HeartCore Enterprises, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements All statements other than statements of historical fact included in this annual report, including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this annual report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or the Company’s management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the SEC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this annual report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. References herein to “we,” “us” or the “Company” refers to HeartCore Enterprises, Inc. and its consolidated subsidiaries, including, but not limited to, HeartCore Co., Ltd. (“HeartCore Co.”), HeartCore Capital Advisors, Inc. (“HeartCore Capital Advisors”), HeartCore Financial, Inc. (HeartCore Financial”), and Sigmaways, Inc. (“Sigmaways”). HeartCore Financial was incorporated in January 2023. HeartCore Capital Advisors was incorporated in February 2023. The acquisition of Sigmaways was closed in February 2023. 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. On September 6, 2022, HeartCore Enterprises, Inc. entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51% of the outstanding shares of Sigmaways, a company incorporated under the laws of the State of California and is engaged in the business of developing and sales of software in the United States. The acquisition closed on February 1, 2023. During 2022, we started the GO IPO business, which supports Japanese companies to list on Nasdaq and NYSE in the United States. As of March 30, 2023, we have entered into consulting agreements with nine companies to assist them in their IPO process, whereby we are entitled to receive from each company a consulting fee ranges from $350,000 to $900,000 and warrants or Japanese acquisition rights to purchase one to four percent of the fully-diluted share capital of such companies that is exercisable on certain dates at an exercise price of $0.01 per share. The revenue in the GO IPO business helped to offset the decline in sales in the CX and DX divisions. In the first quarter of 2023, we formed HeartCore Financial and HeartCore Capital Advisors as a part of our Go IPO consulting business. 67 We have made significant investments in our sales and marketing efforts globally. As of December 31, 2022, our sales and marketing organization was comprised of 14 employees, including our field sales organization, which maintains a physical sales presence in the Japanese software market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified revenue and customer base. As of December 31, 2022, our combined business units (customer experience management business unit and digital transformation business unit) had 903 total customers in Japan. We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our majority-owned subsidiary, HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co.”), which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009 and acquired by us in July 2021. HeartCore Co. started out with helping companies effectively managing content with its powerful content management system. Since then, HeartCore Co. has expanded offerings to help companies manage all forms of business processes. The acquisition of HeartCore Co. was accounted for as a recapitalization among entities under common control since the same controlling shareholders controlled all these entities before and after the transaction. The consolidation of the Company and its subsidiary has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements. For the fiscal years ended December 31, 2022 and 2021, we generated revenues of $8,818,312 and $10,822,514, respectively, and reported net loss of $6,677,466 and $327,044, respectively, and cash flows used in operating activities of $4,808,547 and cash flows from operating activities of $766,300, respectively. As noted in our consolidated financial statements, as of December 31, 2022, we had an accumulated deficit of $10,573,579. Key Factors that Affect Our Results of Operations We believe the following key factors may affect our financial condition and results of operations: Our Ability to Strength Our Competitive Advantages Our mission is to be at the forefront of innovation and thought leadership in enterprise business automation, analyzing enterprise users’ desktops and mission-critical systems, and creating end-to-end software that provides business automation based on the results of that analysis and further simulating the numbers. We create end-to-end software that provides business automation. Our customers use our software across their organizations so that they can run their operations in a more fully automated