HeartCore Enterprises, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking statements made by or on behalf of HeartCore Enterprises, Inc. (the “Company”). The Company and its representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as the same may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. Business Overview We are a leading software development company based in Tokyo, Japan. We provide software through two business units. The first business unit includes a customer experience management business that has been in existence for 12 years. Our customer experience management platform (the “CXM Platform”) includes marketing, sales, service and content management systems, as well as other tools and integrations, that enable companies to attract and engage customers throughout the customer experience. We also provide education, services and support to help customers be successful with our CXM Platform . The second business unit is a digital transformation business which provides customers with robotics process automation, process mining and task mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software that supports the narrow needs of large enterprise customers. We have made significant investments in our sales and marketing efforts globally. As of June 30, 2022, our sales and marketing organization was comprised of 16 employees including our field sales organization, which maintains a physical sales presence in the Japanese software market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified revenue and customer base. As of June 30, 2022, our combined business units (customer experience management business unit and digital transformation business unit) had a total of 877 customers in Japan . We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly-owned subsidiary, HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co”), which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009. We acquired 97.5% of the equity interest of HeartCore Co in July 2021 and acquired the remaining interest in February 2022. HeartCore Co started out with helping companies effectively managing content with its powerful content management system. Since then, HeartCore Co has expanded offerings to help companies manage all forms of business processes . 22 The acquisition of HeartCore Co in July 2021 was accounted for as a recapitalization among entities under common control since the same controlling shareholders controlled all these entities before and after the transaction. The consolidation of the Company and its subsidiary has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements . Recent Developments A.L.I. Consulting Agreement On April 13, 2022, the Company entered into a Consulting and Services Agreement (the “ALI Consulting Agreement”) by and between the Company and A.L.I. Technologies Inc. (“ALI”). Pursuant to the terms of the ALI Consulting Agreement, the Company agreed to provide certain consulting services, including the following (collectively, the “Services”): (i) Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm for ALI; (ii) Assisting in the preparation of documentation for internal controls required for an initial public offering or de-SPAC by ALI; (iii) Providing support services to remove problematic accounting accounts upon listing; (iv) Translation of requested documents into English; (v) Attend and, if requested by ALI, lead meetings with ALI’s management team and employees; (vi) Provide ALI with support services related to ALI’s NASDAQ listing; (vii) Conversion of accounting data from Japanese standards to US GAAP; (viii) Services to remove problematic accounting accounts upon listing; (ix) Support for the ALI’s negotiations with the audit firm; (x) Assist in the preparation of S-1 or S-4 filings; (xi) Creation of English language website; and (xii) Preparing an investor presentation/deck and executive summary of ALI’s business and operations. In providing the Services, the Company will not perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the ALI Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of ALI’s securities; participation in discussions between ALI and potential investors; assisting in structuring any transactions involving the sale of ALI’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in ALI. Pursuant to the terms of the ALI Consulting Agreement, ALI agreed to compensate the Company as follows in return for the provision of Services: (a) $400,000, to be paid as follows: (i) $200,000 on April 13, 2022; (ii) $100,000 on the three-month anniversary of April 13, 2022; and (iii) $100,000 on the six-month anniversary of April 13, 2022; and (b) Issuance by ALI to the Company of a warrant to acquire a number of shares of capital stock of ALI, to initially be equal to 1% of the fully diluted share capital of ALI as of April 13, 2022, subject to adjustment as set forth in the warrant. The ALI Consulting Agreement has a term of six months, which shall expire unless renewed upon mutual written agreement of the parties. For any services performed by the Company beyond the initial term, ALI will compensate the Company for Services at the rate of $150 per hour. As provided in the ALI