HeartCore Enterprises, Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is listed The Nasdaq Capital Market and its stock symbol is “HTCR.” The closing price of our common stock on Nasdaq on March 28, 2022 was $2.62. Holders As of March 31, 2022, there were 18,915,943 shares of common stock issued and outstanding, and we had approximately 46 holders of record of our common stock. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries. Dividends We have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Securities Authorized for Issuance Under Equity Compensation Plans Our Board of Directors and stockholders approved the 2021 Equity Incentive Plan (the “2021 Plan”) on August 6, 2021. Under the 2021 Plan, 2,400,000 shares of common stock are authorized for issuance to employees, directors and independent contractors (except those performing services in connection with the offer or sale of the Company’s securities in a capital raising transaction, or promoting or maintaining a market for the Company’s securities) of the Company or its subsidiary. The 2021 Plan authorizes equity-based and cash-based incentives for participants. As of March 31, 2022, there were 865,500 shares authorized for issuance under the 2021 Plan. Recent Sales of Unregistered Securities On May 18, 2021, we issued five shares of common stock to Sumitaka Yamamoto, Chief Executive Officer of the Company, for $1.00 per share for a total subscription of $5.00. On July 16, 2021, pursuant to the terms of a share exchange agreement among the Company, HeartCore Co., the shareholders of HeartCore Co. (excluding Dentsu Digital Investment Limited) and Sumitaka Yamamoto, as the representative of the shareholders of HeartCore Co., we issued 15,999,994 shares of our common stock to the shareholders of HeartCore Co. in exchange for 10,706 shares HeartCore Co.’s common stock, representing 97.5% of the issued and outstanding capital stock of HeartCore Co. On February 24, 2022, the Company purchased 278 shares of HeartCore Co. from Dentsu Digital for 50,040,000 Japanese Yen (approximately $435,500). As a result, effective February 24, 2022, HeartCore Co. is a wholly owned subsidiary of the Company. 69 On November 3, 2021, the Company redeemed 484,056 shares of common stock held by Sumitaka Yamamoto, Chief Executive Officer of the Company, for $1.00. During the period from October 27, 2021 through January 13, 2022, the Company issued 400,000 shares of common stock at a purchase price of $2.50 per share (for an aggregate of $1,000,000 of proceeds) to accredited investors in a private placement under Rule 506(b) of Regulation D of the Securities Act. On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to our 2021 Equity Incentive Plan at an exercise price of $2.50 per share to various officers, directors, employees and consultants of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to 25% of the applicable shares of common stock, subject to the terms and conditions of the 2021 Equity Incentive Plan and the option award agreements pursuant to which the options were awarded. The above issuances were made pursuant to an exemption from registration as set forth in 506 of Regulation D and/or Section 4(a)(2) of the Securities Act. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. Transfer Agent and Registrar The Company’s transfer agent is Transhare Corporation. The transfer agent’s address is Bayside Center 1, 17755 US Highway 19 N, Suite 140, Clearwater, Florida 33764, and its telephone number is (303) 662-1112. ITEM 6. RESERVED ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements All statements other than statements of historical fact included in this annual report, including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this annual report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or the Company’s management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the SEC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this annual report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. References herein to “we,” “us” or the “Company” refer to HeartCore Enterprises, Inc. and its consolidated subsidiary, HeartCore Co., Ltd. 70 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 December 31, 2021, our sales and marketing organization was comprised of 16 employees, including our field sales organization, which maintains a physical sales presence in the Japanese software market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified revenue and customer base. As of December 31, 2021, our combined business units (customer experience management business unit and digital transformation