HeartCore Enterprises, Inc. 10-Q

Item 1. Financial Statements. HEARTCORE ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS June 30, December 31, 2022 2021 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 12,463,179 $ 3,136,839 Accounts receivable, net 1,119,990 960,964 Prepaid expenses 852,270 444,405 Due from related party 46,639 50,559 Loan receivable from employee - 8,341 Other current assets 23,304 15,654 Total current assets 14,505,382 4,616,762 Non-current assets: Property and equipment, net 211,180 261,414 Operating lease right-of-use assets 2,677,171 3,319,749 Deferred tax assets 239,176 297,990 Security deposits 235,274 278,237 Long-term loan receivable from related party 260,592 335,756 Loan receivable from employee, non-current - 4,518 Other non-current assets 4,012 8,737 Total non-current assets 3,627,405 4,506,401 Total assets $ 18,132,787 $ 9,123,163 LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses $ 818,222 $ 646,425 Accrued payroll and other employee costs 364,123 255,082 Due to related party 5,857 1,110 Current portion of long-term debts 733,235 849,995 Insurance premium financing 220,583 - Operating lease liabilities, current 280,789 332,277 Finance lease liabilities, current 20,717 37,459 Income tax payables 1,322 10,919 Deferred revenue 1,991,090 1,690,917 Mandatorily redeemable financial interest - 447,986 Other current liabilities 65,547 281,673 Total current liabilities 4,501,485 4,553,843 Non-current liabilities: Long-term debts 1,367,101 1,871,580 Operating lease liabilities, non-current 2,467,546 3,076,204 Finance lease liabilities, non-current 9,279 23,861 Other non-current liabilities 132,648 156,627 Total non-current liabilities 3,976,574 5,128,272 Total liabilities: 8,478,059 9,682,115 Shareholders’ equity (deficit): Preferred shares ($ 0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of June 30, 2022 and December 31, 2021) - - Common shares ($ 0.0001 par value, 200,000,000 shares authorized; 18,999,276 and 15,819,943 shares issued; 18,440,467 and 15,546,454 shares outstanding as of June 30, 2022 and December 31, 2021, respectively) 1,899 1,554 Additional paid-in capital 17,883,555 3,350,779 Treasury shares, at cost ( 558,809 and 0 shares as of June 30, 2022 and December 31, 2021, respectively) ( 1,336,762 ) - Accumulated deficit ( 7,178,205 ) ( 3,896,113 ) Accumulated other comprehensive income (loss) 284,241 ( 15,172 ) Total shareholders’ equity (deficit) 9,654,728 ( 558,952 ) Total liabilities and shareholders’ equity (deficit) $ 18,132,787 $ 9,123,163 The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 HEARTCORE ENTERPRISES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) 2022 2021 2022 2021 For the Three Months Ended June 30, For the Six Months Ended June 30, 2022 2021 2022 2021 Revenues $ 2,670,297 $ 2,865,192 $ 4,946,298 $ 4,975,501 Cost of revenues 1,337,296 1,175,387 2,392,652 2,583,019 Gross profit 1,333,001 1,689,805 2,553,646 2,392,482 Operating expenses: Selling expenses 728,836 101,124 934,754 147,465 General and administrative expenses 1,850,315 1,020,842 4,319,248 1,783,590 Research and development expenses 417,228 80,025 525,487 132,171 Total operating expenses 2,996,379 1,201,991 5,779,489 2,063,226 Income (loss) from operations ( 1,663,378 ) 487,814 ( 3,225,843 ) 329,256 Other income (expenses): Interest income 9,091 3,726 10,549 3,848 Interest expense ( 17,590 ) ( 12,404 ) ( 28,861 ) ( 23,232 ) Other income 8,777 14,207 25,450 15,195 Other expenses ( 31,562 ) ( 5,403 ) ( 55,224 ) ( 17,675 ) Total other income (expenses) ( 31,284 ) 126 ( 48,086 ) ( 21,864 ) Income (loss) before income tax provision ( 1,694,662 ) 487,940 ( 3,273,929 ) 307,392 Income tax expense 8,979 76,226 8,163 83,915 Net income (loss) ( 1,703,641 ) 411,714 ( 3,282,092 ) 223,477 Less: net income attributable to non-controlling interest - 10,924 - 5,936 Net income (loss) attributable to HeartCore Enterprises, Inc. $ ( 1,703,641 ) $ 400,790 $ ( 3,282,092 ) $ 217,541 Other comprehensive income (loss): Foreign currency translation adjustment 219,360 ( 13,848 ) 299,413 83,674 Total comprehensive income (loss) ( 1,484,281 ) 397,866 ( 2,982,679 ) 307,151 Less: comprehensive income attributable to non-controlling interest - 10,557 - 8,153 Comprehensive income (loss) attributable to HeartCore Enterprises, Inc. $ ( 1,484,281 ) $ 387,309 $ ( 2,982,679 ) $ 298,998 Net earnings (loss) per common share attributable to HeartCore Enterprises, Inc. * Basic * $ ( 0.09 ) $ 0.03 $ ( 0.18 ) $ 0.01 Diluted * $ ( 0.09 ) $ 0.03 $ ( 0.18 ) $ 0.01 Weighted average common shares outstanding * Basic * 18,936,829 15,242,454 18,105,698 15,242,454 Diluted * 18,936,829 15,515,943 18,105,698 15,515,943 * Retrospectively restated for effect of share issuances on July 16, 2021. The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 