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, 2022, 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 Quarterly Report on Form 10-Q 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. On September 6, 2022, HeartCore Enterprises, Inc. (the “Company”) 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 consulting business, which supports Japanese companies seeking to list on Nasdaq and NYSE in the United States. As of August 14, 2023, we have entered into consulting agreements with 10 companies to assist them in their IPO process, whereby we are entitled to receive from each company a consulting fee ranging from $350,000 to $900,000 and warrants or Japanese acquisition rights to purchase 1% to 4% of the fully-diluted share capital of such companies that is exercisable on certain dates at an exercise price of $0.01 or JPY1 per share. The revenue from 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, Inc. and HeartCore Capital Advisors, Inc. as a part of our Go IPO consulting business. 3 We have made significant investments in our sales and marketing efforts globally. As of June 30, 2023, 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, 2023, our combined business units (customer experience management business unit and digital transformation business unit) had 923 total customers in Japan. Recent Developments rYojbaba Inc. Consulting Agreement On April 4, 2023 (the “rYojbaba Effective Date”), the Company entered into a Consulting and Services Agreement (the “rYojbaba Consulting Agreement”) by and between the Company and rYojbaba Inc., a Japanese corporation (“rYojbaba”). Pursuant to the terms of the rYojbaba Consulting Agreement, the Company agreed to provide rYojbaba certain services, including the following (collectively, the “rYojbaba Services”): (i) Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm for rYojbaba; (ii) Assisting in the preparation of documentation for internal controls required for an initial public offering of de-SPAC or other rYojbaba Fundamental Transaction (as defined in the rYojbaba Consulting Agreement) by rYojbaba; (iii) Providing support services to remove problematic accounting accounts upon listing; (iv) Translation of requested documents into English; (v) Attend and, if requested by rYojbaba, lead meetings with rYojbaba’s management and employees; (vi) Provide rYojbaba with support services related to rYojbaba’s NASDAQ listing; (vii) Conversion of accounting data from Japanese standards to U.S. GAAP; (viii) Support for rYojbaba’s negotiations with the audit firm; (ix) Assist in the preparation of S-1 or F-1 filings; (x) Creation of English web page; and (xi) Preparing an investor presentation/deck and executive summary of rYojbaba’s operations. In providing the rYojbaba 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 rYojbaba Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of rYojbaba’s securities; participation in discussions between rYojbaba and potential investors; assisting in structuring any transactions involving the sale of rYojbaba’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in rYojbaba. Pursuant to the terms of the rYojbaba Consulting Agreement, rYojbaba agreed to compensate the Company as follows in return for the provision of the rYojbaba Services during the eight-month term: (a) $500,000, to be paid as follows: (i) $200,000 on the rYojbaba Effective Date; (ii) $150,000 on the three-month anniversary of the rYojbaba Effective Date; and (iii) $150,000 on the date that rYojbaba first files a Form S-1, Form F-1, Form S-4, Form F-4 or any similar or replacement form with the SEC with respect to any transaction which is reasonably expected to result in the rYojbaba Trigger Date (as defined in the rYojbaba Warrant); and (b) Issuance by rYojbaba to the Company of a warrant (the “rYojbaba Warrant”), deemed fully earned and vested as of the rYojbaba Effective Date, to acquire a number of shares of capital stock of rYojbaba, to initially be equal to 3% of the fully diluted share capital of rYojbaba as of the rYojbaba Effective Date, subject to adjustment as set forth in the rYojbaba Consulting Agreement and the rYojbaba Warrant. 4 For any services performed by the Company beyond the rYojbaba Term (as hereinafter defined), rYojbaba will compensate the Company for rYojbaba Services at the rate of $150 per hour, based on the hours spent by personnel of the Company. The term of the rYojbaba Consulting Agreement will continue until eight months after the rYojbaba Effective Date, unless sooner terminated in accordance with the terms of the rYojbaba Consulting Agreement (the “rYojbaba Term”). The rYojbaba Consulting Agreement may be terminated at any time by either party upon notice to the other party. rYojbaba Warrant As provided in the rYojbaba Consulting Agreement, on the rYojbaba Effective Date, rYojbaba issued the rYojbaba Warrant to the Company. Pursuant to the terms of the rYojbaba Warrant, the Company may, at any time (i) on or after the earlier of the date that either (a) rYojbaba