business unit) had 839 total customers in Japan. We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our majority-owned subsidiary, HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co.”), which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009 and acquired by us in July 2021. HeartCore Co. started out with helping companies effectively managing content with its powerful content management system. Since then, HeartCore Co. has expanded offerings to help companies manage all forms of business processes. The acquisition of HeartCore Co. was accounted for as a recapitalization among entities under common control since the same controlling shareholders controlled all these entities before and after the transaction. The consolidation of the Company and its 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. For the fiscal years ended December 31, 2021 and 2020, we generated revenues of $10,822,514 and $9,026,463, respectively, and reported net loss of $327,044 and net income of $155,064, respectively, and cash flows from operating activities of $766,300 and $745,748, respectively. As noted in our consolidated financial statements, as of December 31, 2021, we had an accumulated deficit of $3,896,113. Key Factors that Affect Our Results of Operations We believe the following key factors may affect our financial condition and results of operations: Our Ability to Strength Our Competitive Advantages Our mission is to be at the forefront of innovation and thought leadership in enterprise business automation, analyzing enterprise users’ desktops and mission-critical systems, and creating end-to-end software that provides business automation based on the results of that analysis and further simulating the numbers. We create end-to-end software that provides business automation. Our customers use our software across their organizations so that they can run their operations in a more fully automated manner. Our ability to successfully implement the automation in our software greatly affects our profitability. 71 Our Ability to Expand International Market We maintain a physical sales presence in the Japanese software market. Using our global go-to-market strategy we believe we have established a diversified revenue and customer base. We will continue to develop our global operation. International expansion over the long term represents a significant opportunity and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing efforts and leveraging channel and other ecosystem partners. Our Ability to Control Costs and Expenses and Improve Our Operating Efficiency Our business growth is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, secure new contracts with customers and our ability to control costs and expenses to improve our operating efficiency. Our software costs (mostly including purchased software license, salaries and welfare, and outsourcing expenses) have a direct impact on our profitability. Our success is dependent, in part, on our ability to reduce our exposure to increase in those costs through a variety of ways, while maintaining and improving margins and market share. In addition, our staffing costs (including salaries and welfare) and administrative expenses also have a direct impact on our profitability. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability. Our Ability to Manage and Retain Customer Renewals Our ability to manage and retain customer renewals is vital to our expansion of renewals in our customer base and continuous and growing revenue. By achieving and maintaining high retention of customer renewals, we are able to cover most of our expenses from the revenue generated from such retained customer renewals. In order to achieve and maintain a high retention of customer renewals, we engage in the following actions: (i) we conduct annual surveys of existing customers; (ii) we conduct Net Promoter Scoring (NPS), whereby we measure customer loyalty and satisfaction by asking our customers how likely they are to recommend our product and service to others; and (iii) we have sales representatives visit important customers to increase customer retention. Our ability to expand within our customer base is demonstrated by our net retention rate, which represents the rate of net expansion of annualized renewal run-rate from existing customers over the last 12 months. As of December 31, 2021, our combined business units (customer experience management business unit and digital transformation business unit) had 839 total customers in Japan, of which 581, or 69.2%, were paying customers and 24 total customers outside Japan, of which 2, or 1.0%, was