manner. Our ability to successfully implement the automation in our software greatly affects our profitability. Our Ability to Expand International Market We maintain a physical sales presence in the Japanese software market. Using our global go-to-market strategy we believe we have established a diversified revenue and customer base. We will continue to develop our global operation. International expansion over the long term represents a significant opportunity and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing efforts and leveraging channel and other ecosystem partners. Our Ability to Control Costs and Expenses and Improve Our Operating Efficiency Our business growth is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, secure new contracts with customers and our ability to control costs and expenses to improve our operating efficiency. Our software costs (mostly including purchased software license, salaries and welfare, and outsourcing expenses) have a direct impact on our profitability. Our success is dependent, in part, on our ability to reduce our exposure to increase in those costs through a variety of ways, while maintaining and improving margins and market share. In addition, our staffing costs (including salaries and welfare) and administrative expenses also have a direct impact on our profitability. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability. 68 Our Ability to Manage and Retain Customer Renewals Our ability to manage and retain customer renewals is vital to our expansion of renewals in our customer base and continuous and growing revenue. By achieving and maintaining high retention of customer renewals, we are able to cover most of our expenses from the revenue generated from such retained customer renewals. In order to achieve and maintain a high retention of customer renewals, we engage in the following actions: (i) we conduct annual surveys of existing customers; (ii) we conduct Net Promoter Scoring (NPS), whereby we measure customer loyalty and satisfaction by asking our customers how likely they are to recommend our product and service to others; and (iii) we have sales representatives visit important customers to increase customer retention. Our ability to expand within our customer base is demonstrated by our net retention rate, which represents the rate of net expansion of annualized renewal run-rate from existing customers over the last 12 months. As of December 31, 2022, our combined business units (customer experience management business unit and digital transformation business unit) had 903 total customers in Japan, of which 645, or 71.4%, were paying customers and 24 total customers outside Japan, of which 2, or 0.2%, was a paying customer. Our 280 non-paying customers were originally paying customers that utilized our paid services but now use a free version of the CXM Platform. Our net retention rate for our paying customers of our customer experience management business unit (CMS business) was 92%, 95% and 95% as of December 31, 2022, 2021 and 2020, respectively. There is an insignificant impact (below 5%) on our net retention rate as to former paying customers of our CMS business utilizing the free version of your CXM Platform. COVID-19 Affecting Our Results of Operations On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The pandemic has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans, intended to control the spread of the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. As of the filing date of this Annual Report on Form 10-K, the extent of the future impact of COVID-19 is still highly uncertain and cannot be predicted. A Severe or Prolonged Slowdown in the Global and Japan Economy Could Materially and Adversely Affect Our Business and Our Financial Condition In recent years, the economic indicators in Japan have shown mixed signs, and future growth of the Japanese economy is subject to many factors beyond our control. The current administration of Prime Minster Fumio Kishida and the former administration of Prime Minister Yoshihide Suga have introduced policies to combat deflation and promote economic growth. In addition, the Bank of Japan introduced a plan for quantitative and qualitative monetary easing in April 2013 and announced a negative interest rate policy in January 2016. However, the long-term impact of these policy initiatives on Japan’s economy remains uncertain. The impact of Brexit on the Japanese economy and on the value of the Japanese yen against currencies of other countries in which we generate revenue, in both the short and long term, is also uncertain. In addition, an increase in the consumption tax rate, which took place in April 2014 with a further increase in October 2019, may also adversely impact the Japanese economy, potentially impacting consumer spending, and advertising spending by businesses. Any future deterioration of the Japanese or global economy may result in a decline in consumption that would have a negative impact on demand for our products and their prices. GO IPO consulting services business may experience a decrease in clients due to external factors such as the slowdown of the Japanese economy. In addition, an increase in the number of competitors may have an impact on the business. 