completes its first initial public offering of stock in the U.S. resulting in any class of rYojbaba’s stock being listed for trading on any tier of Nasdaq, the NYSE or the NYSE American; (b) rYojbaba consummates a merger or other transaction with a SPAC wherein rYojbaba becomes a subsidiary of the SPAC; or (c) rYojbaba undertakes any other rYojbaba Fundamental Transaction (the “rYojbaba Trigger Date”); and (ii) on or prior to the close of business on the tenth anniversary of the rYojbaba Trigger Date, exercise the rYojbaba Warrant to purchase 3,000 shares of rYojbaba’s common stock, which represents 3% of rYojbaba’s issued and outstanding common stock as of the rYojbaba Trigger Date, for an exercise price per share of $0.01, subject to adjustment as provided in the rYojbaba Warrant. The number of shares for which the rYojbaba Warrant will be exercisable will be automatically adjusted on the rYojbaba Trigger Date to be 3% of the fully diluted number and class of shares of capital stock of rYojbaba as of the rYojbaba Trigger Date, following completion of the transactions which caused the rYojbaba Trigger Date to be achieved. The rYojbaba Warrant contains a 9.99% equity blocker. ZEROSPO Note Purchase Agreement On May 2, 2023, the Company entered into a Note Purchase Agreement by and between the Company and ZEROSPO. Pursuant to the terms of the Note Purchase Agreement, ZEROSPO agreed to issue and sell to the Company, and the Company agreed to purchase, a promissory note in the principal amount of $300,000 (the “ZEROSPO Note”). Pursuant to the terms of the ZEROSPO Note, ZEROSPO agreed to pay to the Company $300,000 and to pay interest on the outstanding principal amount at the rate of 8% per annum. To the extent not earlier paid, the principal amount and all accrued interest will be due and payable on the ZEROSPO Maturity Date (as hereinafter defined) or earlier in the event of an event of default as provided in the ZEROSPO Note. The “ZEROSPO Maturity Date” means the earlier of: (i) The date of the closing of capital-raising transactions consummated by ZEROSPO via the issuance of any debt securities or equity securities of ZEROSPO or any of its affiliates which results in gross proceeds to ZEROSPO or any of its affiliates of $300,000 or more; (ii) The date on which ZEROSPO completes a transaction pursuant to which its ordinary shares are listed for trading on The Nasdaq Capital Market, or any related exchange, including the NASDAQ Global Market, or on the New York Stock Exchange or any related securities exchange, including the NYSE American; and (iii) The date which is 180 days following May 2, 2023. ZEROSPO may, at its sole option, prepay the ZEROSPO Note and any accrued interest thereunder in whole or in part at any time. In the event that any amount due under the ZEROSPO Note is not paid as and when due, such amounts will accrue interest at the rate of 12% per year, simple interest, non-compounding, until paid. Private Placement On May 29, 2023, the Company entered into a Common Stock Sales Agreement (the “Sutter Agreement”) by and between the Company and Sutter Securities, Inc. (the “Sales Agent”). Pursuant to the terms of the Sutter Agreement, the parties agreed that, from time to time during the term of the Sutter Agreement, the Company would issue and sell through the Sales Agent common stock of the Company having an aggregate offering price of up to $5,000,000 (the “Placement Shares”). The issuance and sale of the Placement Shares to or through the Sales Agent will be effected pursuant to the Company’s effective shelf registration statement (File No. 333-270503), which was declared effective on April 12, 2023 (the “Registration Statement”). The Company filed a prospectus supplement to the Registration Statement relating to the offering of the Placement Shares pursuant to the Agreement. 5 Upon notification by the Company that it wishes to issue and sell the Placement Shares through the Sales Agent, as provided in the Sutter Agreement, the Sales Agent will use its commercially reasonable efforts consistent with its normal trading and sales practices and applicable laws, rules and regulations, including rules of The Nasdaq Stock Market (“Nasdaq”), for the period specified in the notice, to sell such shares up to the amount specified by the Company and otherwise in accordance with the terms of the notice. Subject to the terms of the notice, the Sales Agent may sell such shares by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended. The Sales Agent has the right by giving notice as specified in the Sutter Agreement at any time to terminate the Sutter Agreement if (i) any Material Adverse Change (as defined in the Sutter Agreement), or any development that could reasonably be expected to result in a Material Adverse Change has occurred that, in the reasonable judgment of the Sales Agent, may materially impair the ability of the Sales Agent to sell the shares under the Sutter Agreement, (ii) the Company shall have failed, refused or been unable to perform