a paying customer. Our 280 non-paying customers were originally paying customers that utilized our paid services but now use a free version of the CXM Platform. Our net retention rate for our paying customers of our digital transformation business unit (RPA business) was 45%, 52% and 75% as of December 31, 2021, 2020 and 2019, respectively. The reduction in the net retention rate was due to a number of small and medium-sized customers cancelling their contracts due to the COVID-19 pandemic. Notwithstanding, our net retention rate for our paying customers of our customer experience management business unit (CMS business) was 95%, 95% and 92% as of December 31, 2021, 2020 and 2019, respectively. Digital transformation business unit (RPA business) sales only accounted for 5.5%, 9.4% and 10.9% of total sales during the years ended December 31, 2021, 2020 and 2019, respectively. In light of the high net retention rate among our combined paying and non-paying customers of our CMS business, there is an insignificant impact (below 5%) on our net retention rate as to former paying customers of our CMS business utilizing the free version of your CXM Platform. COVID-19 Affecting Our Results of Operations On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The pandemic has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. As of the filing date of this Annual Report on Form 10-K, the extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted. 72 A Severe or Prolonged Slowdown in the Global and Japan Economy Could Materially and Adversely Affect Our Business and Our Financial Condition In recent years, the economic indicators in Japan have shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The current administration of Prime Minster Fumio Kishida and the former administration of Prime Minister Yoshihide Suga have introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. However, the long-term impact of these policy initiatives on Japan’s economy remains uncertain. The impact of Brexit on the Japanese economy and on the value of the Japanese yen against currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain. In addition, an increase in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also adversely impact the Japanese economy, potentially impacting consumer spending, and advertising spending by businesses. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices. Results of Operations Comparison of Results of Operations for the Fiscal Years Ended December 31, 2021 and 2020 The following table summarizes our operating results as reflected in our statements of operations during the fiscal years ended December 31, 2021 and 2020, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods. For the Years ended December 31, 2021 2020 Variance % of % of Amount revenue Amount revenue Amount % of REVENUE $ 10,822,514 100.0 % $ 9,026,463 100.0 % $ 1,796,051 19.9 % COST OF REVENUE 5,634,737 52.1 % 5,008,311 55.5 % 626,426 12.5 % GROSS PROFIT 5,187,777 47.9 % 4,018,152 44.5 % 1,169,625 29.1 % Operating expenses Selling expenses 296,778 2.7 % 242,709 2.7 % 54,069 22.3 % General and administrative expenses 4,321,241 39.9 % 3,205,689 35.5 % 1,115,552 34.8 % Research and development expenses 510,740 4.7 % 311,049 3.4 % 199,691 64.2 % Total operating expenses 5,128,759 47.3 % 3,759,447 41.6 % 1,369,312 36.4 % Income from operations 59,018 0.5 % 258,705 2.9 % (199,687 ) -77.2 % Other expenses (44,117 ) -0.4 % (31,424 ) -0.3 % (12,693 ) 40.4 % Income before income tax provision 14,901 0.1 % 227,281 2.5 % (212,380 ) -93.4 % Income tax expense 341,945 3.2 % 72,217 0.8 % 269,728 373.5 % Net income (loss) (327,044 ) -3.0 % 155,064 1.7 % (482,108 ) -310.9 % Less: net income attributable to non-controlling interest 11,112 0.1 % 4,109 0.0 % 7,003 170.4 % NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. $ (338,156 ) -3.1 % $ 150,955 1.7 % $ (489,111 ) -324.0 % 73 For the Years ended December 31, 2021 2020 Variance % of % of Amount total revenue Amount total revenue Amount % of Revenue Revenue from on-premise software $ 3,609,442 33.4 % $ 2,099,761 23.3 % $ 1,509,681 71.9 % Revenue from maintenance and support services 3,616,918 33.4 % 3,493,316 38.7 % 123,602 3.5 % Revenue from software as a service (“SaaS”) 617,026 5.7 % 484,716 5.4 % 132,310 27.3 % Revenue from software development and other miscellaneous services 2,979,128 27.5 % 2,948,670 32.6 % 30,458 1.0 % Total revenue 10,822,514 100.0 % 9,026,463 100.0 % 1,796,051 19.9 % Cost of Revenue Costs of on-premise software 1,401,907 13.0 % 1,143,099 12.7 % 258,808 22.6 % Costs of maintenance and support services 1,384,660 12.8 % 1,336,703 