69 Results of Operations Comparison of Results of Operations for the Fiscal Years Ended December 31, 2022 and 2021 The following table summarizes our operating results as reflected in our statements of operations during the fiscal years ended December 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods. For the Years Ended December 31, 2022 2021 Variance % of % of Amount Revenues Amount Revenues Amount % of Revenues $ 8,818,312 100.0 % $ 10,822,514 100.0 % $ (2,004,202 ) -18.5 % Cost of revenues 5,467,017 62.0 % 5,634,737 52.1 % (167,720 ) -3.0 % Gross profit 3,351,295 38.0 % 5,187,777 47.9 % (1,836,482 ) -35.4 % Operating expenses: Selling expenses 2,826,615 32.0 % 296,778 2.7 % 2,529,837 852.4 % General and administrative expenses 6,579,734 74.6 % 4,321,241 39.9 % 2,258,493 52.3 % Research and development expenses 641,025 7.3 % 510,740 4.7 % 130,285 25.5 % Total operating expenses 10,047,374 113.9 % 5,128,759 47.3 % 4,918,615 95.9 % Income (loss) from operations (6,696,079 ) -75.9 % 59,018 0.6 % (6,755,097 ) -11,445.8 % Other income (expenses) 12,695 0.1 % (44,117 ) -0.4 % 56,812 -128.8 % Income (loss) before income tax provision (6,683,384 ) -75.8 % 14,901 0.2 % (6,698,285 ) -44,951.9 % Income tax expense (benefit) (5,918 ) -0.1 % 341,945 3.2 % (347,863 ) -101.7 % Net loss (6,677,466 ) -75.7 % (327,044 ) -3.0 % (6,350,422 ) 1,941.8 % Less: net income attributable to non-controlling interest - - 11,112 0.1 % (11,112 ) -100.0 % Net loss attributable to HeartCore Enterprises, Inc. $ (6,677,466 ) -75.7 % $ (338,156 ) -3.1 % $ (6,339,310 ) 1,874.7 % 70 For the Years Ended December 31, 2022 2021 Variance % of % of Amount Total Revenues Amount Total Revenues Amount % of Revenues Revenue from on-premise software $ 1,860,573 21.1 % $ 3,609,442 33.4 % $ (1,748,869 ) -48.5 % Revenue from maintenance and support services 2,962,325 33.6 % 3,616,918 33.4 % (654,593 ) -18.1 % Revenue from software as a service (“SaaS”) 500,461 5.7 % 617,026 5.7 % (116,565 ) -18.9 % Revenue from software development and other miscellaneous services 2,046,588 23.2 % 2,979,128 27.5 % (932,540 ) -31.3 % Revenue from consulting service 1,448,365 16.4 % - - 1,448,365 100.0 % Total revenues 8,818,312 100.0 % 10,822,514 100.0 % (2,004,202 ) -18.5 % Cost of revenues Costs of on-premise software 1,138,533 12.9 % 1,401,907 13.0 % (263,374 ) -18.8 % Costs of maintenance and support services 1,159,418 13.2 % 1,384,660 12.8 % (225,242 ) -16.3 % Costs of software as a service (“SaaS”) 241,756 2.7 % 275,104 2.5 % (33,348 ) -12.1 % Costs of software development and other miscellaneous services 2,003,127 22.7 % 2,573,066 23.8 % (569,939 ) -22.2 % Costs of consulting service 924,183 10.5 % - - 924,183 100.00 % Total cost of revenues 5,467,017 62.0 % 5,634,737 52.1 % (167,720 ) -3.0 % Gross profit On-premise software 722,040 8.2 % 2,207,535 20.3 % (1,485,495 ) -67.3 % Maintenance and support services 1,802,907 20.5 % 2,232,258 20.6 % (429,351 ) -19.2 % Software as a service (“SaaS”) 258,705 2.9 % 341,922 3.2 % (83,217 ) -24.3 % Software development and other miscellaneous services 43,461 0.5 % 406,062 3.8 % (362,601 ) -89.3 % Consulting service 524,182 5.9 % - - 524,182 100.0 % Total gross profit $ 3,351,295 38.0 % $ 5,187,777 47.9 % $ (1,836,482 ) -35.4 % Revenues Our total revenues decreased by $2,004,202, or 18.5%, to $8,818,312 for the year ended December 31, 2022 from $10,822,514 for the year ended December 31, 2021. The decrease in our revenues was attributable to (i) the decrease of $1,748,869 in revenue from sales of on-premise software, because an important customer that purchased a CXM 5-year use license in 2016 renewed their CXM 5-year use license again in 2021 for $1,157,517, and no such large amount license sales revenue in 2022; (ii) the decrease of $932,540 in revenue from software development and other miscellaneous services, as the CMS constructions decreased with the slump in CMS license orders; (iii) the ongoing depreciation of Japanese Yen in 2022 contributed to our revenue decrease; offset by (iv) the revenue of $1,448,365 from newly established consulting services in 2022. Cost of Revenues Our total costs