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 September 30, 2022, our sales and marketing organization was comprised of 15 employees including our field sales organization, which maintains a physical sales presence in the Japanese software market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified revenue and customer base. As of September 30, 2022, our combined business units (customer experience management business unit and digital transformation business unit) had a total of 889 customers in Japan . We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly-owned subsidiary, HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co”), which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009. We acquired 97.5% of the equity interest of HeartCore Co in July 2021 and acquired the remaining interest in February 2022. HeartCore Co started out with helping companies effectively managing content with its powerful content management system. Since then, HeartCore Co has expanded offerings to help companies manage all forms of business processes . 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 Amendment No. 1 to SYLA Consulting and Services Agreement As previously disclosed in the Current Report on Form 8-K filed on May 25, 2022 with the SEC, on May 13, 2022, the Company entered into a Consulting and Services Agreement (the “SYLA Consulting Agreement”) by and between the Company and Syla Technologies Co., Ltd. f/k/a SYLA Holdings Co. Ltd. (“SYLA”), pursuant to which the Company agreed to provide SYLA certain services. On August 17, 2022, the Company and SYLA entered into Amendment No. 1 to the SYLA Consulting Agreement (“Amendment No. 1”). In Amendment No. 1, the parties acknowledged and agreed that pursuant to the terms of the SYLA Consulting Agreement, SYLA agreed to pay to the Company, among other things, a cash “services fee” in the amount of $500,000, to be paid at certain times, including $150,000 on August 13, 2022 (the “Second Payment”). Pursuant to the terms of Amendment No. 1, the parties agreed that in lieu of making the Second Payment, SYLA would issue to the Company a warrant to acquire 37,500 shares of SYLA’s capital stock (the “New Warrant”). Upon issuance of the New Warrant, the cash “services fee” will be deemed reduced to $350,000, of which $200,000 was paid on May 13, 2022, and of which the remaining $150,000 will remain due and payable on November 13, 2022. On August 17, 2022, SYLA issued the New Warrant to the Company. Pursuant to the terms of the New Warrant, the Company may, at any time on or after the date (the “IPO Date”) that SYLA completes its first initial public offering of stock in the United States resulting in any class of SYLA’s stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American (the “IPO”) and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the New Warrant to purchase 37,500 shares of SYLA’s common stock for an exercise price per share of $0.01, subject to adjustment as provided in the New Warrant. The number of shares for which the New Warrant will be exercisable will be automatically adjusted on the IPO Date to be 3% of the fully diluted number and class of shares of capital stock of SYLA as of the IPO Date that are listed for trading. The New Warrant contains a 9.99% equity blocker. Sigmaways Share Exchange and Purchase Agreement On September 6, 2022, the Company entered into a Share Exchange and Purchase Agreement (the “Sigmaways Agreement”), dated as of September 6, 2022, by and among the Company, Sigmaways, Inc. (“Sigmaways”) and Prakash Sadasivam (the “Seller”). Pursuant to the terms of the Sigmaways Agreement, the Company agreed to acquire from the Seller, and the Seller agreed to sell to the Company, 229,500 shares of stock of Sigmaways, representing 51% of Sigmaways’ outstanding shares (the “Acquisition”). In exchange therefor, the Company agreed to (i) issue to the Seller 2,000,000 shares of the Company’s common stock; (ii) pay to the Seller cash consideration initially expected to be $1,000,000; provided that the final number of shares of Company common stock and the final cash consideration each will be jointly determined by the parties prior to the closing of the Acquisition (the “Closing”) based on the valuation of Sigmaways as of the Closing; and (iii) issue to the Seller a warrant to acquire 1,500,000 shares of the Company’s common stock (the “Warrant”). The per share exercise price of the Warrant will be the VWAP for the Company’s common stock calculated as of the last trading day prior to the Closing date. In addition, at the Closing, the Company will acquire from Sigmaways additional shares of Sigmaways stock (the “Additional Shares”) to be issued as newly issued shares, for a total investment of $2,000,000. The parties will jointly determine and agree to the following prior to Closing: (i) the valuation of Sigmaways as of immediately prior to the Closing, and (ii) therefore, the number of shares of Sigmaways stock which will constitute the Additional Shares. Prior to Closing, Sigmaways will amend its articles of incorporation to increase the authorized number of shares of Sigmaways stock to a number sufficient that the Additional Shares may be validly issued to the Company. 