14.8 % 47,957 3.6 % Costs of software as a service (“SaaS”) 275,104 2.5 % 490,229 5.4 % (215,125 ) -43.9 % Costs of software development and other miscellaneous services 2,573,066 23.8 % 2,038,280 22.6 % 534,786 26.2 % Total cost of revenue 5,634,737 52.1 % 5,008,311 55.5 % 626,426 12.5 % Gross Profit On-premise software 2,207,535 20.3 % 956,662 10.6 % 1,250,873 130.8 % Maintenance and support services 2,232,258 20.6 % 2,156,613 23.9 % 75,645 3.5 % Software as a service (“SaaS”) 341,922 3.2 % (5,513 ) -0.1 % 347,435 6,302.1 % Software development and other miscellaneous services 406,062 3.8 % 910,390 10.1 % (504,328 ) -55.4 % Total gross profit $ 5,187,777 47.9 % $ 4,018,152 44.5 % $ 1,169,625 29.1 % Revenue Our total revenues increased by $1,796,051, or 19.9%, to $10,822,514 for the year ended December 31, 2021 from $9,026,463 for the year ended December 31, 2020. The increase in our revenues was attributable to the following reasons: (i) the revenues from sales of on-premise software by $1,509,681, or 71.9%, to $3,609,442 for the year ended December 31, 2021 from $2,099,761 for the year ended December 31, 2020. A major customer renewed its CMS license for $1,157,517. Some other customers also significantly increased their purchase in 2021, as compared to the prior year; 74 (ii) our revenue from software as a service (“SaaS”) increased by $132,310, or 27.3%, to $617,026 for the year ended December 31, 2021 from $484,716 for the year ended December 31, 2020. SaaS service can monitor computers’ activities and therefore can assist employers looking over their staffs’ work load when the employees work remotely. The demand for SaaS services increased as more and more people get used to working remotely as the COVID-19 pandemic changed peoples’ working style. While we retained most of the customers from prior year, we increased our revenue from task mining products by approximately $124,845. Cost of Revenue Our total costs of revenues increased by $626,426, or 12.5%, to $5,634,737 for the year ended December 31, 2021 from $5,008,311 for the year ended December 31, 2020. The increase in our costs was attributable to the following reasons: (i) the costs of On-premises software increased by $258,808, or 22.6%, to $1,401,907 for the year ended December 31, 2021 from $1,143,099 for the year ended December 31, 2020, in light of the increase in sales; (ii) the costs of software development and other miscellaneous services increased by $534,786, or 26.2%, to $2,573,066 for the year ended December 31, 2021 from $2,038,280 for the year ended December 31, 2020, due to unexpected outsources costs associated with the defects in some CMS projects; offset by (iii) a decrease in the costs of SaaS by $215,125, or 43.9%, to $275,104 for the year ended December 31, 2021 from $490,229 for the year ended December 31, 2020. The Company launched a new SaaS product, CXM Cloud, in 2019 and subsequently completed most of the development of the project in 2020, leaving minority debug expenses in 2021. Therefore, the development costs were higher in 2020 than in 2021. Gross Profit Our total gross profit increased by $1,169,625, or 29.1%, to $5,187,777 for the year ended December 31, 2021 from $4,018,152 for the year ended December 31, 2020. The increase in our gross profit was attributable to the following reasons: (i) the gross profit from sales of on-premise software increased by 1,250,873, or 130.8% from 956,662 for the ended December 31, 2020 to $2,207,535 for the year ended December 31, 2021. The profitability increased due to the higher volume sales; (ii) the gross profit from SaaS increased by $347,435, or 6,302.1%, to $341,922 for the year ended December 31, 2021 from a loss of $5,513 for the year ended December 31, 2020, primally due to more of the development costs of the CXM Cloud product was recorded in the prior year. For the reasons discussed above, our overall gross profit margin increased by 3.4% to 47.9% for the year ended December 31, 2021 from 44.5% in the fiscal year 2020. Operating Expenses The following table sets forth the breakdown of our operating expenses for the fiscal years ended December 31, 2021 and 2020: For the Years ended December 31, 2021 2020 Variance % of % of Amount revenue Amount revenue Amount % of Total revenue $ 10,822,514 100.0 % $ 9,026,463 100.0 % $ 1,796,051 19.9 % Operating expenses Selling expenses 296,778 2.7 % 242,709 2.7 % 54,069 22.3 % General and administrative expenses 4,321,241 39.9 % 3,205,689 35.5 % 1,115,552 34.8 % Research and development expenses 510,740 4.7 % 311,049 3.4 % 199,691 64.2 % Total operating expenses $ 5,128,759 47.3 % $ 3,759,447 