of revenues slightly decrease by $167,720, or 3.0%, to $5,467,017 for the year ended December 31, 2022 from $5,634,737 for the year ended December 31, 2021, in light of the decrease in sales of on-promise software and software development, but less proportionally due to fixed software maintenance fee, offset by the costs related to the consulting services . Gross Profit Our total gross profit decreased by $1,836,482, or 35.4%, to $3,351,295 for the year ended December 31, 2022 from $5,187,777 for the year ended December 31, 2021. The decrease in our gross profit was attributable to the decrease in the gross profit from sales of on-premise software and related maintenance and development services, offset by the gross profit from newly established consulting services in 2022 . For the reasons discussed above, our overall gross profit margin decreased by 9.9% to 38.0% for the year ended December 31, 2022 from 47.9% in the fiscal year 2021. 71 Operating Expenses The following table sets forth the breakdown of our operating expenses for the fiscal years ended December 31, 2022 and 2021: For the Years Ended December 31, 2022 2021 Variance % of % of Amount Revenues Amount Revenues Amount % of Total revenues $ 8,818,312 100.0 % $ 10,822,514 100.0 % $ (2,004,202 ) -18.5 % Operating expenses: Selling expenses 2,826,615 32.0 % 296,778 2.7 % 2,529,837 852.4 % General and administrative expenses 6,579,734 74.6 % 4,321,241 39.9 % 2,258,493 52.3 % Research and development expenses 641,025 7.3 % 510,740 4.7 % 130,285 25.5 % Total operating expenses $ 10,047,374 113.9 % $ 5,128,759 47.3 % $ 4,918,615 95.9 % Selling Expenses Our selling expenses primarily include advertising expenses, sales commissions, sales promotion expenses, and stock-based compensation. For the Years Ended December 31, 2022 2021 Variance Amount % of Amount % of Amount % of Selling expenses Advertising expenses $ 1,902,942 67.3 % $ 195,916 66.0 % $ 1,707,026 871.3 % Sales commissions 122,797 4.3 % 99,789 33.6 % 23,008 23.1 % Sales promotion expenses 16,017 0.6 % 1,073 0.4 % 14,944 1,392.7 % Stock-based compensation 784,859 27.8 % - - 784,859 100.0 % Total selling expenses $ 2,826,615 100.0 % $ 296,778 100.0 % $ 2,529,837 852.4 % Our selling expenses increased by $2,529,837, or 852.4%, to $2,826,615 for the year ended December 31, 2022 from $296,778 in the fiscal year 2021, primarily attributable to (i) an increase in advertising expenses by $1,707,026, or 871.3%, to $1,902,942 for the year ended December 31, 2022 from $195,916 in the fiscal year 2021, because 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 early 2022, and to promot e newly established consulting services in Japan. We also increased selling activities to expand the software business in Japan, such as attending software exhibitions ; (ii) an increase of $784,859 in stock-based compensation, as our sales staffs were awarded options to purchase the Company’s common stock. As a percentage of revenues, our selling expenses accounted for 32.0% and 2.7% of our total revenues for the years ended December 31, 2022 and 2021, respectively. 72 General and Administrative Expenses Our general and administrative expenses primarily consist of employee salaries and welfare, consulting and professional service fees, depreciation expense, rent expense, office, utility and other expenses, bad debt expense, travel and entertainment expense, and stock-based compensation. For the Years Ended December 31, 2022 2021 Variance Amount % of Amount % of Amount % of General and administrative expenses Salaries and welfare $ 2,924,547 44.4 % $ 2,306,544 53.4 % $ 618,003 26.8 % Consulting and professional service fees 1,629,622 24.8 % 1,164,355 26.9 % 465,267 40.0 % Depreciation expense 76,924 1.2 % 102,409 2.4 % (25,485 ) -24.9 % Rent expense 184,179 2.8 % 219,918 5.1 % (35,739 ) -16.3 % Office, utility and other expenses 836,609 12.7 % 297,614 6.9 % 538,995 181.1 % Bad debt expense - - 80,879 1.9 % (80,879 ) -100.0 % Travel and entertainment expense 299,655 4.6 % 130,735 3.0 % 168,920 129.2 % Stock-based compensation 628,198 9.5 % 18,787 0.4 % 609,411 100.0 % Total general and administrative expenses $ 6,579,734 100.0 % $ 4,321,241 100.0 % $ 2,258,493 52.3 % Our general and administrative expenses increased by $2,258,493 or 52.3%, to $6,579,734 for the year ended December 31, 2022 from $4,321,241 in the fiscal year 2021, primarily attributable to (i) an increase of $465,267 in consulting and professional fees, as we incurred more audit fees, legal fees, and filing fees to satisfy the SEC filing requirements as we got listed in the Nasdaq in February 2022, and customer referral and attraction related expenses related to newly established GO IPO