any agreement on its part to be performed hereunder; provided, however, in the case of any failure of the Company to deliver (or cause another person to deliver) certain certifications, opinions, or letters, the Sales Agent’s right to terminate shall not arise unless such failure to deliver (or cause to be delivered) continues for more than 30 days from the date such delivery was required, (iii) any other condition of the Sales Agent’s obligations under the Sutter Agreement is not fulfilled, or (iv) any suspension or limitation of trading in the shares under the Sutter Agreement or in securities generally on Nasdaq shall have occurred (including automatic halt in trading pursuant to market-decline triggers, other than those in which solely program trading is temporarily halted), or a major disruption of securities settlements or clearing services in the United States shall have occurred, or minimum prices for trading have been fixed on Nasdaq. In addition, each of the Company and the Sales Agent has the right, by giving 10 days’ notice as specified in the Sutter Agreement, to terminate the Sutter Agreement in its sole discretion at any time after the date of the Sutter Agreement. Unless earlier terminated, the Sutter Agreement will automatically terminate upon the earlier to occur of (i) issuance and sale of all of the Placement Shares to or through the Sales Agent on the terms and subject to the conditions set forth in the Sutter Agreement, and (ii) the expiration of the Registration Statement on the third anniversary of the initial effective date of the Registration Statement pursuant to Rule 415(a)(5) under the Securities Act. The Sutter Agreement contains certain covenants, representations and warranties customary for an agreement of this type. The Company has not received any fund from Sutter Agreement as of the date of this filing. Appointment of Heather Neville as a Director On May 30, 2023, the Board of Directors (the “Board”) of HeartCore Enterprises, Inc. (the “Company”) expanded the size of the Board from eight persons to nine persons, and named Heather Marie Neville to serve as a member of the Board, to fill the vacancy created by the increase in the size of the Board. Neville Director Agreement On June 1, 2023, the Company and Ms. Neville entered into a Director Agreement. The Director Agreement provides that Ms. Neville will be compensated as follows: ● Ms. Neville will be paid the sum of $60,000 annually for her service as a director of the Company, to be paid $15,000 each calendar quarter, payable within five business days of the end of each calendar quarter, and with such amount for any partial calendar quarter being appropriately prorated. During the term of the Director Agreement, the Company will reimburse Ms. Neville for all reasonable out-of-pocket expenses incurred by her in attending any in-person meetings, provided that Ms. Neville complies with the generally applicable policies, practices and procedures of the Company for submission of expense reports, receipts or similar documentation of such expenses. Any reimbursements for allocated expenses (as compared to out-of-pocket expenses in excess of $500) must be approved in advance by the Company. The Director Agreement contains customary confidentiality provisions, and customary provisions related to Company ownership of intellectual property conceived or made by Ms. Neville in connection with the performance of her duties under the Director Agreement (i.e., a “work-made-for-hire” provision). 6 The Director Agreement provides that, during the term (which continues as long as Ms. Neville is serving as a director of the Company), Ms. Neville is entitled to indemnification and insurance coverage for officers’ liability, fiduciary liability and other liabilities arising out of her position with the Company in any capacity, in an amount not less than the highest amount available to any other director, and such coverage and protections, with respect to the various liabilities as to which Ms. Neville has been customarily indemnified prior to termination of employment, shall continue for at least six years following the end of the term. Any indemnification agreement entered into between the Company and Ms. Neville will continue in full force and effect in accordance with its terms following the termination of the applicable agreement. The Director Agreement contains customary representations and warranties by Ms. Neville, relating to the Director Agreement, and contains other customary miscellaneous provisions relating to waivers, assignments, third party rights, survival of provisions following termination, severability, notices, waiver of jury trials and other provisions. Financial Overview For the three months ended June 30, 2023 and 2022, we generated revenues of $5,095,373 and $2,670,297, respectively, and reported net loss of $1,022,846 and $1,703,641, respectively. For the six months ended June 30, 2023 and 2022, we generated revenues of $13,829,523 and $4,946,298, respectively, and