HEARTCORE ENTERPRISES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 Common shares* Additional Accumulated other Total HeartCore Enterprises, Inc. Non- Total Number of shares Amount paid-in capital* Accumulated deficit comprehensive loss shareholders’ deficit controlling interest shareholders’ deficit Balance, December 31, 2020 * 15,242,454 $ 1,524 $ 2,735,315 - $ ( 3,557,957 ) $ ( 136,890 ) $ ( 958,008 ) $ 353,825 $ ( 604,183 ) Net loss - - - - ( 183,249 ) - ( 183,249 ) ( 4,988 ) ( 188,237 ) Foreign currency translation adjustment - - - - 94,938 94,938 2,584 97,522 Balance, March 31, 2021 * 15,242,454 1,524 2,735,315 - ( 3,741,206 ) ( 41,952 ) ( 1,046,319 ) 351,421 ( 694,898 ) Net income - - - 400,790 - 400,790 10,924 411,714 Foreign currency translation adjustment - - - - - ( 13,481 ) ( 13,481 ) ( 367 ) ( 13,848 ) Balance, June 30, 2021 * 15,242,454 $ 1,524 $ 2,735,315 - $ ( 3,340,416 ) $ ( 55,433 ) $ ( 659,010 ) $ 361,978 $ ( 297,032 ) * Retrospectively restated for effect of share issuances on July 16, 2021. Number of shares Amount paid-in capital Number of shares Amount Accumulated deficit comprehensive income (loss) equity (deficit) Common shares Additional Treasury shares Accumulated other Total shareholders’ Number of shares Amount paid-in capital Number of shares Amount Accumulated deficit comprehensive income (loss) equity (deficit) Balance, December 31, 2021 15,546,454 $ 1,554 $ 3,350,779 - $ - $ ( 3,896,113 ) $ ( 15,172 ) $ ( 558,952 ) Net loss - - - - - ( 1,578,451 ) - ( 1,578,451 ) Foreign currency translation adjustment - - - - - - 80,053 80,053 Issuance of common shares for cash 3,096,000 310 13,643,969 - - - - 13,644,279 Issuance of common shares from exercise of share options 273,489 27 ( 11 ) - - - - 16 Share-based compensation - - 422,164 - - - - 422,164 Balance, March 31, 2022 18,915,943 1,891 17,416,901 - - ( 5,474,564 ) 64,881 12,009,109 Net loss - - - - - ( 1,703,641 ) - ( 1,703,641 ) Foreign currency translation adjustment - - - - - - 219,360 219,360 Share-based compensation 83,333 8 466,654 - - - - 466,662 Repurchase of common shares - - - ( 558,809 ) ( 1,336,762 ) - - ( 1,336,762 ) Balance, June 30, 2022 18,999,276 $ 1,899 $ 17,883,555 $ ( 558,809 ) $ ( 1,336,762 ) $ ( 7,178,205 ) $ 284,241 $ 9,654,728 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 HEARTCORE ENTERPRISES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS 2022 2021 For the Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 3,282,092 ) $ 223,477 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation expenses 46,688 55,458 Amortization of debt issuance costs 2,768 3,923 Non-cash lease expense 143,845 171,935 Deferred income taxes 14,167 96,517 Share-based compensation 888,826 - Changes in assets and liabilities: Accounts receivable, net ( 344,779 ) ( 570,886 ) Prepaid expenses ( 266,030 ) ( 282,508 ) Other assets ( 5,516 ) ( 46,074 ) Accounts payable and accrued expenses 281,567 128,308 Accrued payroll and other employee costs 175,246 105,120 Due to related party 5,448 - Operating lease liabilities ( 148,125 ) ( 176,913 ) Finance lease liabilities ( 288 ) ( 689 ) Income tax payables ( 8,756 ) 5,487 Deferred revenue 596,762 621,707 Other liabilities ( 193,598 ) 13,049 Net cash flows provided by (used in) operating activities ( 2,093,867 ) 347,911 Cash flows from investing activities: Purchases of property and equipment ( 30,963 ) ( 19,894 ) Advance and loan provided to related parties - ( 83,798 ) Repayment of loan provided to related party 21,508 - Net cash flows used in investing activities ( 9,455 ) ( 103,692 ) Cash flows from financing activities: Proceeds from initial public offering, net of issuance cost 13,602,554 - Proceeds from issuance of common shares prior to initial public offering 220,572 - Repurchase of common shares ( 1,336,762 ) - Payments for finance leases ( 24,189 ) ( 29,561 ) Proceeds from long-term debt 258,087 - Repayment of long-term debts ( 469,166 ) ( 503,230 ) Repayment of insurance premium financing ( 167,955 ) - Payments for debt issuance costs ( 1,030 ) ( 1,420 ) Payment for mandatorily redeemable financial interest ( 430,489 ) - Net cash flows provided by (used in) financing activities 11,651,622 ( 534,211 ) Effect of exchange rate changes ( 221,960 ) ( 149,784 ) Net change in cash and cash equivalents 9,326,340 ( 439,776 ) Cash and cash equivalents - beginning of the period 3,136,839 3,058,175 Cash and cash equivalents - end of the period $ 12,463,179 $ 2,618,399 Supplemental cash flow disclosure: Interest paid $ 28,025 $ 20,635 Income taxes paid $ 3,013 $ 9,047 Non-cash investing and financing transactions Payroll withheld as repayment of loan receivable from employees $ 12,034 $ 7,240 Expense paid by related party on behalf of the Company $ - $ 39,679 Liabilities assumed in connection with purchase of