Consulting Agreement, on April 13, 2022, ALI issued to the Company the warrant. Pursuant to the terms of the warrant, the Company may, at any time on or after the date that ALI completes its first initial public offering of stock in the United States resulting in any class of ALI’s stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American (the “IPO Date”) and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the warrant to purchase 1% of the fully diluted share capital of ALI as of April 13, 2022 for an exercise price per share of $0.01, subject to adjustment as provided in the warrant. The number of shares for which the warrant will be exercisable will be automatically adjusted on the IPO Date to be 1% of the fully diluted number and class of shares of capital stock of ALI as of the IPO Date that are listed for trading. The warrant contains a 9.99% equity blocker. 23 SYLA Consulting Agreement On May 13, 2022, the Company entered into a Consulting and Services Agreement (the “SYLA Consulting Agreement”) by and between the Company and SYLA Holdings Co. Ltd. (“SYLA”). Pursuant to the terms of the SYLA Consulting Agreement, the Company agreed to provide SYLA certain services, including the Services. In providing the Services, the Company will not perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the SYLA Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of SYLA’s securities; participation in discussions between SYLA and potential investors; assisting in structuring any transactions involving the sale of SYLA’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in SYLA. Pursuant to the terms of the SYLA Consulting Agreement, SYLA agreed to compensate the Company as follows in return for the provision of Services: (a) $500,000, to be paid as follows: (i) $200,000 on the effective date of the SYLA Consulting Agreement; (ii) $150,000 on the three-month anniversary of the effective date of the SYLA Consulting Agreement; and (iii) $150,000 on the six-month anniversary of the SYLA Consulting Agreement; and (b) Issuance by SYLA to the Company of a warrant, deemed fully earned and vested as of the effective date of the SYLA Consulting Agreement, to acquire a number of shares of capital stock of SYLA, to initially be equal to 2% of the fully diluted share capital of SYLA as of the effective date of the SYLA Consulting Agreement, subject to adjustment as set forth in the warrant. The SYLA Consulting Agreement’s initial term of six months will expire unless renewed upon mutual written agreement of the parties. For any services performed by the Company beyond the initial term, SYLA will compensate the Company for Services at the rate of $150 per hour, based on the hours spent by personnel of the Company. As provided in the SYLA Consulting Agreement, on the Effective Date, SYLA issued the warrant to the Company. Pursuant to the terms of the warrant, the Company may, at any time on or after the date the IPO Date and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the warrant to purchase 2% of the fully diluted share capital of SYLA as of the effective date of the SYLA Consulting Agreement for an exercise price per share of $0.01, subject to adjustment as provided in the warrant. The number of shares for which the warrant will be exercisable will be automatically adjusted on the IPO Date to be 2% of the fully diluted number and class of shares of capital stock of SYLA as of the IPO Date that are listed for trading. The warrant contains a 9.99% equity blocker. Going forward, we expect that we will offer services substantially similar to the Services to other third parties, as well. Stock Repurchase Program The Company’s Board of Directors (the “Board”) authorized a share repurchase program, pursuant to which the Company may repurchase up to $3.5 million of its outstanding shares of common stock. The Board authorized the Company to purchase its common stock from time to time on a discretionary basis through open market purchases, privately negotiated transactions or other means, including trading plans intended to qualify under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in accordance with applicable federal securities laws and other applicable legal requirements. The Company expects to fund these repurchases through existing cash balances. Decisions regarding the amount and the timing of purchases under the program will be influenced by the Company’s cash on hand, cash flows from operations, general market conditions and other factors. HeartCore is not obligated to acquire any particular amount of its common stock. This program has no set termination date and may be suspended or discontinued by the Board at any time. 24 Financial Overview For the three months ended June 30, 2022 and 2021, we generated revenues of $2,670,297 and $2,865,192, respectively, and reported net losses of $1,703,641 and net income of $411,714, respectively. For the six months ended June 30, 2022 and 2021, we generated revenues of $4,946,298 and $4,975,501, respectively, and reported net losses of $3,282,092 and net income of $223,477, respectively, and cash out flow used in operating activities of $2,093,867 and cash in flow provided by operating