41.6 % $ 1,369,312 36.4 % 75 Selling Expenses Our selling expenses primarily include advertising expenses, sales commissions, and sales promotion expenses. For the Years ended December 31, 2021 2020 Variance Amount % of Amount % of Amount % of Selling Expenses Advertising expenses $ 195,916 66.0 % $ 97,944 40.4 % $ 97,972 100.0 % Sales commissions 99,789 33.6 % 141,621 58.4 % (41,832 ) -29.5 % Sales promotion expenses 1,073 0.4 % 3,144 1.2 % (2,071 ) -65.9 % Total selling expenses $ 296,778 100.0 % $ 242,709 100.0 % $ 54,069 22.3 % Our selling expenses increased by $54,069, or 22.3%, to $296,778 for the year ended December 31, 2021 from $242,709 in the fiscal year 2020, primarily attributable to (i) an increase in advertising expenses by $97,972, or 100%, to $195,916 for the year ended December 31, 2021 from $97,944 in the fiscal year 2020. The Japanese economy gradually resumed in 2021 as the COVID-19 pandemic became less severe. In order to attract customers, the company expensed $62,261 for seminars, and $43,329 for billboard; offset by (ii) a decrease in sales commission by $41,832, or 29.5% from $141,621 in the fiscal year 2020 to $99,789. Because the Company did not achieve its sales goal in the prior year, the performance-linked bonuses decreased in the consecutive year. These above-mentioned factors combined led to the increase in our selling expenses for the year ended December 31, 2021 as compared to the fiscal year 2020. As a percentage of revenues, our selling expenses accounted for 2.7% of our total revenue for the years ended December 31, 2021 and 2020. 76 General and Administrative Expenses Our general and administrative expenses primarily consist of employee salaries and welfare, consulting and professional service fees incurred for company reorganization and going public, depreciation and amortization expenses, rental expenses, office, utility and other expenses, bad debt expenses, and travel and entertainment expenses. For the Years ended December 31, 2021 2020 Variance Amount % of Amount % of Amount % of General and Administrative Expenses Salaries and welfare $ 2,306,544 53.3 % $ 1,985,048 61.9 % $ 321,496 16.2 % Consulting and professional service fees 296,731 6.9 % 461,951 14.4 % (165,220 ) -35.8 % Depreciation expense 102,409 2.4 % 116,745 3.6 % (14,336 ) -12.3 % Rent expense 219,918 5.1 % 226,009 7.1 % (6,091 ) -2.7 % Office, utility and other expenses 316,401 7.3 % 355,301 11.1 % (38,900 ) -10.9 % Listing-related expenses 867,624 20.1 % - 0.0 % 867,624 100.0 % Bad debt expense 80,879 1.9 % 8,684 0.3 % 72,195 831.4 % Travel and entertainment expense 130,735 3.0 % 51,951 1.6 % 78,784 151.7 % Total general and administrative expenses $ 4,321,241 100.0 % $ 3,205,689 100.0 % $ 1,115,552 34.8 % Our general and administrative expenses increased by $1,115,552 or 34.8%, to $4,321,241 for the year ended December 31, 2021 from $3,205,689 in the fiscal year 2020, primarily attributable to (i) we incurred listing-related expenses of $867,624 in 2021 to get our stock listed in the Nasdaq Stock Exchange in early 2022; (ii) an increase in travel and entertainment expenses by $78,784, or 151.7%, to $130,735 in the fiscal year ended December 31, 2021 from $51,951 in the fiscal year ended December 31, 2020. Our officers travelled to the US to meet our legal counsel, underwriter, and prospective investors to promote our stock and for the matter of going public; (iii) an increase in salaries and welfare by $321,496, or 16.2%, to $2,306,544 in the fiscal year ended December 31, 2021 from $1,985,048 in the fiscal year ended December 31, 2020. In addition to our average salary increased by 3% in the year December 31, 2021, we hired four more employees in 2021 to support the extension of business; offset by (iv) our consulting and professional fees decreased by $165,220 or 35.8% for the year ended December 31, 2021 as compared to the fiscal year 2020, primarily attributable to the termination of sales supporting consultant contracts executed in 2020, due to ineffectiveness. The overall increase in our general and administrative expenses in fiscal year 2021 as compared to fiscal year 2020 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 39.9% and 35.5% of our revenue for the fiscal years ended December 31, 2021 and 2020, respectively. Research and development expenses Our research and development expenses primarily consist of employee salaries and welfare, and outsourcing expenses. For the Years ended December 31, 2021 2020 Variance Amount % of Amount % of Amount % of Research and Development Expenses Salaries and welfare $ 82,739 16.2 % $ 50,164 16.1 % $ 32,575 64.9 % Outsourcing expenses 428,001 83.8 % 260,885 83.9 % 167,116 64.1 % Total research and development expenses $ 510,740 100.0 % $ 311,049 100.0 % $ 199,691 64.2 % Our research and development expenses increased by $199,691, or 64.2%, to $510,740 in the fiscal year ended December 31, 2021 from $311,049 in the fiscal year ended December 31, 2020, primarily attributable to (i) an increase in salary and welfare expenses by $32,575 or 64.9% to $82,739 in the fiscal year ended December 31, 2021 from $50,164 in the fiscal year ended December 31, 2020, as we increased the number of research and development staffs to speed up our new product development; (ii) an increase in outsourcing expenses by $167,116, or 64.1%, to $428,001 in the fiscal year ended December 31, 2021 from $260,885 in the fiscal year ended December 31, 2020, as we outsourced more development activities for efficiency and experience. The overall increase in our research and development expenses in fiscal year 2021 as compared to fiscal year 2020 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 4.7% and 3.4% of our revenue for the fiscal years ended December 31, 2021 and 2020, respectively. Other Expenses, net Our other income (expenses) primarily includes interest income generated from bank deposits, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, increased by $12,693 or 40.4%, from $31,424 for the year ended December 31,2020 to $44,117 for the year ended December 31, 2021. Provision for Income Taxes Our provision for income taxes was $341,945 for the year ended December 31, 2021, an increase of $269,728, or 373.5% from $72,217 in fiscal year 2020 primarily due to the increase in deferred tax expense. 77 Net Income (Loss) As a result of the foregoing, we reported a net loss of $327,044 for the fiscal year ended December 31, 2021, representing a $482,108 or 310.9% decrease from a net income of $155,064 for the fiscal year ended December 31, 2020. Net income attributable to non-controlling interest Before we entered into a stock purchase agreement with a non-controlling shareholder of HeartCore Co. in August 2021, we owned 97.35% of the outstanding shares of the operating subsidiary, HeartCore Co., which located in Japan. Accordingly, we recorded non-controlling interest income attributable to the non-controlling interest. The net income attributable to non-controlling interest increased by $7,003 or 170.4% from $4,109 in the fiscal year 2020 to $11,112 for the year ended December 31, 2021. 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 $338,156 for the fiscal year ended December 31, 2021, representing a $489,111 or 324.0% decrease from a net income of $150,955 for the fiscal year ended December 31, 2020. Liquidity and Capital Resources As of December 31, 2021, we had $3,136,839 in cash as compared to $3,058,175 as of December 31, 2020. We also had $960,964 in accounts receivable as of December 31, 2021. Our accounts receivable primarily include balance due from customers for our on-premise software sold and services provided and accepted by customers. As of December 31, 2021, our working capital was $62,919. In assessing our liquidity, management monitors and analyzes our cash, our ability to generate sufficient revenue in the future, and our operating and capital expenditure commitments. On February 14, 2022, we closed our initial public offering of 3,000,000 shares of common stock at a public offering price of $5.00 per share for a net proceeds of $13.7 million, after deducting underwriting discounts, commissions, and other offering expenses. We believe that our current cash and cash flows provided by operating activities will be sufficient to meet our working capital needs in the next 12 months from the date the audited financial statements were issued. In the coming years, we will be looking for other sources, such as raising additional capital by issuing shares of stock, to meet our needs for cash. Even though we face uncertainties in regards to the size and timing of capital-raising, we are confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities and shareholder working capital funding, as necessary. Cash Flows for the Years Ended December 31, 2021 and 2020 The following table sets forth summary of our cash flows for the periods indicated: For the Years Ended December 31, 2021 2020 Net cash provided by operating activities $ 766,300 $ 745,748 Net cash used in investing activities (179,029 ) (401,150 ) Net cash provided by (used in) financing activities (257,353 ) 2,063,166 Effect of exchange rate changes (251,254 ) 115,124 Net increase in cash and cash equivalents 78,664 2,522,888 