 30, 2021.

 

Selling Expenses

 

Our selling expenses increased by $1,479,347, or 652.0%, to $1,706,250 in the nine months ended September 30, 2022 from $226,903 in the nine months ended September 30, 2021, primarily attributable to an increase in advertising expenses, as the U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company went public in the U.S. In addition, the Company increased advertising expenses for its newly established consulting services in Japan.

 

As a percentage of revenues, our selling expenses accounted for 25.0% and 2.7% of our total revenue for the nine months ended September 30, 2022 and 2021, respectively.

 

General and Administrative Expenses

 

Our general and administrative expenses increased by $2,845,985 or 95.3%, to $5,832,276 in the nine months ended September 30, 2022 from $2,986,291 in the nine months ended September 30, 2021, primarily attributable to the increase in stock-based compensation, salaries and welfare, the U.S. parent company’s office expenses, and D&O indemnity insurance premiums.

 

As a percentage of revenues, general and administrative expenses were 85.5% and 35.4% of our revenue for the nine months ended September 30, 2022 and 2021, respectively.

 

Research and Development Expenses

 

Our research and development expenses increased by $261,905 or 81.4%, to $583,762 in the nine months ended September 30, 2022 from $321,857 in the nine months ended September 30, 2021, primarily attributable to an increase in outsourcing expenses relating to development of a high quality 12K VR camera and related data compression system in the nine months ended September 30, 2022.

 

As a percentage of revenues, research and development expenses were 8.6% and 3.8% of our revenue for the nine months ended September 30, 2022 and 2021, respectively.

 

Other Expenses, net

 

Our other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, decreased by $5,043 or 17.1%, from $29,553 in the nine months ended September 30, 2021 to $24,510 in the nine months ended September 30, 2022.

 

30
 

 

Income Tax Expense (Benefit)

 

Our income taxes benefit was $10,906 in the nine months ended September 30, 2022, as compared to the income taxes expense of $97,437 in the nine months ended September 30, 2021, mainly due to the increase in net loss and the decrease in deferred tax expense.

 

Net Income (Loss)

 

As a result of the foregoing, we reported a net loss of $5,253,026 for the nine months ended September 30, 2022, representing a $5,667,852 or 1,366.3% decrease from a net income of $414,826 for the nine months ended September 30, 2021.

 

Net Income attributable to Non-controlling Interest

 

We owned 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of September 30, 2021. Accordingly, we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $11,112 in the nine months ended September 30, 2021.

 

On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022.

 

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

 

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

 

As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $5,253,026 for the nine months ended September 30, 2022, representing a $5,656,740 or 1,401.2% decrease from a net income attributable to HeartCore Enterprises, Inc. of $403,714 for the nine months ended September 30, 2021.

 

Liquidity and Capital Resources

 

As of September 30, 2022, we had $7,843,208 in cash as compared to $3,136,839 as of December 31, 2021. As of September 30, 2022, our working capital was $6,149,541 as compared to $62,919 as of December 31, 2021. We also had $621,345 in accounts receivable as of September 30, 2022. Our accounts receivable primarily include balance due from customers for our on-premise software sold and services provided to and accepted by customers.

 

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

 

   For the Nine Months Ended
September 30,		 
   2022   2021 
Net cash provided by (used in) operating activities  $(4,206,370)  $1,239,250 
Net cash used in investing activities   (8,630)   (151,065)
Net cash provided by (used in) financing activities   9,122,350    (816,155)
Effect of exchange rate changes   (200,981)   (239,423)
Net increase in cash and cash equivalents   4,706,369    32,607 
Cash and cash equivalents, beginning of the period   3,136,839    3,058,175 
Cash and cash equivalents, end of the period  $7,843,208   $3,090,782 

 

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Operating Activities

 

Net cash used in operating activities was $4,206,370 for the nine months ended September 30, 2022, as compared to the amount of $1,239,250 net cash provided by operating activities for the nine months ended September 30, 2021, primarily consisting of the following:

 

  ● Net loss of $5,253,026 for the nine months ended September 30, 2022.
  ● A decrease of $213,691 in operating lease liabilities, due to the rent payment made.
  ● A decrease of $206,569 in other liabilities, primarily due to the decrease in sales tax payable.
  ● Offset by non-cash lease expense of $207,549.
  ● Offset by share-based compensation of $1,225,477.