activities of $347,683, respectively. As noted in our unaudited consolidated financial statements, as of June 30, 2022, we had an accumulated deficit of $7,178,205. Results of Operations Comparison of Results of Operations for the Three Months ended June 30, 2022 and 2021 The following table summarizes our operating results as reflected in our statements of income during the three months ended June 30, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Three Months ended June 30, 2022 2021 Variance % of % of Amount revenue Amount revenue Amount % of REVENUES $ 2,670,297 100.0 % $ 2,865,192 100.0 % $ (194,895 ) -6.8 % COST OF REVENUES 1,337,296 50.1 % 1,175,387 41.0 % 161,909 13.8 % GROSS PROFIT 1,333,001 49.9 % 1,689,805 59.0 % (356,804 ) -21.1 % Operating expenses Selling expenses 728,836 27.3 % 101,124 3.5 % 627,712 620.7 % General and administrative expenses 1,850,315 69.3 % 1,020,842 35.7 % 829,473 81.3 % Research and development expenses 417,228 15.6 % 80,025 2.8 % 337,203 421.4 % Total operating expenses 2,996,379 112.2 % 1,201,991 42.0 % 1,794,388 149.3 % Income (loss) from operations (1,663,378 ) -62.3 % 487,814 17.0 % (2,151,192 ) -441.0 % Other income (expenses) (31,284 ) -1.2 % 126 0.0 % (31,410 ) -24,928.6 % Income (loss) before income tax provision (1,694,662 ) -63.5 % 487,940 17.0 % (2,182,602 ) -447.3 % Income taxes expense 8,979 0.3 % 76,226 2.6 % (67,247 ) -88.2 % Net income (loss) (1,703,641 ) -63.8 % 411,714 14.4 % (2,115,355 ) -513.8 % Less: net income attributable to non-controlling interest - - 10,924 0.4 % (10,924 ) -100.0 % NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. $ (1,703,641 ) -63.8 % $ 400,790 14.0 % $ (2,104,431 ) -525.1 % Revenues Our total revenues decreased by $194,895, or 6.8%, to $2,670,297 for the three months ended June 30, 2022 from $2,865,192 for the three months ended June 30, 2021. The decrease in our revenues was attributable to the following reasons: (i) the revenues from sales of on-premise software decreased by $416,076, or 36.7%, to $716,532 for the three months ended June 30, 2022 from $1,132,608 for the three months ended June 30, 2021, mainly attributable to the concentration of sales of CMS licenses in May 2021; (ii) our revenue from maintenance and support services decreased by $163,275, or 18.3%, to $727,277 for the three months ended June 30, 2022 from $890,552 for the three months ended June 30, 2021. In addition to terminations of CMS major maintenance contracts, sales decreased due to the ongoing depreciation of Japanese Yen; (iii) Offset by our newly generated revenue of $448,355 from consulting services provided to three Japan-based companies, which intend to go public in the US capital markets. 25 Cost of Revenues Our total costs of revenues increased by $161,909, or 13.8%, to $1,337,296 for the three months ended June 30, 2022 from $1,175,387 for the three months ended June 30, 2021. The increase in our costs was attributable to the following reasons: (i) the increase of $175,194 in the costs of newly established consulting services; (ii) the costs of software development and other miscellaneous services increased by $104,541, or 20.4%, to $616,461 for the three months ended June 30, 2022 from $511,920 for the three months ended June 30, 2021. The Company incurred high subcontracting costs for projects and defect handling in the current period ; (iii) offset by the costs of SaaS decreased by $90,343, or 77.6%, to $26,144 for the three months ended June 30, 2022 from $116,487 for the three months ended June 30, 2021. The Company incurred expenses for process mining product menu Japanese language additions and manual maintenance in June 2021; Gross Profit Our total gross profit decreased by $356,804, or 21.1%, to $1,333,001 for the three months ended June 30, 2022 from $1,689,805 for the three months ended June 30, 2021. O ur overall gross profit margin decreased by 9.1% to 49.9% in the three months ended June 30, 2022 from 59.0% in the three months ended June 30, 2021. Operating Expenses Our operating expenses primarily include selling expenses, general and administrative expenses, and research and development expenses. Selling Expenses Our selling expenses primarily include advertising expenses, sale commissions, and sales promotion expenses. Our selling expenses increased by $627,712, or 620.7%, to $728,836 in the three months ended June 30, 2022 from $101,124 in the three months ended June 30, 2021, primarily attributable to an increase in advertising expenses by $650,690, or 1,428.1%, to $696,252 in the three months ended June 30, 2022 from $45,562 in the three months ended June 30, 2021. The U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company going public in the U.S. In addition, the Company increased advertising expenses for its newly established consulting services in Japan. As a percentage of revenues, our selling expenses accounted for 27.3% and 3.5% of our total revenue for the three months ended June 30, 2022 and 2021 , respectively. General and Administrative Expenses Our general and administrative expenses primarily consist of employee salaries and welfare, consulting and professional service fees incurred for maintaining the Company as a public company, depreciation and amortization expenses, rental expenses, office, utility and other expenses, listing-related expenses, travel and entertainment expenses, and share-based compensation expense . 