23 At the Closing, two persons designated by the Company will be named to Sigmaways’ Board of Directors, and the sole other member of the Sigmaways Board of Directors will be the Seller. In addition, at the Closing, the Seller will be named to the Company’s Board of Directors. At the Closing, Sigmaways will enter into an employment agreement with the Seller and such other persons if agreed upon by the parties. The Sigmaways Agreement contains certain covenants, representations and warranties customary for an agreement of this type. In addition, the Closing is subject to the satisfaction or waiver of certain conditions, including, but not limited to, the following: (i) the parties shall have agreed, in each party’s sole discretion, on the valuation of Sigmaways as of the Closing, the resulting cash purchase price and the number of Additional Shares to be acquired by the Company pursuant to the terms of the Sigmaways Agreement; (ii) the Paycheck Protection Program Loan received by Sigmaways shall have been forgiven. The Sigmaways Agreement may be terminated at any time prior to the Closing as follows: ● By mutual written consent of all parties; ● By the Seller and Sigmaways, acting jointly, or by the Company, if there shall be in effect a final non-appealable order, judgment, injunction or decree entered by or with any governmental authority restraining, enjoining or otherwise prohibiting the consummation of the transactions that are the subject of the Sigmaways Agreement; ● By the Company if there shall have been a breach in any material respect of any representation, warranty, covenant or agreement on the part of Sigmaways or the Seller and such breach has not been cured as set forth in the Sigmaways Agreement; ● By the Seller and Sigmaways, acting jointly, if there shall have been a breach in any material respect of any representation, warranty, covenant or agreement on the part of the Company and such breach has not been cured as set forth in the Sigmaways Agreement; ● By either the Seller and Sigmaways, acting jointly, or by the Company, if the Closing has not occurred by December 31, 2022; or ● By the Company if, its sole discretion, at any time prior to the Closing, the Company determines that its due diligence review of Sigmaways is not satisfactory to the Company. As of the date of this filing, Sigmaways and the Company were still undergoing the process of the share exchange transaction. The transaction has not been closed yet. Metros Consulting and Services Agreement On October 20, 2022 (the “Effective Date”), the Company entered into a Consulting and Services Agreement (the “Metros Consulting Agreement”) by and between the Company and Metros Development Co., Ltd., a Japanese corporation (“Metros”). Pursuant to the terms of the Metros Consulting Agreement, the Company agreed to provide Metros certain services, including the following (collectively, the “Company Services”): (i) Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm for Metros; (ii) Assisting in the preparation of documentation for internal controls required for an initial public offering or de-SPAC transaction or other Fundamental Transaction (as defined below) by Metros; (iii) Attend and, if requested by Metros, lead meetings with Metros’ management and employees; (iv) Provide Metros with support services related to Metros’ NASDAQ listing; (v) Assist in the preparation of S-1 or F-1 filings; and (vi) Preparing an investor presentation/deck and executive summary of Metros’ business and operations. In providing the Company Services, the Company will not render legal advice or perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the Metros Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of Metros’ securities; participation in discussions between Metros and potential investors; assisting in structuring any transactions involving the sale of Metros’ securities; pre-screening of potential investors; discuss details of the nature of the securities sold or whether recommendations were made concerning the sale of securities; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in Metros. 