property and equipment $ 9,676 $ - Share repurchase liability settled by issuance of common shares $ 16 $ - Deferred offering costs recognized against the proceeds from the offering $ 178,847 $ - Insurance premium financing $ 388,538 $ - The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS HeartCore Enterprises, Inc. (“HeartCore USA” or the “Company”), a holding company, was incorporated under the laws of the State of Delaware on May 18, 2021. On July 16, 2021, the Company executed a Share Exchange Agreement with certain shareholders of HeartCore Co. Ltd. (“HeartCore Japan”), a company that was incorporated in Japan on June 12, 2009. Pursuant to the terms of the Share Exchange Agreement, the Company issued 15,999,994 shares of its common shares to the shareholders of HeartCore Japan in exchange for 10,706 shares out of 10,984 shares of common shares issued by HeartCore Japan, representing approximately 97.5 % of HeartCore Japan’s outstanding common shares. On February 24, 2022, the Company purchased the remaining 278 shares of common shares of HeartCore Japan. As a result, HeartCore Japan became a wholly owned operating subsidiary of the Company . The share exchange on July 16, 2021 has been accounted for as a recapitalization between entities under common control since the same controlling shareholders controlled these two entities before and after the transaction. The consolidation of the Company and its subsidiary has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the earliest period presented in the accompanying unaudited consolidated financial statements . The Company, via its wholly-owned operating subsidiary, HeartCore Japan, is mainly engaged in the business of developing and sales of comprehensive software. HeartCore USA and HeartCore Japan are hereafter referred to as the Company . NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiary. Prior to February 24, 2022, ownership interest of non-controlling party is presented as mandatorily redeemable financial interest or non-controlling interest as applicable. All significant intercompany accounts and transactions have been eliminated. These unaudited interim consolidated financial statements do not include all of the information and disclosure required by the U.S. GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments consisting of normal recurring nature considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021. 7 Use of Estimates In preparing the consolidated financial statements in conformity U.S. GAAP, the management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for doubtful accounts, useful lives of property and equipment, the impairment of long-lived assets, valuation of share-based compensation, valuation allowance of deferred tax assets, implicit interest rate of operating and financing leases, valuation of asset retirement obligations and revenue recognition. Actual results could differ from those estimates. COVID-19 While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent to which COVID-19 may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, which will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s financial statements. Asset Retirement Obligations Pursuant to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other non-current liabilities in the consolidated balance sheets, in accordance with Accounting Standards Codification (“ASC”) 410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations: SCHEDULE OF CHANGES IN ASSET RETIREMENT OBLIGATIONS June 30, December 31, 2022 2021 Beginning balance $ 155,666 $ 173,043 Accretion expense 242 730 Foreign currency translation adjustment ( 23,260 ) ( 18,107 ) Ending balance $ 132,648 $ 155,666 Software Development Costs Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Technological feasibility is established upon completion of a detailed program design or the completion of a working model. Costs incurred by the Company between establishment of technological feasibility and the point at which the product is ready for general release are capitalized and amortized over the economic life of the related products. The Company’s software development costs incurred subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred. 8 In the six months ended June 30, 2022 and 2021, software development costs expensed as incurred amounted to $ 525,487 and $ 132,171 , respectively. These software development costs were included in the research and development expenses. Impairment of Long-Lived Assets Long-lived assets with finite lives, primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets during the six months ended June 30, 2022 and 2021. Foreign Currency Translation The Company maintains its books and record in its local currency, Japanese YEN (“JPY”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations. The reporting currency of the Company is the United States Dollars (“US$”), and the accompanying unaudited consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of changes in shareholders’ equity (deficit). Translation of amounts from the local currency of the Company into US$1 has been made at the following exchange rates: SCHEDULE OF FOREIGN CURRENCY TRANSLATION June 30, 2022 June 30, 2021 Current JPY: US$1 exchange rate 136.11 110.74 Average JPY: US$1 exchange rate 122.98 107.74 Revenue Recognition The Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with customers”. To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales is calculated at 10% of gross sales. 