 

Investing Activities

 

Net cash used in investing activities amounted to $8,630 for the nine months ended September 30, 2022, as compared to net cash used in investing activities amounted to $151,065 for the nine months ended September 30, 2021.

 

Financing Activities

 

Net cash provided by financing activities amounted to $9,122,350 for the nine months ended September 30, 2022, as compared to net cash used in financing activities amounted to $816,155 for the nine months ended September 30, 2021, primarily consisting of net proceeds of $13,823,126 from the initial public offering and issuance of common shares prior to the initial public offering, and offset by payment for mandatorily redeemable financial interest of $430,489, payment for repurchase of common stocks of $3,500,000, and repayment of long-term debts of $699,407.

 

Contractual obligations

 

Lease commitment

 

The Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were classified as finance leases.

 

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

 

Year ending December 31,  Finance leases  

Operating

leases

 
Remaining of 2022  $5,243   $71,778 
2023   17,649    287,112 
2024   259    287,112 
2025   -    287,112 
2026   -    287,112 
Thereafter   -    1,469,265 
Total lease payments   23,151    2,689,491 
Less: imputed interest   (76)   (165,820)
Total lease liabilities   23,075    2,523,671 
Less: current portion   19,502    264,387 
Non-current lease liabilities  $3,573   $2,259,284 

 

Long Term Debt

 

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

 

32
 

 

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

 

    Loan 
Year ending December 31,   Payment 
Remaining of 2022   $107,593 
2023    646,715 
2024    400,961 
2025    230,041 
2026    209,315 
Thereafter    171,757 
Total   $1,766,382 

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies and Estimates

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

Revenue from On-Premise Software

 

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

 

33
 

 

Revenue from Maintenance and Support Service

 

Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers.

 

Revenue from Software as a Service (“SaaS”)

 

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

 

Revenue from Software Development and other Miscellaneous Services

 

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

 

Revenue from Consulting Service

 

The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents and supporting the listing process. Revenues from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less than one year in length.

 

The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the nine months ended September 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $1.2 million and $2.0 million, respectively.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

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

 

Changes in Internal Control Over Financial Reporting

 

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

 

34
 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

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

 

Period 

Total number

of shares

purchased

  

Average

price paid

per share

  

Total number

of shares

purchased as

part of publicly

announced

plans or

Programs (1)

  

Approximate

dollar value of

shares that

may yet

be purchased

under plans or programs

 
July 1, 2022 to July 31, 2022   587,804   $2.83    587,804   $499,244 
August 1, 2022 to August 31, 2022   174,873    2.57    174,873    49,256 
September 1, 2022 to September 30, 2022   27,904    1.77    27,904    - 
Total   790,581   $2.74    790,581   $- 

 

(1) The stock repurchase program approved by the Board of Directors on June 1, 2022, authorized the repurchase of up to $3.5 million of our outstanding common shares from time to time on the open market or in privately negotiated transactions permitted by securities laws and other legal requirements. The repurchase program was terminated on September 23, 2022. The Company has repurchased an aggregate of 1,349,390 shares of its common stock pursuant to the repurchase program.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

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

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

(a) None.

 

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

 

35
 

 

ITEM 6. EXHIBITS

 

Exhibit
Number		   Description of Document
     
10.1   Amendment No. 1 to Consulting and Services Agreement, dated as of August 17, 2022, by and between the registrant and Syla Technologies Co. Ltd. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on August 18, 2022).
     
10.2   Common Stock Purchase Warrant issued on August 17, 2022 by Syla Technologies Co. Ltd. to the registrant (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on August 18, 2022).
     
10.3   Share Exchange and Purchase Agreement, dated as of September 6, 2022, by and among the registrant, Sigmaways, Inc. and Prakash Sadasivam (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on September 8, 2022).
     