Cash and cash equivalents, beginning of the year 3,058,175 535,287 Cash and cash equivalents, end of the year $ 3,136,839 $ 3,058,175 78 Operating Activities Net cash provided by operating activities was $766,300 for the year ended December 31, 2021, primarily consisting of the following: ● Net loss of $327,044 for the fiscal year. ● An increase in accounts payable and accrued expenses of $553,009. The increase was mainly due to the increase in accrued listing-related expense and accrued software development outsourcing expense. ● Depreciation expenses of $105,394. ● An increase in deferred revenue of $304,536. We request upfront payment for service provided over a period of time. The deferred revenue increased as the sales increased. Net cash provided by operating activities was $745,748 for the year ended December 31, 2020, primarily consisting of the following: ● Net income of $155,064 for the fiscal year. ● A decrease in accounts receivable of $237,574. The decrease was primarily due to our effort to strengthen our credit policy and get rid of bad credit customers in the current fiscal year. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary. ● Depreciation expenses of $114,467. ● An increase in deferred revenue of $163,188. We request upfront payment for service provided over a period of time. The deferred revenue increased as the sales increased. Investing Activities Net cash used in investing activities amounted to $179,029 for the year ended December 31, 2021, and primarily included the purchase of fixed assets of $36,153, and the loans provided to related parties of $142,876. Net cash used in investing activities amounted to $401,150 for the year ended December 31, 2020, and primarily included the purchase of fixed assets of $27,170, and the loans provided to related parties of $359,928. Financing Activities Net cash used in financing activities amounted to $257,353 for the fiscal year ended December 31, 2021, primarily consisting of repayment of long-term debts of $878,625 and repayment of finance lease obligations (principal) of $53,640, offset by proceeds from issuance of common shares of $677,945. Net cash provided by financing activities amounted to $2,063,166 for the fiscal year ended December 31, 2020, primarily consisting of proceeds from issuance of common shares of $932,278 and proceeds from long-term debts of $1,873,536, offset by repayment of long-term debts of $678,604 and repayment of finance lease obligations (principal) of $52,520. Private Placement During the period from October 27, 2021 through January 13, 2022, the Company issued 400,000 shares of common stock at a purchase price of $2.50 per share (for an aggregate of $1,000,000 of proceeds) to accredited investors in a private placement under Rule 506(b) of Regulation D of the Securities Act. Option Awards On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to our 2021 Equity Incentive Plan at an exercise price of $2.50 per share to various officers, directors, employees and consultants of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to 25% of the applicable shares of common stock, subject to the terms and conditions of the 2021 Equity Incentive Plan and the option award agreements pursuant to which the options were awarded. Contractual obligations Lease commitment The Company’s subsidiary, HeartCore Co., Ltd. entered into two leases for its office space and parking lot, which were classified as operating leases. HeartCore Co., Ltd. also entered into two leases for office equipment and a lease for a vehicle, and these leases were classified as finance leases. 79 As of December 31, 2021, future minimum lease payments under the non-cancelable lease agreements are as follows: Year ending December 31, Finance lease Operating lease 2022 $ 39,328 $ 360,721 2023 22,173 360,721 2024 326 360,721 2025 - 360,721 2026 - 360,721 Thereafter - 1,845,948 Total lease payments 61,827 3,649,553 Less: imputed interest (507 ) (241,072 ) Total lease liabilities 61,320 3,408,481 Less: current portion 37,459 332,277 Non-current lease liabilities $ 23,861 $ 3,076,204 Long-Term Debt s The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions. As of December 31, 2021, future minimum loan payments are as follows: Loan Year ending December 31, Payment 2022 $ 855,117 2023 724,935 2024 416,176 2025 261,910 2026 262,979 Thereafter 215,790 Total $ 2,736,907 80 COVID-19 In December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The pandemic, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours. For example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions, closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. In