reported net income of $785,191 and net loss of $3,282,092, respectively, and cash flows used in operating activities of $1,368,562 and $2,093,867, respectively. As noted in our unaudited consolidated financial statements, as of June 30, 2023, we had an accumulated deficit of $9,603,090. Results of Operations Comparison of Results of Operations for the Three Months Ended June 30, 2023 and 2022 The following table summarizes our operating results as reflected in our unaudited statements of operations during the three months ended June 30, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Three Months Ended June 30, 2023 2022 Variance % of % of % of Amount Revenues Amount Revenues Amount Revenues Revenues $ 5,095,373 100.0 % $ 2,670,297 100.0 % $ 2,425,076 90.8 % Cost of Revenues 3,586,938 70.4 % 1,337,296 50.1 % 2,249,642 168.2 % Gross Profit 1,508,435 29.6 % 1,333,001 49.9 % 175,434 13.2 % Operating expenses: Selling expenses 488,062 9.6 % 728,836 27.3 % (240,774 ) -33.0 % General and administrative expenses 2,447,887 48.0 % 1,850,315 69.3 % 597,572 32.3 % Research and development expenses 39,608 0.8 % 417,228 15.6 % (377,620 ) -90.5 % Total operating expenses 2,975,557 58.4 % 2,996,379 112.2 % (20,822 ) -0.7 % Loss from operations (1,467,122 ) -28.8 % (1,663,378 ) -62.3 % 196,256 -11.8 % Other expenses (177,726 ) -3.5 % (31,284 ) -1.2 % (146,442 ) 468.1 % Loss before income tax provision (1,644,848 ) -32.3 % (1,694,662 ) -63.5 % 49,814 -2.9 % Income tax expense (benefit) (622,002 ) -12.2 % 8,979 0.3 % (630,981 ) -7027.3 % Net loss (1,022,846 ) -20.1 % (1,703,641 ) -63.8 % 680,795 -40.0 % Less: net loss attributable to non-controlling interest (111,046 ) -2.2 % - - (111,046 ) -100.0 % Net loss attributable to HeartCore Enterprises, Inc. $ (911,800 ) -17.9 % $ (1,703,641 ) -63.8 % $ 791,841 -46.5 % 7 Revenues Our total revenues increased by $2,425,076, or 90.8%, to $5,095,373 for the three months ended June 30, 2023 from $2,670,297 for the three months ended June 30, 2022, mainly attributable to (i) an increased revenue of $2,294,953 from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023; (ii) an increased revenue of $189,088 from GO IPO consulting services as the Company obtained more IPO consulting customers in 2023. Cost of Revenues Our total costs of revenues increased by $2,249,642, or 168.2%, to $3,586,938 for the three months ended June 30, 2023 from $1,337,296 for the three months ended June 30, 2022, in light of the increase in sales in GO IPO consulting services and customized software development and services. Gross Profit Our total gross profit increased by $175,434, or 13.2%, to $1,508,435 for the three months ended June 30, 2023 from $1,333,001 for the three months ended June 30, 2022, mainly attributable to (i) the increased gross profit of $336,870 from maintenance and support services, as we terminated some subcontractors in supporting service, as part of our effect to reduce costs; (ii) the increased gross profit of $485,731 from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023; offset by (iii) the decreased gross profit of $387,651 from sales of on-premise software, as we incurred costs of approximately $184,000 to purchase third-party software to be included in the CMS sale, per certain customers’ request in the current period; and (iv) the decreased gross profit of $236,103 from GO IPO consulting services. Our overall gross profit margin decreased by 20.3% to 29.6% for the three months ended June 30, 2023, from 49.9% for the three months ended June 30, 2022. Selling Expenses Our selling expenses decreased by $240,774, or 33.0%, to $488,062 for the three months ended June 30, 2023 from $728,836 for the three months ended June 30, 2022, primarily attributable to a decrease of $371,413 in advertising expense, as the company spent heavily on IR and PR in the U.S. immediately after listing in Nasdaq in early 2022; offset by an increase of $82,002 in stock-based compensation for sales staff. As a percentage of revenues, our selling expenses accounted for 9.6% and 27.3% of our total revenues for the three months ended June 30, 2023 and 2022, respectively. General and Administrative Expenses Our general and administrative expenses increased by $597,572, or 32.3%, to $2,447,887 for the three months ended June 30, 2023 from $1,850,315 for the three months ended June 30, 2022, primarily attributable to (i) an increase of $546,302 in salaries and welfare due to a company-wide wage increase and additional staffs employed by Sigmaways and its subsidiaries; (ii) an increase of $114,129 in office, utility and other expenses, an increase of $154,542 in depreciation and amortization expenses, and an increase of $65,125 in rent expenses, mostly due to the acquisition of Sigmaways and its subsidiaries as well as the overall business expansion; offset by (iii) a decrease of $383,879 in stock-based compensation as the Company awarded options and RSUs to employees and service providers in early 2022 when the Company finished going public. As a percentage of revenues, general and administrative expenses were 48.0% and 69.3% of our revenues for the three months ended June 30, 2023 and 2022, respectively. Research and Development Expenses Our research and development expenses decreased by $377,620, or 90.5%, to $39,608 for the three months ended June 30, 2023 from $417,228 for the three months ended June 30, 2022, 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. 