10.4   Consulting and Services Agreement, dated as of October 20, 2022, by and between HeartCore Enterprises, Inc. and Metros Development Co., Ltd. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on October 26, 2022).
     
10.5   Common Stock Purchase Warrant, issued on October 20, 2022, by Metros Development Co., Ltd. in favor of HeartCore Enterprises, Inc. (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on October 26, 2022).
     
10.6   Consulting and Services Agreement, dated as of October 20, 2022, by and between HeartCore Inc. and Metros Development Co., Ltd. (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the SEC on October 26, 2022).
     
10.7   Common Stock Purchase Warrant, issued on October 20, 2022, by Metros Development Co., Ltd. in favor of HeartCore Inc. (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the SEC on October 26, 2022).
     
10.8   Termination of Consulting and Services Agreement and Warrant, dated as of October 26, 2022, by and between HeartCore Inc. and Metros Development Co., Ltd. (incorporated by reference to Exhibit 10.5 to the registrant’s Current Report on Form 8-K filed with the SEC on October 26, 2022).
     
10.9   Amendment No. 1 to Consulting and Services Agreement, dated as of October 26, 2022, by and between HeartCore Enterprises, Inc. and Metros Development Co., Ltd. (incorporated by reference to Exhibit 10.6 to the registrant’s Current Report on Form 8-K filed with the SEC on October 26, 2022).
     
10.10   Common Stock Purchase Warrant, issued on October 26, 2022, by Metros Development Co., Ltd. in favor of HeartCore Enterprises, Inc. (incorporated by reference to Exhibit 10.7 to the registrant’s Current Report on Form 8-K filed with the SEC on October 26, 2022).
     
10.11†   Amendment No. 1 to Executive Employment Agreement, dated as of October 28, 2022, by and between the registrant and Sumitaka Yamamoto. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on November 4, 2022).
     
31.1*   Rule 13a-14(a) Certification of Principal Executive Officer.
     
31.2*   Rule 13a-14(a) Certification of Principal Financial Officer.
     
32.1**   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Principal Executive Officer and Principal Financial Officer.
     
101.INS*   Inline XBRL Instance Document
     
101.SCH*   Inline XBRL Taxonomy Extension Schema Document
     
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase
     
101.LAB*   Inline XBRL Taxonomy Extension Labels Linkbase
     
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase
     
104*   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan, contract or arrangement.

 

36
 

 

SIGNATURES

 

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

 

  HEARTCORE ENTERPRISES, INC.
     
Dated: November 14, 2022 By: /s/ Sumitaka Yamamoto
    Sumitaka Yamamoto
    Chief Executive Officer and President (principal executive officer)
     
Dated: November 14, 2022 By: /s/ Qizhi Gao
    Qizhi Gao
    Chief Financial Officer (principal financial officer and principal accounting officer)

 

37

 

 

Exhibit 31.1

 

CERTIFICATIONS

 

I, Sumitaka Yamamoto, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2022 of HeartCore Enterprises, Inc.; and
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and
   
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
     
  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 14, 2022 By: /s/ Sumitaka Yamamoto
    Sumitaka Yamamoto
    Chief Executive Officer and President (principal executive officer)

 

 

 

 

Exhibit 31.2

 

CERTIFICATIONS

 

I, Qizhi Gao, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2022 of HeartCore Enterprises, Inc.; and
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and
   
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
     
  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 14, 2022 By: /s/ Qizhi Gao
    Qizhi Gao
    Chief Financial Officer (principal financial officer)

 

 

 

 

Exhibit 32.1

 

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of HeartCore Enterprises, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sumitaka Yamamoto, Chief Executive Officer and President of the Company, and I, Qizhi Gao, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

Date: November 14, 2022 /s/ Sumitaka Yamamoto
 

Sumitaka Yamamoto

Chief Executive Officer and President (principal executive officer)

   
Date: November 14, 2022 /s/ Qizhi Gao
 

Qizhi Gao

Chief Financial Officer (principal financial officer)

 

This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.