March 2021, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all HeartCore Co. employees were required to work from home for several months during the height of the pandemic. We cancelled or shifted our customer and industry events to virtual-only experiences. Although we have begun to slowly re-open our offices on a staggered, region-by-region basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. All of these changes may disrupt the way we operate our business. In addition, our management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic and seeking to minimize the risk of the virus and manage its effects on our business and workforce. Although we were recently formed, our wholly owned operating subsidiary, HeartCore Co. has been operating through the pandemic. The operations of HeartCore Co. have been impacted by a range of external factors related to the pandemic that are not within our control. As for existing customers, the pandemic has not affected their use of our software. As for new customers in the travel, hotel, airline, railroad, and restaurant industry for the CX division, the pandemic has resulted in a reduction in new orders. However, as for new customers in the retail and finance industry for the CX division, orders have increased despite the pandemic, resulting in an overall increase in sales for the CX division of $2,159,372 for the year ended December 31, 2021 as compared to the year ended December 31, 2020. As for the impact of the pandemic on the DX division, large companies were forced to change the way they operate, as employees were forced to work remotely, which increased the demand for our DX software, but due to the delay in the sales cycle by the pandemic, realization of sales were delayed resulting in reduction of sales of $363,321 for the year ended December 31, 2021, as compared to the year ended December 31, 2020. The duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed. To the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section, including, in particular, risks related to our dependence on customer renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions may harm our industry, business and results of operations. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of December 31, 2021. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and 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 in this annual report reflect the more significant judgments and estimates used in preparation of our consolidated financial statements. Accounts Receivable Accounts receivable, net represent the amounts that the Company has an unconditional right to consideration, which are stated at the original amount less an allowance for doubtful receivables. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. The Company usually determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of operations and comprehensive income (loss). Delinquent account balances are written off against the allowance for doubtful accounts after management has determined that the likelihood of collection is remote. In circumstances in which the Company receives payment for accounts receivable that have previously been written off, the Company reverses the allowance and bad debt. 81 Revenue Recognition The Company recognize revenue under ASC 606, “Revenue from Contracts with customers”. To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales is calculated at 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 price (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. Revenue from Maintenance and Support service Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers. Revenue from Software as a Service (“SaaS”) The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length. Revenue from Software Development and other Miscellaneous Services The Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognized revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers. The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the years ended December 31, 2021 and 2020 that were included in the opening deferred revenues balance was approximately $1.5 million and $1.7 million, respectively. 82 Share-based Compensation The Company accounts for share-based compensation awards in accordance with ASC 718, “Compensation – Stock Compensation”. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period or vesting period. The Company records forfeitures as they occur. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to pages F-1 through F-6 comprising a portion of this annual report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.