24 Pursuant to the terms of the Metros Consulting Agreement, Metros agreed to compensate the Company as follows in return for the provision of the Company Services during the nine-month term (the “Term”): (a) $300,000, to be paid as follows: (i) $100,000 on the Effective Date; (ii) $100,000 on the three-month anniversary of the Effective Date; and (iii) $100,000 on the six-month anniversary of the Effective Date; and (b) Issuance by Metros to the Company of a warrant (the “Company Warrant”), deemed fully earned and vested as of the Effective Date, to acquire a number of shares of capital stock of Metros, to initially be equal to 2% of the fully diluted share capital of Metros as of the Effective Date (980 shares), subject to adjustment as set forth in the Company Warrant. For any services performed by the Company beyond the Term, Metros will compensate the Company for such Company Services at the rate of $150 per hour, based on the hours spent by personnel of the Company. The Term of the Metros Consulting Agreement will expire unless renewed upon mutual written agreement of the parties. As provided in the Metros Consulting Agreement, on the Effective Date, Metros issued the Company Warrant to the Company. Pursuant to the terms of the Company Warrant, the Company may, at any time on or after the date (the “Metros IPO Date”) that either (i) Metros completes its first initial public offering of stock in the United States resulting in any class of Metros’ stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American (the “Metros IPO”), or (ii) Metros undertakes any other Fundamental Transaction, and on or prior to the close of business on the tenth anniversary of the Metros IPO Date, exercise the Company Warrant to purchase 980 shares of capital stock of Metros for an exercise price per share of $0.01, subject to adjustment as provided in the Company Warrant. The Company Warrant contains a 9.99% equity blocker. Amendment No. 1 to Metros Consulting and Services Agreement On October 26, 2022, the Company entered into Amendment No. 1 to Consulting and Services Agreement by and between the Company and Metros (“Metros Amendment No. 1”). Pursuant to the terms of Metros Amendment No. 1, the Company and Metros agreed to amend the Metros Consulting Agreement such that Metros agreed to compensate the Company as follows in return for the provision of the Company Services during the nine-month Term: (a) $500,000, to be paid as follows: (i) $200,000 on the Effective Date; (ii) $150,000 on the three-month anniversary of the Effective Date; and (iii) $150,000 on the six-month anniversary of the Effective Date; and (b) Issuance by Metros to the Company of a warrant (the “New Company Warrant”), deemed fully earned and vested as of the Effective Date, to acquire a number of shares of capital stock of Metros, to initially be equal to 3% of the fully diluted share capital of Metros as of the Effective Date (1,440 shares), subject to adjustment as set forth in the New Company Warrant. In addition, pursuant to the terms of Metros Amendment No. 1, the Company Warrant was terminated as of October 26, 2022. Except as set forth in Metros Amendment No. 1, the Metros Consulting Agreement remains in full force and effect. As provided in Metros Amendment No. 1, on October 26, 2022, Metros issued the New Company Warrant to the Company. Pursuant to the terms of the New Company Warrant, the Company may, at any time on or after the Metros IPO Date, and on or prior to the close of business on the tenth anniversary of the Metros IPO Date, exercise the New Company Warrant to purchase 1,440 shares of capital stock of Metros for an exercise price per share of $0.01, subject to adjustment as provided in the New Company Warrant. The New Company Warrant contains a 9.99% equity blocker. 25 Stock Repurchase Program The Company’s Board of Directors (the “Board”) authorized a share repurchase program, pursuant to which the Company may repurchase up to $3.5 million of its outstanding shares of common stock (the “Repurchase Program”). The Board authorized the Company to purchase its common stock from time to time on a discretionary basis through open market purchases, privately negotiated transactions or other means, including trading plans intended to qualify under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in accordance with applicable federal securities laws and other applicable legal requirements. The Company funded these repurchases through existing cash balances. Decisions regarding the amount and the timing of purchases under the program were influenced by