consulting services; (ii) an increase of $618,003 in salaries and welfare, as all our employees received significant salary raise in February 2022, and newly employed staffs for US operation; (iii) an increase of $609,411 in stock-based compensation, as the Company awarded options to the employees in 2022; (iv) an increase of $538,995 in office, utility and other expenses, mainly because we entered into D&O insurance policy and incurred insurance expense in 2022. As a percentage of revenues, general and administrative expenses were 74.6% and 39.9% of our revenues for the fiscal years ended December 31, 2022 and 2021, respectively. Research and Development Expenses Our research and development expenses primarily consist of employee salaries and welfare, outsourcing expenses, and stock-based compensation. For the Years Ended December 31, 2022 2021 Variance Amount % of Amount % of Amount % of Research and development expenses Salaries and welfare $ 29,681 4.6 % $ 82,739 16.2 % $ (53,058 ) -64.1 % Outsourcing expenses 601,583 93.9 % 428,001 83.8 % 173,582 40.6 % Stock-based compensation 9,761 1.5 % - - 9,761 100.0 % Total research and development expenses $ 641,025 100.0 % $ 510,740 100.0 % $ 130,285 25.5 % Our research and development expenses increased by $130,285, or 25.5%, to $641,025 in the fiscal year ended December 31, 2022 from $510,740 in the fiscal year ended December 31, 2021, primarily attributable to an increase in outsourcing expenses relating to development of a high quality 12K VR camera and related data compression system . As a percentage of revenues, research and development expenses were 7.3% and 4.7% of our revenues for the fiscal years ended December 31, 2022 and 2021, respectively. 73 Other Income (Expenses), Net Our other income (expenses) primarily includes interest income generated from bank deposits, interest expense for bank loans, bonds, and leases, other income, and other expenses. Total other income (expenses), net, increased by $56,812 or -128.8%, from other expenses, net, $44,117 for the year ended December 31, 2021 to other income, net, $12,695 for the year ended December 31, 2022, primarily attributable to an increase of interest income of $60,008, due to the increase in cash balance deposited in bank and the interest rate increased significantly in the fiscal year ended December 31, 2022. Income Tax Expense (Benefit) Income tax benefit was $5,918 for the year ended December 31, 2022, a decrease of $347,863, or 101.7% from income tax expense of $341,945 in the fiscal year 2021, primarily due to the increase in net loss before tax and decrease in deferred tax expense in the fiscal year ended December 31, 2022. Net Loss As a result of the foregoing, we reported a net loss of $6,677,466 for the fiscal year ended December 31, 2022, representing a $6,350,422 or 1,941.8% increase from a net loss of $327,044 for the fiscal year ended December 31, 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 December 31, 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 year ended December 31, 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. The Company has determined such shares to be a mandatorily redeemable financial instrument and is recorded as a liability of JPY50,040,000 (approximately $448,000) in the consolidated balance sheet as of December 31, 2021. The Company did not recognize any net income attributable to non-controlling interest since then. Accordingly, we did not record non-controlling interest income in the year ended December 31, 2022. Net Loss attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $6,677,466 for the fiscal year ended December 31, 2022, representing a $6,339,310 or 1,874.7% increase from a net loss of $338,156 for the fiscal year ended December 31, 2021. Liquidity and Capital Resources As of December 31, 2022, we had $7,177,326 in cash as compared to $3,136,839 as of December 31, 2021. We also had $551,064 in accounts receivable as of December 31, 2022. Our accounts receivable primarily include balance due from customers for our on-premise software sold and services provided and accepted by customers. As of December 31, 2022, our working capital was $4,887,444. In assessing our liquidity, management monitors and analyzes our cash, our ability to generate sufficient revenues in the future, and our operating and capital expenditure commitments. 