8 As a percentage of revenues, research and development expenses were 0.8% and 15.6% of our revenues for the three months ended June 30, 2023 and 2022, respectively. Other Expenses Our other expenses primarily include changes in fair value of investments in marketable securities, changes in fair value of investments in warrants, interest income generated from bank deposits, interest expense for bank loans and bonds, other income, and other expenses. Our other expenses increased by $146,442, or 468.1%, to $177,726 in the three months ended June 30, 2023 from $31,284 in the three months ended June 30, 2022, primarily attributable to a decrease of $229,022 in changes in fair value of investments in marketable securities and a decrease of $27,258 in changes in fair value of investments in warrants, offset by an increase of $101,023 in other income, primarily attributable to the CMS development subsidy granted by the Japanese government. Income Tax Expense (Benefit) Our income tax benefit was $622,002 in the three months ended June 30, 2023, as compared to the income tax expense of $8,979 in the three months ended June 30, 2022, as the Company started to consider net operating losses carried forward from previous years in the current period income tax calculation and recognized an income tax benefit in the current period to offset the income tax expense recognized in the prior quarter. Net Loss As a result of the foregoing, we reported a net loss of $1,022,846 for the three months ended June 30, 2023, representing a $680,795, or 40.0%, decreased from a net loss of $1,703,641 for the three months ended June 30, 2022. Net Loss Attributable to Non-controlling Interest We owned 51% equity ownership interest of Sigmaways and its subsidiaries as of June 30, 2023. Accordingly, we recorded net loss attributable to the non-controlling interest of $111,046 in the three months ended June 30, 2023. Net Loss Attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $911,800 for the three months ended June 30, 2023, representing a $791,841 or 46.5%, decreased from a net loss attributable to HeartCore Enterprises, Inc. of $1,703,641 for the three months ended June 30, 2022. Comparison of Results of Operations for the Six Months Ended June 30, 2023 and 2022 The following table summarizes our operating results as reflected in our unaudited statements of operations during the six months ended June 30, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Six Months Ended June 30, 2023 2022 Variance % of % of % of Amount Revenues Amount Revenues Amount Revenues Revenues $ 13,829,523 100.0 % $ 4,946,298 100.0 % $ 8,883,225 179.6 % Cost of Revenues 6,688,004 48.4 % 2,392,652 48.4 % 4,295,352 179.5 % Gross Profit 7,141,519 51.6 % 2,553,646 51.6 % 4,587,873 179.7 % Operating expenses: Selling expenses 1,056,704 7.6 % 934,754 18.9 % 121,950 13.0 % General and administrative expenses 5,133,094 37.1 % 4,319,248 87.3 % 813,846 18.8 % Research and development expenses 119,232 0.9 % 525,487 10.6 % (406,255 ) -77.3 % Total operating expenses 6,309,030 45.6 % 5,779,489 116.8 % 529,541 9.2 % Income (loss) from operations 832,489 6.0 % (3,225,843 ) -65.2 % 4,058,332 -125.8 % Other expenses (7,852 ) -0.1 % (48,086 ) -1.0 % 40,234 -83.7 % Income (loss) before income tax provision 824,637 5.9 % (3,273,929 ) -66.2 % 4,098,566 -125.2 % Income tax expense 39,446 0.3 % 8,163 0.2 % 31,283 383.2 % Net income (loss) 785,191 5.6 % (3,282,092 ) -66.4 % 4,067,283 -123.9 % Less: net loss attributable to non-controlling interest (185,298 ) -1.4 % - - (185,298 ) -100.0 % Net income (loss) attributable to HeartCore Enterprises, Inc. $ 970,489 7.0 % $ (3,282,092 ) -66.4 % $ 4,252,581 -129.6 % 9 Revenues Our total revenues increased by $8,883,225, or 179.6%, to $13,829,523 for the six months ended June 30, 2023 from $4,946,298 for the six months ended June 30, 2022, mainly attributable to (i) the increased revenue of $5,381,839 from GO IPO consulting services as the Company obtained more IPO consulting customers in 2023 and received warrants from its customers as noncash consideration from consulting services; (ii) the increased revenue of $3,926,572 from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023; offset by (iii) the decreased revenue of $456,944 in revenue from sales of on-premise software, primarily due to the weak perform of a significant distributor in the current period. Cost of Revenues Our total costs of revenues increased by $4,295,352, or 179.5%, to $6,688,004 for the six months ended June 30, 2023 from $2,392,652 for the six months ended June 30, 2022, in light of the increase