the Company’s cash on hand, cash flows from operations, general market conditions and other factors. HeartCore was not obligated to acquire any particular amount of its common stock. This program had no set termination date and could be suspended or discontinued by the Board at any time. The Repurchase Program was terminated on September 23, 2022. The Company has repurchased an aggregate of 1,349,390 shares of its common stock pursuant to the Repurchase Program. Financial Overview For the three months ended September 30, 2022 and 2021, we generated revenues of $1,872,476 and $3,470,510, respectively, and reported net losses of $1,970,934 and net income of $191,349, respectively. For the nine months ended September 30, 2022 and 2021, we generated revenues of $6,818,774 and $8,446,011, respectively, and reported net losses of $5,253,026 and net income of $414,826, respectively, and cash out flow used in operating activities of $4,206,370 and cash in flow provided by operating activities of $1,239,250, respectively. As noted in our unaudited consolidated financial statements, as of September 30, 2022, we had an accumulated deficit of $9,149,139. Results of Operations Comparison of Results of Operations for the Three Months ended September 30, 2022 and 2021 The following table summarizes our operating results as reflected in our statements of income during the three months ended September 30, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Three Months ended September 30, 2022 2021 Variance % of % of Amount revenue Amount revenue Amount % of REVENUES $ 1,872,476 100.0 % $ 3,470,510 100.0 % $ (1,598,034 ) -46.0 % COST OF REVENUES 1,543,256 82.4 % 1,786,125 51.5 % (242,869 ) -13.6 % GROSS PROFIT 329,220 17.6 % 1,684,385 48.5 % (1,355,165 ) -80.5 % Operating expenses Selling expenses 771,496 41.2 % 79,438 2.3 % 692,058 871.2 % General and administrative expenses 1,513,028 80.8 % 1,202,701 34.6 % 310,327 25.8 % Research and development expenses 58,275 3.1 % 189,686 5.5 % (131,411 ) -69.3 % Total operating expenses 2,342,799 125.1 % 1,471,825 42.4 % 870,974 59.2 % Income (loss) from operations (2,013,579 ) -107.5 % 212,560 6.1 % (2,226,139 ) -1,047.3 % Other income (expenses), net 23,576 1.2 % (7,689 ) -0.2 % 31,265 -406.6 % Income (loss) before income tax provision (1,990,003 ) -106.3 % 204,871 5.9 % (2,194,874 ) -1,071.3 % Income taxes expense (benefit) (19,069 ) -1.0 % 13,522 0.4 % (32,591 ) -241.0 % Net income (loss) (1,970,934 ) -105.3 % 191,349 5.5 % (2,162,283 ) -1,130.0 % Less: net income attributable to non-controlling interest - - 5,176 0.1 % (5,176 ) -100.0 % NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. $ (1,970,934 ) -105.3 % $ 186,173 5.4 % $ (2,157,107 ) -1,158.7 % 26 Revenues Our total revenues decreased by $1,598,034, or 46.0%, to $1,872,476 for the three months ended September 30, 2022 from $3,470,510 for the three months ended September 30, 2021, mainly attributable to the decrease in revenue from sales of on-premise software, because an important customer renewed its software license in July 2021, and decrease in revenue from software development, offset by revenue from newly established consulting services. Cost of Revenues Our total costs of revenues decreased by $242,869, or 13.6%, to $1,543,256 for the three months ended September 30, 2022 from $1,786,125 for the three months ended September 30, 2021, in light of the decrease in sales of on-promise software and software development, offset by the costs related to the consulting services. Gross Profit Our total gross profit decreased by $1,355,165, or 80.5%, to $329,220 for the three months ended September 30, 2022 from $1,684,385 for the three months ended September 30, 2021. O ur overall gross profit margin decreased by 30.9% to 17.6% in the three months ended September 30, 2022 from 48.5% in the three months ended September 30, 2021. Selling Expenses Our selling expenses increased by $692,058, or 871.2%, to $771,496 in the three months ended September 30, 2022 from $79,438 in the three months ended September 30, 2021, primarily attributable to an increase in advertising expenses, as t he U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company went public in the U.S. In addition, the Company increased advertising expenses for its newly established consulting services in Japan. As a percentage of revenues, our selling expenses accounted for 41.2% and 2.3% of our total revenue for the three months ended September 30, 2022 and 2021 , respectively. General and Administrative Expenses Our general and administrative expenses increased by $310,327 or 25.8%, to $1,513,028 in the three months ended September 30, 2022 from $1,202,701 in the three months ended September 30, 2021, primarily attributable to the increase in stock-based compensation, the U.S. parent company’s office expenses, and D&O indemnity insurance premiums, offset by the decrease in consulting and professional fees as we finished the process of going public in early 2022. As a percentage of revenues, general and administrative expenses were 80.8% and 34.6% of our revenue for the three months ended September 30, 2022 and 2021, respectively. 