9 The Company currently generates its revenue from the following main sources: Revenue from On-Premise Software Licenses for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenue from on-premise licenses is recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. Revenue from Maintenance and Support service Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers. Revenue from Software as a Service (“SaaS”) The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length. Revenue from Software Development and other Miscellaneous Services The Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers. Revenue from Consulting Service The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents and supporting the listing process. Revenues from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less than one year in length. The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the six months ended June 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $ 1.1 million and $ 1.2 million, respectively. 10 Disaggregation of Revenue The Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues by type for the three and six months ended June 30, 2022 and 2021 is as following: SCHEDULE OF DISAGGREGATION OF REVENUES 2022 2021 2022 2021 For the Three Months Ended For the Six Months Ended June 30, June 30, 2022 2021 2022 2021 Revenue from On-Premise Software $ 716,532 $ 1,132,608 $ 1,518,133 $ 1,382,216 Revenue from Maintenance and Support Service 727,277 890,552 1,572,616 1,832,767 Revenue from Software as a Service (“SaaS”) 103,250 139,712 229,904 291,520 Revenue from Software Development and other Miscellaneous Services 674,883 702,320 1,177,290 1,468,998 Revenue from Consulting Service 448,355 - 448,355 - Total Revenue $ 2,670,297 $ 2,865,192 $ 4,946,298 $ 4,975,501 The Company’s disaggregation of revenues by product/service is as following: For the Three Months Ended For the Six Months Ended June 30, June 30, 2022 2021 2022 2021 Revenue from Customer Experience Management Platform $ 1,831,166 $ 2,397,068 $ 3,586,219 $ 4,011,424 Revenue from Process Mining 118,320 148,894 384,808 405,678 Revenue from Robotic Process Automation 149,031 192,569 247,417 299,248 Revenue from Task Mining 98,558 76,807 185,435 132,606 Revenue from Consulting Service 448,355 - 448,355 - Revenue from Others 24,867 49,854 94,064 126,545 Total Revenue $ 2,670,297 $ 2,865,192 $ 4,946,298 $ 4,975,501 As of June 30, 2022 and 2021, and for the period then ended, all long-lived assets and the predominant portion of the revenue generated are attributed to the Company’s operation in Japan. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable. For the six months ended June 30, 2022, customer A and B represents 12.9 % and 10.4 %, respectively, of the Company’s total revenues. For the six months ended June 30, 2021, customer B and C represents 11.5 % and 12.7 %, respectively, of the Company’s total revenues. For the six months ended June 30, 2022, vendor A and B represents 44.5 % and 29.8 %, respectively, of the Company’s total purchases. For the six months ended June 30, 2021, vendor A, B, and C represents 40.2 %, 36.3 %, and 14.1 %, respectively, of the Company’s total purchases. 11 Share-based Compensation The Company accounts for share-based compensation awards in accordance with ASC 718, “Compensation – Stock Compensation”. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the consolidated statements of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period or vesting period. The Company records forfeitures as they occur. NOTE 3 — ACCOUNTS RECEIVABLE, NET Accounts receivable consists of the following: SCHEDULE OF ACCOUNTS RECEIVABLE NET June 30, December 31, 2022 2021 Accounts receivable $ 1,119,990 $ 960,964 Less: allowance for doubtful accounts - - Accounts receivable, net $ 1,119,990 $ 960,964 NOTE 4 — PREPAID EXPENSES Prepaid expenses consist of the following: SCHEDULE OF PREPAID EXPENSES June 30, December 31, 2022 2021 Prepayments to software vendors $ 151,852 $ 157,060 Prepaid selling expenses 262,417 - Prepaid subscription fees 48,077 53,413 Deferred offering expenses - 180,630 Prepaid insurance