74 Cash Flows for the Years Ended December 31, 2022 and 2021 The following table sets forth summary of our cash flows for the periods indicated: For the Years Ended December 31, 2022 2021 Net cash provided by (used in) operating activities $ (4,808,547 ) $ 766,300 Net cash used in investing activities (12,200 ) (179,029 ) Net cash provided by (used in) financing activities 8,915,341 (257,353 ) Effect of exchange rate changes (54,107 ) (251,254 ) Net increase in cash and cash equivalents 4,040,487 78,664 Cash and cash equivalents, beginning of the year 3,136,839 3,058,175 Cash and cash equivalents, end of the year $ 7,177,326 $ 3,136,839 Operating Activities Net cash used in operating activities was $4,808,547 for the year ended December 31, 2022, primarily consisting of the following: ● Net loss of $6,677,466 for the fiscal year. ● A decrease of $283,921 in operating lease liabilities, due to the rent payment made. ● Offset by non-cash lease expense of $273,836. ● Offset by stock-based compensation of $1,519,743, as we granted equity rewards to our employees in 2022. ● Offset by a decrease in accounts receivable of $296,835. The decrease was primarily due to the decrease in our sales in the current fiscal year. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary. ● Offset by an increase in deferred revenue of $239,129. We request upfront payment for service provided over a period of time. The deferred revenue increased as a result of newly established consultant services in 2022. Net cash provided by operating activities was $766,300 for the year ended December 31, 2021, primarily consisting of the following: ● Net loss of $327,044 for the fiscal year. ● An increase in accounts payable and accrued expenses of $553,009. The increase was mainly due to the increase in accrued listing-related expense and accrued software development outsourcing expense. ● Depreciation expenses of $105,394. ● An increase in deferred revenue of $304,536. We request upfront payment for service provided over a period of time. The deferred revenue increased as the sales increased. Investing Activities Net cash used in investing activities amounted to $12,200 for the year ended December 31, 2022, and included the purchases of fixed assets of $57,071, offset by the repayment of $44,871 of loan provided to related party. Net cash used in investing activities amounted to $179,029 for the year ended December 31, 2021, and included the purchases of fixed assets of $36,153, and advance and loan provided to related parties of $142,876. Financing Activities Net cash provided by financing activities amounted to $8,915,341 for the fiscal year ended December 31, 2022, primarily consisting of proceeds of $13,823,126 from the initial public offering and issuance of common shares prior to the initial public offering, proceeds of $258,087 from long-term debt, offset by payment for mandatorily redeemable financial interest of $430,489, payment for repurchase of common shares of $3,500,000, repayment of long-term debts of $810,750, and repayment of insurance premium financing of $388,538. 75 Net cash used in financing activities amounted to $257,353 for the fiscal year ended December 31, 2021, primarily consisting of repayment of long-term debts of $878,625 and repayment of finance lease obligations (principal) of $53,640, offset by proceeds from issuance of common shares of $677,945. Contractual Obligations Lease Commitment The Company’s subsidiary, HeartCore Co., Ltd. entered into two leases for its office space and parking lot, which were classified as operating leases. HeartCore Co., Ltd. also entered into two leases for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were classified as finance leases. As of December 31, 2022, future minimum lease payments under the non-cancelable lease agreements are as follows: Year Ended December 31, Finance Leases Operating Leases 2023 $ 19,476 $ 316,847 2024 286 316,847 2025 - 316,847 2026 - 316,847 2027 - 316,847 Thereafter - 1,304,581 Total lease payments 19,762 2,888,816 Less: imputed interest (9 ) (175,899 ) Total lease liabilities 19,753 2,712,917 Less: current portion 19,294 291,863 Non-current lease liabilities $ 459 $ 2,421,054 76 Long-Term Debt s The Company’s long-term debts included bonds payable and loans borrowed from banks and other financial institutions. As of December 31, 2022, future minimum loan payments are as follows: Loan Year Ended December 31, Payment 2023 $ 713,692 2024 442,486 2025 253,866 2026 230,993 2027 189,544 Thereafter - Total $ 1,830,581 COVID-19 In December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The pandemic, which has continued to spread, and the related adverse public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours. For example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions, closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide. In March 2020, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all HeartCore Co. employees were required to work from home for several months during the height of