27 Research and Development Expenses Our research and development expenses decreased by $131,411 or 69.3%, to $58,275 in the three months ended September 30, 2022 from $189,686 in the three months ended September 30, 2021, primarily attributable to the decrease in outsourcing expenses relating to the development of a high quality 12K VR camera and related data compression system, which was completed in June 2022. As a percentage of revenues, research and development expenses were 3.1% and 5.5% of our revenue for the three months ended September 30, 2022 and 2021, respectively . Other Income (Expenses), net Our other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. We recorded other income, net of $23,576 in the three months ended September 30, 2022, as compared to other expense, net of $7,689 in the three months ended September 30, 2021, primarily attributable to the increase in interest income and other income . Income Tax Expense (Benefit) Our income taxes benefit was $19,069 in the three months ended September 30, 2022, as compared to the income taxes expense of $13,522 in the three months ended September 30, 2021, mainly due to the increase in the net loss and the decrease in deferred tax expense. Net Income (Loss) As a result of the foregoing, we reported a net loss of $1,970,934 for the three months ended September 30, 2022, representing a $2,162,283 or 1,130.0% decrease from a net income of $191,349 for the three months ended September 30, 2021. Net Income attributable to Non-controlling Interest We owned 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of September 30, 2021. Accordingly, we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $5,176 in the three months ended September 30, 2021 . On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022. On February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest income in the three months ended September 30, 2022. Net Income (Loss) attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,970,934 for the three months ended September 30, 2022, representing a $2,157,107 or 1,158.7% decrease from a net income attributable to HeartCore Enterprises, Inc. of $186,173 for the three months ended September 30, 2021 . 28 Comparison of Results of Operations for the Nine Months ended September 30, 2022 and 2021 The following table summarizes our operating results as reflected in our unaudited statements of operations during the nine months ended September 30, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Nine Months ended September 30, 2022 2021 Variance % of % of Amount revenue Amount revenue Amount % of REVENUES $ 6,818,774 100.0 % $ 8,446,011 100.0 % $ (1,627,237 ) -19.3 % COST OF REVENUES 3,935,908 57.7 % 4,369,144 51.7 % (433,236 ) -9.9 % GROSS PROFIT 2,882,866 42.3 % 4,076,867 48.3 % (1,194,001 ) -29.3 % Operating expenses Selling expenses 1,706,250 25.0 % 226,903 2.7 % 1,479,347 652.0 % General and administrative expenses 5,832,276 85.5 % 2,986,291 35.4 % 2,845,985 95.3 % Research and development expenses 583,762 8.6 % 321,857 3.8 % 261,905 81.4 % Total operating expenses 8,122,288 119.1 % 3,535,051 41.9 % 4,587,237 129.8 % Income (loss) from operations (5,239,422 ) -76.8 % 541,816 6.4 % (5,781,238 ) -1,067.0 % Other expenses, net (24,510 ) -0.4 % (29,553 ) -0.3 % 5,043 -17.1 % Income (loss) before income tax provision (5,263,932 ) -77.2 % 512,263 6.1 % (5,776,195 ) -1,127.6 % Income taxes expense (benefit) (10,906 ) -0.2 % 97,437 1.2 % (108,343 ) -111.2 % Net income (loss) (5,253,026 ) -77.0 % 414,826 4.9 % (5,667,852 ) -1,366.3 % Less: net income attributable to non-controlling interest - - 11,112 0.1 % (11,112 ) -100.0 % NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. $ (5,253,026 ) -77.0 % $ 403,714 4.8 % $ (5,656,740 ) -1,401.2 % Revenues Our total revenues decreased by $1,627,237, or 19.3%, to $6,818,774 for the nine months ended September 30, 2022 from $8,446,011 for the nine months ended September 30, 2021, primarily attributable to the decrease in revenue from sales of on-premise software, because an important customer renewed its software license in July 2021, and the decrease in revenue from software development, offset by revenue from newly established consulting services. In addition, the ongoing depreciation of Japanese Yen in 2022 also caused the decrease in our revenue. Cost of Revenues Our total costs of revenues decreased by $433,236 or 9.9%, to $3,935,908 for the nine months ended September 30, 2022 from $4,369,144 for the nine months ended September 30, 2021, in light of the decrease in sales of on-promise software and software development, offset by the costs related to the consulting services. 