26 Our general and administrative expenses increased by $829,473 or 81.3%, to $1,850,315 in the three months ended June 30, 2022 from $1,020,842 in the three months ended June 30, 2021, primarily attributable to: (i) our office, utility and other expenses increased by $146,359 or 154.7%, to $240,953 in the three months ended June 30, 2022 from $94,594 in the three months ended June 30, 2021, primarily due to the increase in the U.S. parent company’s office expenses, and D&O indemnity insurance premiums of the parent company; (ii) our consulting and professional fees increased by $241,548 or 2,850.1%, to $250,023 in the three months ended June 30, 2022 from $8,475 in the three months ended June 30, 2021, primarily due to the increase in consulting and legal fees related to maintaining as a public company and stock promotion; (iii) an increase in salaries and welfare by $235,262, or 45.2%, to $755,300 in the three months ended June 30, 2022 from $520,038 in the three months ended June 30, 2021, primarily due to the salaries paid to the parent company’s newly hired U.S. employees; (iv) an increase in share-based compensation of $466,662, or 100 .0 %, to $466,662 in the three months ended June 30, 2022 from nil in the three months ended June 30, 2021, primarily due to the amortization of fair value of stock options and restricted stock units granted. The overall increase in our general and administrative expenses in three months ended June 30, 2022 as compared to the three months ended June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 69.3% and 35.6% of our revenue for the three months ended June 30, 2022 and 2021, respectively. Research and Development Expenses Our research and development expenses primarily consist of employee salaries and welfare, and outsourcing expenses. Our research and development expenses increased by $337,203 or 421.4%, to $417,228 in the three months ended June 30, 2022 from $80,025 in the three months ended June 30, 2021, primarily attributable to an increase in outsourcing expenses by $323,308, or 403.5%, to $403,441 in the three months ended June 30, 2022 from $80,133 in the three months ended June 30, 2021, as we outsourced certain development activities for more efficiency and experience, relating to development of a high quality 12K VR camera and related data compression system. The overall increase in our research and development expenses in the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 15.6% and 2.8% of our revenue for the three months ended June 30, 2022 and 2021, respectively . Other Income (Expenses), net Our other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, increased by $31,410, from other income, net of $126 in the three months ended June 30, 2021 to other expense, net of $31,284 in the three months ended June 30, 2022 . Income Tax Expense Our income taxes expense was $8,979 in the three months ended June 30, 2022, as compared to the income taxes expense of $76,226 in the three months ended June 30, 2021, mainly due to the decrease in deferred tax expense . Net Income (Loss) As a result of the foregoing, we reported a net loss of $1,703,641 for the three months ended June 30, 2022, representing a $2,115,355 or 513.8% increase from a net income of $411,714 for the three months ended June 30, 2021. 27 Net Income attributable to Non-controlling Interest We own 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of June 30, 2021. Accordingly, we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $10,924 in the three months ended June 30, 2021 . On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022. On February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest income in the three months ended June 30, 2022. Net Income (Loss) attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,703,641 for the three months ended June 30, 2022, representing a $2,104,431 or 525.1% increase from a net income attributable to HeartCore Enterprises, Inc. of $400,790 for the three months ended June 30, 2021 . Comparison of Results of Operations for the Six Months ended June 30, 2022 and 2021 The following table summarizes our operating results as reflected in our unaudited statements of operations during the six months ended June 30, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Six Months ended June 30, 2022 2021 Variance % of % of Amount revenue Amount revenue Amount % of REVENUES $ 4,946,298 100.0 % $ 4,975,501 100.0 % $ (29,203 ) -0.6 % COST OF REVENUES 2,392,652 48.4 % 2,583,019 51.9 % (190,367 ) -7.4 % GROSS PROFIT 2,553,646 51.6 % 2,392,482 48.1 % 161,164 6.7 % Operating expenses Selling expenses 934,754 18.9 % 147,465 3.0 % 787,289 533.9 % General and administrative expenses 4,319,248 87.3 % 1,783,590 35.8 % 2,535,658 142.2 % Research and development expenses 525,487 10.6 % 132,171 2.7 % 393,316 297.6 % Total operating expenses 5,779,489 116.8 % 2,063,226 41.5 % 3,716,263 180.1 % Income (Loss) from operations (3,225,843 ) -65.2 % 329,256 6.6 % (3,555,099 ) -1,079.7 % Other expenses, net (48,086 ) -1.0 % (21,864 ) -0.4 % (26,222 ) 119.9 % Income (Loss) before income tax provision (3,273,929 ) -66.2 % 307,392 6.2 % (3,581,321 ) -1,165.1 % Income taxes expense 8,163 0.2 % 83,915 1.7 % (75,752 ) -90.3 % Net income (loss) (3,282,092 ) -66.4 % 223,477 4.5 % (3,505,569 ) -1,568.6 % Less: net income attributable to non-controlling interest - - % 5,936 0.1 % (5,936 ) -100.0 % NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. $ (3,282,092 ) -66.4 % $ 217,541 4.4 % $ (3,499,633 ) -1,608.7 % 28 Revenues Our total revenues decreased by $29,203, or 0.6%, to $4,946,298 for the six months ended June 30, 2022 from $4,975,501 for the six months ended June 30, 2021. The decrease in our revenues was attributable to the following reasons: (i) our revenue from maintenance and support services decreased by $260,151, or 14.2%, to $1,572,616 for the six months ended June 30, 2022 from $1,832,767 for the six months ended June 30, 2021. In addition to terminations of CMS major maintenance contracts, sales decreased due to the ongoing depreciation of Japanese yen. The depreciation amounted to approximately 14.1% from $1.00 to 107.74 Yen in the six months ended June 30, 2021 to $1.00 to 122.98 Yen in the six months ended June 30, 2022; (ii) our revenue from software development and other services decreased by $291,708, or 19.9%, to $1,177,290 for the six months ended June 30, 2022 from $1,468,998 for the six months ended June 30, 2021, because we did not retain new software development clients in the current period, in addition to the ongoing depreciation of Japanese yen; (iii) Offset by our newly generated revenue of $448,355 from consulting services provided to three Japan-based companies, which intend to go public in the US capital markets. Cost of Revenues Our total costs of revenues decreased by $190,367, or 7.4%, to $2,392,652 for the six months ended June 30, 2022 from $2,583,019 for the six months ended June 30, 2021. The decrease in our costs was attributable to the following reasons: (i) the costs of on-premises software decreased by $95,989, or 20.1%, to $381,552 for the six months ended June 30, 2022 from $477,541 for the six months ended June 30, 2021. In addition to the depreciation of the yen, CMS license costs were fixed monthly and not proportional to sales. On the other hands, the sales deceased in the six months ended June 30, 2022 for process mining products, the costs of which were proportional to sales, resulting in a decrease in cost of sales ; (ii) the costs of SaaS decreased by $134,960, or 58.2%, to $97,068 for the six months ended June 30, 2022 from $232,028 for the six months ended June 30, 2021. There were specialized supporting employees and subcontractors for CXM Cloud (SaaS) in the first two quarters of 2021. As the product entered into a mature phase and operations became stable in 2022, specialized supporting employees and subcontractors were no longer needed, and the costs decreased accordingly; (iii) the costs of software development and other miscellaneous services decreased by $117,767, or 9.9%, to $1,072,175 for the six months ended June 30, 2022 from $1,189,942 for the six months ended June 30, 2021, in light of the decrease in sales as mentioned above; (iv) Offset by the increase of $175,194 in the costs of newly established consulting services . Gross Profit Our total gross profit increased by $161,164, or 6.7%, to $2,553,646 for the six months ended June 30, 2022 from $2,392,482 for the six months ended June 30, 2021. Our overall gross profit margin increased by 3.5% to 51.6% in the six months ended June 30, 2022 from 48.1% in the six months ended June 30, 2021. Operating Expenses Our operating expenses primarily include selling expenses, general and administrative expenses, and research and development expenses. 29 Selling Expenses Our selling expenses primarily include advertising expenses, sales commissions, and sales promotion expenses. Our selling expenses increased by $787,289, or 533.9%, to $934,754 in the six months ended June 30, 2022 from $147,465 in the six months ended June 30, 2021, primarily attributable to an increase in advertising expenses by $807,960, or 1,072.1%, to 883,322 in the six months ended June 30, 2022 from $75,362 in the six months ended June 30, 2021. The U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company going public in the U.S. In addition, the Company increased advertising expenses for its newly established consulting services in Japan. As a percentage of revenues, our selling expenses accounted for 18.9% and 3.0% of our total revenue for the six months ended June 30, 2022 and 2021 , respectively. General and Administrative Expenses Our general and administrative expenses primarily consist of employee salaries and welfare, consulting and professional service fees incurred for company reorganization and going public, depreciation and amortization expenses, rental expenses, office, utility and other expenses, listing-related expenses, travel and entertainment expenses, and share-based compensation expense . Our general and administrative expenses increased by $2,535,658 or 142.2%, to $4,319,248 in the six months ended June 