the pandemic. We cancelled or shifted our customer and industry events to virtual-only experiences. Although we have begun to slowly re-open our offices on a staggered, region-by-region basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. All of these changes may disrupt the way we operate our business. In addition, our management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic and seeking to minimize the risk of the virus and manage its effects on our business and workforce. Although our company has been in existence for less than two years, our wholly owned operating subsidiary, HeartCore Co. operated throughout the pandemic and continues to operate after the pandemic. HeartCore Co.’s business is affected by a variety of external factors related to the pandemic and post-pandemic that are beyond our control. For existing customers, the pandemic had no impact on the use of our software; for new customers in the travel, hotel, airline, rail, and food service industries in the CX division, the pandemic resulted in a decrease in new orders. However, although the pandemic is coming to an end, it will take some time before the economy is fully normalized. This results in even lower sales in 2022 than in 2021. Regarding the impact of the pandemic on the DX sector, demand for our DX software increased as large companies were forced to change their work patterns, forcing employees to work remotely. In 2022, after the pandemic, a number of employees left the company, forcing the company to downsize its operations and resulted in a decline in sales. During 2022, we started the GO IPO business, which supports Japanese companies to list on Nasdaq and NYSE in the United States. As of March 30, 2023, we have entered into consulting agreements with nine companies to assist them in their IPO process, whereby we are entitled to receive from each company a consulting fee ranges from $350,000 to $900,000 and warrants or Japanese acquisition rights to purchase one to four percent of the fully-diluted share capital of such companies that is exercisable on certain dates at an exercise price of $0.01 per share. The revenue in the GO IPO business helped to offset the decline in sales in the CX and DX divisions. The duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed. To the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section, including, in particular, risks related to our dependence on customer renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions may harm our industry, business and results of operations. 77 Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of December 31, 2022. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this annual report reflect the more significant judgments and estimates used in preparation of our consolidated financial statements. Accounts Receivable Accounts receivable represent the amounts that the Company has an unconditional right to consideration, which are stated at the original amount less an allowance for doubtful receivables. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. The Company usually determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements of operations and comprehensive loss. Delinquent account balances are written off against the allowance for doubtful accounts after management has determined that the likelihood of collection is remote. In circumstances in which the Company receives payment for accounts receivable that have previously been written off, the Company reverses the allowance and bad debt. Revenue Recognition The Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers”. To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales are calculated at 10% and nil of gross sales in Japan and in the U.S., respectively. 78 The Company currently generates its revenues 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 related to the initial public offering and supporting the listing process. The consulting service contracts are generally less than one year in length. Revenues from consulting services are recognized over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. 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 revenue on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenue is reported net of related uncollected deferred revenue in the consolidated balance sheets. The amount of revenues recognized during the years ended December 31, 2022 and 2021 that were included in the opening deferred revenue balance was approximately $1.5 million and $1.5 million, respectively. 79 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to pages F-1 through F-24 comprising a portion of this annual report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.