29 Gross Profit Our total gross profit decreased by $1,194,001, or 29.3%, to $2,882,866 for the nine months ended September 30, 2022 from $4,076,867 for the nine months ended September 30, 2021. Our overall gross profit margin decreased by 6.0% to 42.3% in the nine months ended September 30, 2022 from 48.3% in the nine months ended September 30, 2021. Selling Expenses Our selling expenses increased by $1,479,347, or 652.0%, to $1,706,250 in the nine months ended September 30, 2022 from $226,903 in the nine months ended September 30, 2021, primarily attributable to an increase in advertising expenses, as t he U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company went public in the U.S. In addition, the Company increased advertising expenses for its newly established consulting services in Japan. As a percentage of revenues, our selling expenses accounted for 25.0% and 2.7% of our total revenue for the nine months ended September 30, 2022 and 2021 , respectively. General and Administrative Expenses Our general and administrative expenses increased by $2,845,985 or 95.3%, to $5,832,276 in the nine months ended September 30, 2022 from $2,986,291 in the nine months ended September 30, 2021, primarily attributable to the increase in stock-based compensation, salaries and welfare, the U.S. parent company’s office expenses, and D&O indemnity insurance premiums. As a percentage of revenues, general and administrative expenses were 85.5% and 35.4% of our revenue for the nine months ended September 30, 2022 and 2021, respectively. Research and Development Expenses Our research and development expenses increased by $261,905 or 81.4%, to $583,762 in the nine months ended September 30, 2022 from $321,857 in the nine months ended September 30, 2021, primarily attributable to an increase in outsourcing expenses relating to development of a high quality 12K VR camera and related data compression system in the nine months ended September 30, 2022. As a percentage of revenues, research and development expenses were 8.6% and 3.8% of our revenue for the nine months ended September 30, 2022 and 2021, respectively . Other Expenses, net Our other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, decreased by $5,043 or 17.1%, from $29,553 in the nine months ended September 30, 2021 to $24,510 in the nine months ended September 30, 2022 . 30 Income Tax Expense (Benefit) Our income taxes benefit was $10,906 in the nine months ended September 30, 2022, as compared to the income taxes expense of $97,437 in the nine months ended September 30, 2021, mainly due to the increase in net loss and the decrease in deferred tax expense . Net Income (Loss) As a result of the foregoing, we reported a net loss of $5,253,026 for the nine months ended September 30, 2022, representing a $5,667,852 or 1,366.3% decrease from a net income of $414,826 for the nine months ended September 30, 2021. Net Income attributable to Non-controlling Interest We owned 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of September 30, 2021. Accordingly, we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $11,112 in the nine months ended September 30, 2021 . On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022. On February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest income in the nine months ended September 30, 2022. Net Income (Loss) attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $5,253,026 for the nine months ended September 30, 2022, representing a $5,656,740 or 1,401.2% decrease from a net income attributable to HeartCore Enterprises, Inc. of $403,714 for the nine months ended September 30, 2021 . Liquidity and Capital Resources As of September 30, 2022, we had $7,843,208 in cash as compared to $3,136,839 as of December 31, 2021. As of September 30, 2022, our working capital was $6,149,541 as compared to $62,919 as of December 31, 2021. We also had $621,345 in accounts receivable as of September 30, 2022. Our accounts receivable primarily include balance due from customers for our on-premise software sold and services provided to and accepted by customers. The following table sets