premium 329,709 18,252 Others 60,215 35,050 Total $ 852,270 $ 444,405 Deferred offering expenses, consisting of legal fees and road show expenses relating to the Company’s planned initial public offering, are capitalized and recorded on the balance sheet. The deferred offering expenses were reclassified to shareholders’ equity and recorded against the proceeds received upon the closing of our initial public offering on February 14, 2022. NOTE 5 — RELATED PARTY TRANSACTIONS As of June 30, 2022 and December 31, 2021, the Company has a due to related party balance of $ 5,885 and $ 1,110 , respectively, from Sumitaka Yamamoto, the CEO and major shareholder of the Company. The balance is unsecured, non-interest bearing and due on demand. During the six months ended June 30, 2022, the related party paid operating expenses on behalf of the Company and received the payments in a net amount of $ 5,448 . During the six months ended June 30, 2021, the Company advanced $ 26,603 to this related party, and the related party paid expenses of $ 25,482 on behalf of the Company. 12 As of June 30, 2022 and December 31, 2021, the Company has a loan receivable balance of $ 307,231 and $ 386,315 , respectively, from Heartcore Technology Inc., a company controlled by the CEO of the Company. The loan was made to the related party to support its operation. The balance is unsecured, bears an annual interest of 1.475 %, and requires repayments in installments starting from February 2022. During the six months ended June 30, 2022 and 2021, the Company loaned nil and $ 57,195 , respectively, to this related party, and the related party paid expenses of nil and $ 14,197 , respectively, on behalf of the Company. During the six months ended June 30, 2022 and 2021, the Company received repayments of $ 21,508 and nil , respectively, from this related party. In June 2020, Suzuyo Shinwart Corporation became an over 10 % shareholder of the Company. During the six months ended June 30, 2021, the Company has revenue from this related party of $ 146,083 from software sales and incurred cost with this related party of $ 338,029 for software development services provided. As of June 30, 2021, the Company has deferred revenue with this related party of $ 57,593 . In July 2021, Suzuyo Shinwart Corporation sold all its shares of the Company to the Company’s CEO and ceased to be the Company’s related party. During the period from January 1, 2022 through January 13, 2022, the Company completed a private placement, in which, it issued 30,000 shares of common shares at a purchase price of $ 2.50 per share to the officers of the Company for an aggregate amount of $ 75,000 . NOTE 6 — PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following: SCHEDULE OF PROPERTY AND EQUIPMENT NET June 30, December 31, 2022 2021 Leasehold improvement $ 279,549 $ 320,257 Machinery and equipment 290,884 316,126 Vehicle 102,515 121,235 Software 156,964 185,627 Subtotal 829,912 943,245 Accumulated depreciation ( 618,732 ) ( 681,831 ) Property and equipment, net $ 211,180 $ 261,414 Depreciation expense was $ 46,688 and $ 55,458 for the six months ended June 30, 2022 and 2021, respectively. NOTE 7 — LEASES The Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were classified as finance leases. Right-of-use assets of these finance leases in the amount of $ 28,487 and $ 57,167 are included in property and equipment as of June 30, 2022 and December 31, 2021, respectively. 13 The components of lease costs are as follows: SCHEDULE OF LEASE COSTS 2022 2021 For the Six Months Ended June 30, 2022 2021 Finance lease costs Amortization of right-of-use assets $ 21,972 $ 26,883 Interest on lease liabilities 288 689 Total finance lease costs 22,260 27,572 Operating lease costs 164,513 199,318 Total lease costs $ 186,773 $ 226,890 The following table presents supplemental information related to the Company’s leases: SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO THE COMPANY'S LEASES 2022 2021 For the Six Months Ended June 30, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 288 $ 689 Operating cash flows from operating leases 168,793 204,296 Financing cash flows from finance leases 24,189 29,561 Weighted average remaining lease term (years) Finance leases 1.3 1.9 Operating leases 9.6 10.6 Weighted-average discount rate: (per annum) Finance leases 1.32 % 1.32 % Operating leases 1.32 % 1.32 % As of June 30, 2022, the future maturity of lease liabilities is as follows: SCHEDULE OF FINANCE LEASE AND OPERATING LEASE FUTURE MATURITY OF LEASE LIABILITIES Year ending December 31, Finance leases Operating leases Remaining of 2022 $ 11,140 $ 152,511 2023 18,750 305,021 2024 276 305,021 2025 - 305,021 2026 - 305,021 Thereafter - 1,560,912 Total lease payments 30,166 2,933,507 Less: imputed interest ( 170 ) ( 185,172 ) Total lease liabilities 29,996 2,748,335 Less: current portion 20,717 280,789 Non-current lease liabilities $ 9,279 $ 2,467,546 Pursuant to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $ 235,274 and $ 278,237 as of June 30, 2022 and December 31, 2021, respectively. 