30, 2022 from $1,783,590 in the six months ended June 30, 2021, primarily attributable to: (i) our office, utility and other expenses increased by $267,986 or 152.1%, to $444,210 in the six months ended June 30, 2022 from $176,224 in the six months ended June 30, 2021, primarily due to the increase in the U.S. parent company’s office expenses, and D&O indemnity insurance premiums of the parent company; (ii) our consulting and professional fees increased by $654,261 or 585.0%, to $766,095 in the six months ended June 30, 2022 from $111,834 in the six months ended June 30, 2021, primarily due to the increase in consulting and legal fees related to going public and stock promotion; (iii) an increase in salaries and welfare by $619,650, or 61.9%, to $1,621,507 in the six months ended June 30, 2022 from $1,001,857 in the six months ended June 30, 2021, primarily due to the salaries paid to the parent company’s newly hired U.S. employees. In addition, the company paid approximately $150,000 in executive bonuses in the first quarter 2022; (iv) an increase in share-based compensation of $888,826, or 100%, to $888,826 in the six months ended June 30, 2022 from nil in the six months ended June 30, 2021, primarily due to the amortization of fair value of stock options and restricted stock units granted. The overall increase in our general and administrative expenses in six months ended June 30, 2022 as compared to the six months ended June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 87.3% and 35.8% of our revenue for the six months ended June 30, 2022 and 2021, respectively. Research and Development Expenses Our research and development expenses primarily consist of employee salaries and welfare, and outsourcing expenses. Our research and development expenses increased by $393,316 or 297.6%, to $525,487 in the six months ended June 30, 2022 from $132,171 in the six months ended June 30, 2021, primarily attributable to an increase in outsourcing expenses by $380,610, or 303.1%, to $506,191 in the six months ended June 30, 2022 from $125,581 in the six months ended June 30, 2021, as we outsourced certain development activities for more efficiency and experience, relating to CMS UI renewal and development of a high quality 12K VR camera and related data compression system in the six months ended June 30, 2022 . 30 The overall increase in our research and development expenses in the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 10.6% and 2.7% of our revenue for the six months ended June 30, 2022 and 2021, respectively . Other Expenses, net Our other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, increased by $26,222 or 119.9%, from $21,864 in the six months ended June 30, 2021 to $48,086 in the six months ended June 30, 2022 . Income Tax Expense Our income taxes expense was $8,163 in the six months ended June 30, 2022, as compared to the income taxes expense of $83,915 in the six months ended June 30, 2021, mainly due to the decrease in deferred tax expense . Net Income (Loss) As a result of the foregoing, we reported a net loss of $3,282,092 for the six months ended June 30, 2022, representing a $3,505,569 or 1,568.6% decrease from a net income of $223,477 for the six months ended June 30, 2021. Net Income attributable to Non-controlling Interest We own 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of June 30, 2021. Accordingly, we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $5,936 in the six months ended June 30, 2021 . On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022. On February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest income in the six months ended June 30, 2022. Net Income (Loss) attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $3,282,092 for the six months ended June 30, 2022, representing a $3,499,633 or 1,608 . 7% increase from a net income attributable to HeartCore Enterprises, Inc. of $217,541 for the six months ended June 30, 2021 . 31 Liquidity and Capital Resources As of June 30, 2022, we had $12,463,179 in cash as compared to $3,136,839 as of December 31, 2021. As of June 30, 2022, our working capital was $10,003,897 as compared to $62,919 as of December 31, 2021. We also had $1,119,990 in accounts receivable as of June 30, 2022. Our accounts receivable primarily include balance due from customers for our on-premises software sold and services provided to and accepted by customers. The following table sets forth summary of our cash flows for the periods indicated: For the Six Months Ended June 30, 2022 2021 Net cash provided by (used in) operating activities $ (2,093,867 ) $ 347,911 Net cash used in investing activities (9,455 ) (103,692 ) Net cash provided by (used in) financing activities 11,651,622 (534,211 ) Effect of exchange rate changes (221,960 ) (149,784 ) Net increase in cash and cash equivalents 9,326,340 (439,776 ) Cash and cash equivalents, beginning of the period 3,136,839 3,058,175 Cash and cash equivalents, end of the period $ 12,463,179 $ 2,618,399 Operating Activities Net cash used in operating activities was $2,093,867 for the six months ended June 30, 2022, primarily consisting of the following: ● Net loss of $3,282,092 for the six months ended June 30, 2022. ● An increase in accounts receivable of $344,779. The increase was primarily due to the increase in our sales in the current period. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary. ● An increase in prepaid expense of $266,030, primarily due to the increase in the prepayment to an IR provider of $400,000. ● Offset by an increase in accounts payable and accrued expenses of $281,567, primarily attributable to the payoff the accrued expenses related to the IPO. ● Offset by an increase of deferred revenue of $596,762, primarily due to the completion of software development project. ● Offset by share-based compensation of $888,826. 32 Net cash provided by operating activities was $347,911 for the six months ended June 30, 2021, primarily consisting of the following: ● Net income of $223,477 for the six months ended June 30, 2021. ● An increase of deferred revenue of $621,707, primarily due to the upfront payment received for software development projects. ● An increase in accounts payable and accrued expenses of $128,308, primarily attributable to the increase in accrued expenses related to the IPO . ● Non-cash lease expense of 171,935 . ● Offset by an increase in accounts receivable of $570,886. The increase was primarily due to the increase in sales. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary. ● Offset by an increase in prepaid expense of $282,508, primarily due to the increase in the prepayments to software venders. Investing Activities Net cash used in investing activities amounted to $9,455 for the six months ended June 30, 2022, primarily included the purchase of fixed assets of $30,963, offset by repayment of loan provided to a related party of $21,508. Net cash used in investing activities amounted to $103,692 for the six months ended June 30, 2021, primarily included the purchase of fixed assets of $19,894 and the loans provided to related parties of $83,798. Financing Activities Net cash provided by financing activities amounted to $11,651,622 for the six months ended June 30, 2022, primarily consisting of total proceeds of $13,823,126 from the initial public offering and issuance of common shares prior to the initial public offering, and offset by payment for mandatorily redeemable financial interest of $430,489, payment for repurchase of common stocks of $1,336,762, and repayment of long-term debts of $469,166. Net cash used in financing activities amounted to $534,211 for the six months ended June 30, 2021, primarily consisting of repayment of long-term debts of $503,230 and payments for finance leases of $29,561. Contractual obligations Lease commitment The Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were classified as finance leases. 33 As of June 30, 2022, future minimum lease payments under the non-cancelable lease agreements are as follows: Year ending December 31, Finance leases Operating leases Remaining of 2022 $ 11,140 $ 152,511 2023 18,750 305,021 2024 276 305,021 2025 - 305,021 2026 - 305,021 Thereafter - 1,560,912 Total lease payments 30,166 2,933,507 Less: imputed interest (170 ) (185,172 ) Total lease liabilities 29,996 2,748,335 Less: current portion 20,717 280,789 Non-current lease liabilities $ 9,279 $ 2,467,546 Long Term Debt The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions. As of June 30, 2022, future minimum loan payments are as follows: Loan Year ending December 31, Payment Remaining of 2022 $ 348,542 2023 687,055 2024 425,972 2025 244,391 2026 222,372 Thereafter 182,468 Total $ 2,110,800 Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of June 30, 2022. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements. These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenue and expenses incurred during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed herein reflect the more significant judgments and estimates used in preparation of our unaudited consolidated financial statements. 34 Revenue Recognition The Company recognizes revenue under the ASC Topic 606, “Revenue from Contracts with customers”. To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales is calculated at 10% of gross sales. The Company currently generates its revenue from the following main sources: Revenue from On-Premise Software Licenses for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenue from on-premise licenses is recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. Revenue from Maintenance and Support service Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers. Revenue from Software as a Service (“SaaS”) The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length. Revenue from Software Development and other Miscellaneous Services The Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers. Revenue from Consulting Service The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents and supporting the listing process. Revenues from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less than one year in length. The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the six months ended June 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $1.1 million and $1.2 million, respectively. 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.