forth summary of our cash flows for the periods indicated: For the Nine Months Ended September 30, 2022 2021 Net cash provided by (used in) operating activities $ (4,206,370 ) $ 1,239,250 Net cash used in investing activities (8,630 ) (151,065 ) Net cash provided by (used in) financing activities 9,122,350 (816,155 ) Effect of exchange rate changes (200,981 ) (239,423 ) Net increase in cash and cash equivalents 4,706,369 32,607 Cash and cash equivalents, beginning of the period 3,136,839 3,058,175 Cash and cash equivalents, end of the period $ 7,843,208 $ 3,090,782 31 Operating Activities Net cash used in operating activities was $4,206,370 for the nine months ended September 30, 2022, as compared to the amount of $1,239,250 net cash provided by operating activities for the nine months ended September 30, 2021, primarily consisting of the following: ● Net loss of $5,253,026 for the nine months ended September 30, 2022. ● A decrease of $213,691 in operating lease liabilities, due to the rent payment made. ● A decrease of $206,569 in other liabilities, primarily due to the decrease in sales tax payable. ● Offset by non-cash lease expense of $207,549. ● Offset by share-based compensation of $1,225,477. Investing Activities Net cash used in investing activities amounted to $8,630 for the nine months ended September 30, 2022, as compared to net cash used in investing activities amounted to $151,065 for the nine months ended September 30, 2021. Financing Activities Net cash provided by financing activities amounted to $9,122,350 for the nine months ended September 30, 2022, as compared to net cash used in financing activities amounted to $816,155 for the nine months ended September 30, 2021, primarily consisting of net proceeds of $13,823,126 from the initial public offering and issuance of common shares prior to the initial public offering, and offset by payment for mandatorily redeemable financial interest of $430,489, payment for repurchase of common stocks of $3,500,000, and repayment of long-term debts of $699,407. Contractual obligations Lease commitment The Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were classified as finance leases. As of September 30, 2022, future minimum lease payments under the non-cancelable lease agreements are as follows: Year ending December 31, Finance leases Operating leases Remaining of 2022 $ 5,243 $ 71,778 2023 17,649 287,112 2024 259 287,112 2025 - 287,112 2026 - 287,112 Thereafter - 1,469,265 Total lease payments 23,151 2,689,491 Less: imputed interest (76 ) (165,820 ) Total lease liabilities 23,075 2,523,671 Less: current portion 19,502 264,387 Non-current lease liabilities $ 3,573 $ 2,259,284 Long Term Debt The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions. 32 As of September 30, 2022, future minimum loan payments are as follows: Loan Year ending December 31, Payment Remaining of 2022 $ 107,593 2023 646,715 2024 400,961 2025 230,041 2026 209,315 Thereafter 171,757 Total $ 1,766,382 Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of September 30, 2022. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements. These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenue and expenses incurred during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed herein reflect the more significant judgments and estimates used in preparation of our unaudited consolidated financial statements. Revenue Recognition The Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with customers”. To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales is calculated at 10% of gross sales. The Company currently generates its revenue from the following main sources: Revenue from On-Premise Software Licenses for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenue from on-premise licenses is recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. 33 Revenue from Maintenance and Support Service Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers. Revenue from Software as a Service (“SaaS”) The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length. Revenue from Software Development and other Miscellaneous Services The Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers. Revenue from Consulting Service The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents and supporting the listing process. Revenues from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less than one year in length. The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the nine months ended September 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $1.2 million and $2.0 million, respectively. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.