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: SCHEDULE OF LONG-TERM DEBTS Name of Financial Institutions Original Amount Borrowed (JPY) Loan Duration Annual Interest Rate Balance as of June 30, 2022 Balance as of December 31, 2021 Bond payable Corporate bond issued through Resona Bank 100,000,000 (a)(b) 1/10/2019—1/10/2024 0.430 % $ 293,880 $ 434,431 Loans with banks and other financial institutions Resona Bank, Limited. 30,000,000 (a) 12/29/2017—12/30/2022 1.475 % 22,041 56,476 Resona Bank, Limited. 50,000,000 (a)(b) 12/29/2017—12/29/2024 0.675 % 131,291 191,454 Resona Bank, Limited. 10,000,000 (a)(b) 9/30/2020—9/30/2027 0.000 % 55,110 72,411 Resona Bank, Limited. 40,000,000 (a)(b) 9/30//2020—9/30/2027 0.000 % 220,439 289,644 Resona Bank, Limited. 20,000,000 (a)(b) 11/13/2020—10/31/2027 1.600 % 111,968 146,890 Sumitomo Mitsui Banking Corporation 100,000,000 12/28/2018—12/28/2023 1.475 % 220,307 361,925 Sumitomo Mitsui Banking Corporation 10,000,000 (b) 12/30/2019—12/30/2026 1.975 % 47,241 63,105 The Shoko Chukin Bank, Ltd. 30,000,000 9/28/2018—8/31/2023 1.200 % 51,796 92,273 The Shoko Chukin Bank, Ltd. 50,000,000 7/27/2020—6/30/2027 1.290 % 265,961 351,020 Japan Finance Corporation 40,000,000 12/15/2017—11/30/2022 0.300 % 28,066 73,940 Japan Finance Corporation 80,000,000 11/17/2020—11/30/2027 0.210 % 460,804 603,339 Higashi-Nippon Bank 30,000,000 (a) 3/31/2022—3/31/2025 1.400 % 201,896 - Aggregate outstanding principal balances 2,110,800 2,736,908 Less: unamortized debt issuance costs ( 10,464 ) ( 15,333 ) Less: current portion ( 733,235 ) ( 849,995 ) Non-current portion $ 1,367,101 $ 1,871,580 (a) These debts are guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder. (b) These debts are guaranteed by Tokyo Credit Guarantee Association, and the Company has paid guarantee expenses for these debts. In March 2022, the Company entered into a loan agreement with Higashi-Nippon Bank with a term of three years payable monthly. The loan is guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder . Interest expense for long-term debts was $ 14,676 and $ 23,232 for the six months ended June 30, 2022 and 2021, respectively. 15 As of June 30, 2022, future minimum loan payments are as follows: SCHEDULE OF FUTURE MINIMUM LOAN PAYMENTS Year ending December 31, Loan Payment Remaining of 2022 $ 348,542 2023 687,055 2024 425,972 2025 244,391 2026 222,372 Thereafter 182,468 Total $ 2,110,800 NOTE 9 — INSURANCE PREMIUM FINANCING In February 2022, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $ 388,538 at an annual interest rate of 12.80 % for nine months from February 1, 2022, payable in nine monthly installments of principal and interest. As of June 30, 2022, the balance of the insurance premium financing was $ 220,583 . During the six months ended June 30, 2022, the interest incurred was $ 14,185 . NOTE 10 — INCOME TAXES United States (U.S.) HeartCore USA is a holding company registered in the State of Delaware incorporated in May 2021. The U.S. federal income tax rate is 21 %. No provision for income taxes in the U.S. has been made as the Company has no U.S. taxable income for the six months ended June 30, 2022 and 2021. Japan The Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the local tax authority. Income taxes in Japan applicable to the Company are imposed by the national, prefectural, and municipal governments and in the aggregate resulted in an effective statutory rate of approximately 30.62 % for the six months ended June 30, 2022 and 2021. For the six months ended June 30, 2022 and 2021, the Company’s income tax expenses are as follows: SCHEDULE OF INCOME TAX EXPENSES 2022 2021 For the Six Months Ended June 30, 2022 2021 Current $ ( 1,464 ) $ ( 7,117 ) Deferred 9,627 91,032 Income tax expense $ 8,163 $ 83,915 The effective tax rate was ( 0.25 )% and 27.30 % for the six months ended June 30, 2022 and 2021, respectively. 