in sales in GO IPO consulting services and customized software development and services. Gross Profit Our total gross profit increased by $4,587,873, or 179.7%, to $7,141,519 for the six months ended June 30, 2023 from $2,553,646 for the six months ended June 30, 2022, mainly attributable to (i) the increased gross profit of $4,282,835 from GO IPO consulting services as the Company obtained more IPO consulting customers in 2023 and received warrants from its customers as noncash consideration from consulting services; (ii) the increased gross profit of $709,607 from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023; offset by (iii) the decreased gross profit of $914,590 from sales of on-premise software due to the overall market competition. Our overall gross profit margin remained 51.6% for the six months ended June 30, 2023 and 2022. Selling Expenses Our selling expenses increased by $121,950 or 13.0%, to $1,056,704 for the six months ended June 30, 2023 from $934,754 for the six months ended June 30, 2022, primarily attributable to an increase of $403,378 in stock-based compensation for sales staff, offset by the decrease of $340,712 in advertising expenses, as the company spent heavily on IR and PR in the U.S. immediately after listing in Nasdaq in early 2022. As a percentage of revenues, our selling expenses accounted for 7.6% and 18.9% of our total revenues for the six months ended June 30, 2023 and 2022, respectively. General and Administrative Expenses Our general and administrative expenses increased by $813,846, or 18.8%, to $5,133,094 for the six months ended June 30, 2023 from $4,319,248 for the six months ended June 30, 2022, primarily attributable to (i) an increase of $576,859 in salaries and welfare, an increase of $310,796 in office, utility and other expenses, an increase of $250,646 in depreciation and amortization expenses, and an increase of $115,807 in rent expenses, mostly due to the acquisition of Sigmaways and its subsidiaries as well as the overall business expansion; offset by (ii) a decrease of $271,771 in listing-related expenses as we finished the process of going public in early 2022; and (iii) a decrease of $281,522 in stock-based compensation as the Company awarded options and RSUs to employees and service providers in early 2022 when the Company finished going public. As a percentage of revenues, general and administrative expenses were 37.1% and 87.3% of our revenues for the six months ended June 30, 2023 and 2022, respectively. Research and Development Expenses Our research and development expenses decreased by $406,255, or 77.3%, to $119,232 for the six months ended June 30, 2023 from $525,487 for the six months ended June 30, 2022, 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, offset by an increase of $57,839 in stock-based compensation for research and development staff. As a percentage of revenues, research and development expenses were 0.9% and 10.6% of our revenues for the six months ended June 30, 2023 and 2022, respectively. 10 Other Expenses Our other expenses primarily include changes in fair value of investments in marketable securities and changes in fair value of investments in warrants, interest income generated from bank deposits, interest expense for bank loans and bonds, other income, and other expenses. Our other expenses decreased by $40,234, or 83.7%, to $7,852 in the six months ended June 30, 2023 from $48,086 in the six months ended June 30, 2022, primarily attributable to (i) an increase of $166,107 in changes in fair value of investments in warrants; (ii) an increase of $98,551 in other income, primarily attributable to the CMS development subsidy granted by the Japanese government; offset by (iii) a decrease of $229,022 in changes in fair value of investments in marketable securities. Income Tax Expense Our income tax expense was $39,446 in the six months ended June 30, 2023, as compared to $8,163 in the six months ended June 30, 2022, mainly due to the net income before income tax of $824,637 in the current period, as compared to a net loss before income tax of $3,273,929 in the prior period. Net Income (Loss) As a result of the foregoing, we reported a net income of $785,191 for the six months ended June 30, 2023, representing a $4,067,283, or 123.9%, increase from a net loss of $3,282,092 for the six months ended June 30, 2022. Net Loss Attributable to Non-controlling Interest We owned 51% equity ownership interest of Sigmaways and its subsidiaries as of June 30, 2023. Accordingly, we recorded net loss attributable to the non-controlling interest of $185,298 in the six months ended June 30, 2023. Net Income (Loss) Attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net income attributable to HeartCore Enterprises, Inc. of $970,489 for the six months ended June 30, 2023, representing a $4,252,581, or 129.6%, increase from a net loss attributable to HeartCore Enterprises, Inc. of $3,282,092 for the six months ended June 30, 2022. Liquidity and Capital Resources As of June 30, 