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 JPY 10 each (approximately $ 0.09 ). All options are exercisable upon issuance with a repurchase provision before the completion of the Company’s initial public offering, which serves as a vesting condition. All employees that were granted these stock options had early exercised their stock options in 2016 prior to the vesting of the related stock options. As of June 30, 2021, 324 units of the options were forfeited, and the CEO of the Company has repurchased and held the shares issued related to the early exercise of such stock options on behalf of the Company. On November 3, 2021, the Company redeemed 484,056 shares (equivalent to 324 shares of common shares of HeartCore Japan) from the CEO of the Company. The consideration received for the remaining early exercised options were recorded by the Company as a share repurchase liability included in other current liabilities in the consolidated balance sheets with JPY 1,830 (approximately $ 16 ) as of December 31, 2021. The shares issued related to the early exercise of the above-mentioned stock options were not considered outstanding as of December 31, 2021. On February 14, 2022, the 183 units of stock options were vested upon the completion of the Company’s initial public offering and the Company recognized share-based compensation of $ 11,005 during the six months ended June 30, 2022. In the same period, the share repurchase liability of $ 16 was settled by issuance of 273,489 shares of common shares (equivalent to 183 shares of common shares of HeartCore Japan) from exercise of stock options. The following summarized the Company’s stock options activity for the stock option issued in 2016 for the six months ended June 30, 2022 and 2021: SCHEDULE OF UNVESTED STOCK OPTION Number of stock options Issued and unvested as of January 1, 2021 194 Forfeited 11 Vested and exercised Issued and unvested as of June 30, 2021 183 Issued and unvested as of January 1, 2022 183 Vested and exercised 183 Exercisable as of June 30, 2022 - On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common shares at an exercise price of $ 2.50 per share to various officers, directors, employees and consultants of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to 25 % of the applicable shares of common shares, with the expiration date on December 25, 2031 . The following table summarizes the share options activity and related information for the six months ended June 30, 2022: SCHEDULE OF STOCK OPTION ACTIVITY Number of Options/ Warrants Weighted Average Exercise Price Weighted Average Remaining Term (Years) Intrinsic Value As of January 1, 2022 1,534,500 $ 2.5 9.99 $ - Granted - - - - Exercised -         - - - Forfeited - - - - As of June 30, 2022 1,534,500 $ 2.5 9.49 $ - Vested and exercisable as of June 30, 2022 - - - - 17 Options granted historically were valued using the binomial model with the assistance of an independent valuation specialist. Significant assumptions used in the valuation include expected volatility, risk-free interest rate, dividend yield and expected exercise term. For the three and six months ended June 30, 2022, share-based compensation related to the options totaled $ 284,938 and $ 577,750 , respectively. For the three and six months ended June 30, 2021, share-based compensation related to the options was nil . The outstanding unamortized share-based compensation related to options was $ 1,608,803 (which will be recognized through December 2025) as of June 30, 2022. Restricted Stock Units (“RSUs”) The following table summarizes the RSUs activity for the six months ended June 30, 2022: SCHEDULE OF RESTRICTED STOCK UNITS Number of RSUs Weighted Average Grant Date Fair Value per Share Unvested as of January 1, 2022 - $ - Granted 169,153 3.84 Vested ( 83,333 ) 2.70 Forfeited - - Unvested as of June 30, 2022 85,820 $ 4.95 On February 9, 2022, the Company entered into executive employment agreements with five executives and granted 85,820 RSUs pursuant to the 2021 Equity Incentive Plan. The RSUs vest on each annual anniversary of the date of the employment agreement, in an amount equal to 25 % of the applicable shares of common shares. The fair value of the RSUs at grant date was $ 424,809 . On February 25, 2022, the Company entered into a service agreement with a marketing company to purchase 6-month marketing services and granted 83,333 RSUs. The RSUs were issued and vested on May 15, 2022. The fair value of the RSUs at grant date was $ 224,999 . For the three and six months ended June 30, 2022, the Company recognized RSU-related share-based compensation of $ 181,724 and $ 311,076 , respectively. The outstanding unamortized share-based compensation related to RSUs was $ 338,732 (which will through February 2026) as of June 30, 2022. NOTE 12 – SHAREHOLDERS’ EQUITY (DEFICIT) The Company was authorized to issue 200,000,000 shares of common shares, par value of $ 0.0001 per share, and 20,000,000 shares of preferred shares, par value of $ 0.0001 per share. During the period from January 1, 2022 through January 13, 2022, the Company issued 96,000 shares of common shares at a purchase price of $ 2.50 per share for an aggregate net proceeds of $ 220,572 in a private placement, including 30,000 shares of common shares issued to the officers of the Company. On February 14, 2022, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “HTCR”. The Company offered 3,000,000 common shares at $ 5.00 per share. Net proceeds raised by the Company from the initial public offering amounted to $ 13,724,167 after deducting underwriting discounts and commissions and other offering expenses. The Company has deferred costs of $ 300,460 directly attributed to the offering, among which $ 178,847 offering costs were paid and deferred as of December 31, 2021. Those costs were also charged against the proceeds from the offering. 