2023, we had $4,238,741 in cash, as compared to $7,177,326 as of December 31, 2022. As of June 30, 2023, our working capital was $3,487,961, as compared to $4,887,444 as of December 31, 2022. We also had $2,812,337 in accounts receivable as of June 30, 2023. Our accounts receivable primarily includes balance due from customers for our on-premise software sold and services provided to and accepted by customers, as well as Sigmaways’s accounts receivable related to customized software development and services. The following table sets forth summary of our cash flows for the periods indicated: For the Six Months Ended June 30, 2023 2022 Net cash flows used in operating activities $ (1,368,562 ) $ (2,093,867 ) Net cash flows used in investing activities (1,181,646 ) (9,455 ) Net cash flows provided by (used in) financing activities (243,897 ) 11,651,622 Effect of exchange rate changes (144,480 ) (221,960 ) Net change in cash and cash equivalents (2,938,585 ) 9,326,340 Cash and cash equivalents, beginning of the period 7,177,326 3,136,839 Cash and cash equivalents, end of the period $ 4,238,741 $ 12,463,179 Operating Activities Net cash flows used in operating activities was $1,368,562 for the six months ended June 30, 2023, as compared to $2,093,867 net cash flows used in operating activities for the six months ended June 30, 2022, primarily consisting of the following: ● Net income of $785,191 for the six months ended June 30, 2023. ● Changes in fair value of investments in warrants of $166,107 and warrants received as non-cash consideration of $4,009,335 as two of our IPO consulting customers completed the IPO during the current period and we recognized investments in warrants and remeasured the fair value at the period end. ● An increase of $596,312 in accounts receivable in light of the increase in revenues. ● Offset by an increase of $810,639 in deferred revenue, due to the upfront payment received for long-term service contracts. ● Offset by stock-based compensation of $1,094,393 for the six months ended June 30, 2023, as we granted equity rewards to our employees and service providers in the first quarter of 2023. ● Offset by depreciation and amortization expenses of $360,097, mainly because we acquired Sigmaways and its subsidiaries on February 1, 2023 and recognized amortization expense for the intangible asset identified through the acquisition. ● Offset by the loss from changes in fair value of investments in marketable securities of $229,022 due to the decrease in customers’ stock price from the warrant exercise date to the balance sheet date. ● Offset by an increase of $106,625 in income tax payables as we generated more taxable income in the current period. 11 Investing Activities Net cash flows used in investing activities amounted to $1,181,646 for the six months ended June 30, 2023, as compared to net cash flows used in investing activities of $9,455 for the six months ended June 30, 2022 . Net cash flows used in investing activities for the six months ended June 30, 2023 primarily consisted of (i) payment for acquisition of Sigmaways and its subsidiaries, net of cash acquired, of $724,910; (ii) advance on notes receivable of $300,000; and (iii) purchases of property and equipment of $180,451. Financing Activities Net cash flows used in financing activities amounted to $243,897 for the six months ended June 30, 2023, as compared to net cash flows provided by financing activities of $11,651,622 for the six months ended June 30, 2022. Net cash flows used in financing activities primarily consisted of repayment of $411,923 for long-term debts, and repayment of $149,250 for insurance premium financing, offset by the net proceeds of $328,967 from the factoring arrangement. Contractual Obligations Lease commitment The Company has entered into three 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 June 30, 2023, future minimum lease payments under the non-cancelable lease agreements are as follows: Year Ended December 31, Finance Leases Operating Leases Remaining of 2023 $ 7,144 $ 148,105 2024 259 286,340 2025 - 286,340 2026 - 286,340 2027 - 286,340 Thereafter - 1,178,973 Total lease payments 7,403 2,472,438 Less: imputed interest (17 ) (144,032 ) Total lease liabilities 7,386 2,328,406 Less: current portion (7,386 ) (262,063 ) Non-current lease liabilities $ - $ 2,066,343 Long-Term Debts The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions. As of June 30, 2023, future minimum loan payments are as follows: Loan Year Ended December 31, Payment Remaining of 2023 $ 295,810 2024 433,421 2025 271,417 2026 258,793 2027 226,359 Thereafter 393,771 Total $ 1,879,571 Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of June 30, 2023. 12 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 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 herein reflect the more significant judgments and estimates used in preparation of our unaudited consolidated financial statements. Business Combinations We account for business combinations using the acquisition method, which requires management to estimate the fair value of the tangible assets, liabilities, identifiable intangible asset and non-controlling interest, and to properly allocate purchase price consideration to the individual assets acquired, liabilities assumed and non-controlling interest. Goodwill is measured as the excess amount of consideration transferred. The allocation of the purchase price utilizes significant estimates and assumptions in determining the fair values of identifiable assets acquired, liabilities assumed and non-controlling interest, especially with respect to intangible asset. These estimates are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset and are reviewed by consulting with third-party valuation appraisers. The purchase price allocation for business acquisitions contains uncertainties because it requires management’s judgment. The fair value of the intangible asset is estimated using the income approach using the multi-period excess earnings method. Management applies significant judgement related to this fair value method, which included the selection of an expected EBITDA margin assumption for the forecast period, and discount rate assumptions. These significant assumptions are based on company specific information and projections, which are not observable in the market (except for the discount rate assumption) and, therefore, are considered Level 2 and Level 3 measurements. These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions. The accounting for business combinations is a critical accounting estimate because it requires estimates and judgement in assessing the future cash flows of the acquired business, the fair value of non-controlling interest, and the allocation of the future cash flows to identifiable intangible assets, in determining the fair value for assets and liabilities. Revenue Recognition The Company recognizes revenues 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 value-added taxes and applicable local government levies. The Company currently generates its revenues from the following main sources: Revenues 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. Revenues from on-premise licenses are 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. 13 Revenues from Maintenance and Support Services 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. Revenues 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. Revenues from Software Development and Other Miscellaneous Services The Company provides customers with software development and support services 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. Revenues from Customized Software Development and Services The Company’s customized software development and services revenues primarily include revenues from providing software development solutions and other support services to its customers. The contract pricing is at stated billing rates per hour. These contracts are generally short-term in nature and not longer than one year in duration. For services provided under the contract that result in the transfer of control over time, the underlying deliverable in the contracts is owned and controlled by the customer and does not create an asset with an alternative use to the Company. The Company recognizes revenue on rate per hour contracts based on the amount billable to the customer, as the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date. Revenues from Consulting Services 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 and normally include both cash and noncash consideration. Cash consideration is paid in installment payments and is recognized in revenue over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. Noncash consideration is in the form of warrants of the customers and is measured at fair value at contract inception. Noncash consideration that is variable for reasons other than only the form of the consideration is included in the transaction price, but is subject to the constraint on variable consideration. The Company assesses the estimated amount of the variable noncash consideration at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved. Only when the significant revenues reversal is concluded probable of not occurring can variable consideration be included in revenues. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the variable noncash consideration is recognized in revenues until the underlying uncertainties have been resolved. The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company has determined that its contracts do not include a significant financing component. 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 factors certain accounts receivable upon or after the performance obligation is being met. 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 six months ended June 30, 2023 and 2022 that were included in the opening deferred revenues balance was approximately $1.3 million and $1.1 million, respectively. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.