18 On February 14, 2022, 273,489 shares of common shares were issued from exercise of stock options by settling share repurchase liability of $ 16 (also see NOTE 11). On May 15, 2022, 83,333 shares of restricted shares were issued to a marketing company as compensation of services received (also see NOTE 11). Share Repurchase Program On June 1, 2022, the Board of Directors approved a share repurchase program (“2022 Share Repurchase Program”), pursuant to which the Company is authorized to repurchase up to $ 3.5 million of its outstanding common shares. The timing and amount of repurchases under the program are determined by the Company’s management based on its evaluation of market conditions and other factors. This program has no set termination date and may be suspended or discontinued by at any time. During the period from June 1, 2022 through June 30, 2022, the Company repurchased 558,809 shares of common shares at an average price of $ 2.39 per share totaling approximately $ 1.3 million (including commissions) under the 2022 Share Repurchase Program. As of June 30, 2022, approximately $ 2.2 million remained available under the 2022 Share Repurchase Program. As of June 30, 2022 and December 31, 2021, there were 18,999,276 and 15,819,943 shares, respectively, of common shares issued; and 18,440,467 and 15,546,454 shares, respectively, of common shares outstanding. No preferred shares were issued and outstanding as of June 30, 2022 and December 31, 2021. NOTE 13 – MANDATORILY REDEEMABLE FINANCIAL INTEREST On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY 50,040,000 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 JPY 50,040,000 (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 JPY 50,040,000 (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 six months ended June 30, 2022 and 2021 is as follows: SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE For the Three Months Ended For the Six Months Ended June 30, June 30, 2022 2021 2022 2021 Earnings (loss) per share – basic Numerator: Allocation of net income (loss) attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings (loss) per common share — basic $ ( 1,703,641 ) $ 400,790 $ ( 3,282,092 ) $ 217,541 Net income (loss) attributable to common shareholders ( 1,703,641 ) 400,790 $ ( 3,282,092 ) $ 217,541 Denominator: Weighted average number of common shares outstanding used in calculating basic earnings (loss) per share 18,936,829 15,242,454 18,105,698 15,242,454 Denominator used for earnings (loss) per share 18,936,829 15,242,454 18,105,698 15,242,454 Earnings (loss) per share — basic $ ( 0.09 ) $ 0.03 $ ( 0.18 ) $ 0.01 20 For the Three Months Ended For the Six Months Ended June 30, June 30, 2022 2021 2022 2021 Earnings (loss) per share – diluted Numerator: Allocation of net income (loss) attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings (loss) per common share — diluted $ ( 1,703,641 ) $ 400,790 $ ( 3,282,092 ) $ 217,541 Net income (loss) attributable to common shareholders ( 1,703,641 ) 400,790 ( 3,282,092 ) 217,541 Denominator: Weighted average number of common shares outstanding used in calculating diluted earnings (loss) per share 18,936,829 15,242,454 18,105,698 15,242,454 Conversion of share repurchase liability to common shares * - 273,489 - 273,489 Denominator used for earnings (loss) per share 18,936,829 15,515,943 18,105,698 15,515,943 Earnings (loss) per share — diluted $ ( 0.09 ) $ 0.03 $ ( 0.18 ) $ 0.01 * The share repurchase liability is related to the early exercised stock options that are issued and unvested as of June 30, 2021, see NOTE 11. Each option is convertible into one share of common stock of HeartCore Japan, which is an equivalent of approximately 1,494 shares of common shares of the Company. For the three and six months ended June 30, 2022, the weighted average shares outstanding are the same for basic and diluted loss per share calculations, as the inclusion of common shares equivalents of 1,620,320 would have an anti-dilutive effect. NOTE 15 - SUBSEQUENT EVENTS During the period from July 1, 2022 through August 9, 2022, the Company paid approximately $ 1.9 million (including commissions) in connection with the repurchase of 651,251 shares of its common shares under the 2022 Share Repurchase Program. As of the filing date of this report, approximately $ 0.3 million remained available under the 2022 Share Repurchase Program. 21