HEARTCORE
ENTERPRISES, INC.
CONSOLIDATED
BALANCE SHEETS
| |
| | | |
| | |
| |
September
30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| (unaudited) | | |
| | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash
equivalents | |
$ | 7,843,208 | | |
$ | 3,136,839 | |
Accounts receivable, net | |
| 621,345 | | |
| 960,964 | |
Prepaid expenses | |
| 618,955 | | |
| 444,405 | |
Due from related party | |
| 43,900 | | |
| 50,559 | |
Loan receivable from employee | |
| - | | |
| 8,341 | |
Other
current assets | |
| 143,999 | | |
| 15,654 | |
Total
current assets | |
| 9,271,407 | | |
| 4,616,762 | |
| |
| | | |
| | |
Non-current assets: | |
| | | |
| | |
Property and equipment,
net | |
| 199,329 | | |
| 261,414 | |
Operating lease right-of-use
assets | |
| 2,458,485 | | |
| 3,319,749 | |
Deferred tax assets | |
| 242,358 | | |
| 297,990 | |
Security deposits | |
| 221,460 | | |
| 278,237 | |
Long-term loan receivable
from related party | |
| 234,316 | | |
| 335,756 | |
Loan receivable from employee,
non-current | |
| - | | |
| 4,518 | |
Other
non-current assets | |
| 2,188 | | |
| 8,737 | |
Total
non-current assets | |
| 3,358,136 | | |
| 4,506,401 | |
| |
| | | |
| | |
Total
assets | |
$ | 12,629,543 | | |
$ | 9,123,163 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’
EQUITY (DEFICIT) | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and accrued
expenses | |
$ | 445,752 | | |
$ | 646,425 | |
Accrued payroll and other
employee costs | |
| 245,113 | | |
| 255,082 | |
Due to related party | |
| 3,622 | | |
| 1,110 | |
Current portion of long-term
debts | |
| 622,937 | | |
| 849,995 | |
Insurance premium financing | |
| 89,652 | | |
| - | |
Operating lease liabilities,
current | |
| 264,387 | | |
| 332,277 | |
Finance lease liabilities,
current | |
| 19,502 | | |
| 37,459 | |
Income tax payables | |
| 1,867 | | |
| 10,919 | |
Deferred revenue | |
| 1,386,559 | | |
| 1,690,917 | |
Mandatorily redeemable
financial interest | |
| - | | |
| 447,986 | |
Other
current liabilities | |
| 42,475 | | |
| 281,673 | |
Total
current liabilities | |
| 3,121,866 | | |
| 4,553,843 | |
| |
| | | |
| | |
Non-current liabilities: | |
| | | |
| | |
Long-term debts | |
| 1,133,945 | | |
| 1,871,580 | |
Operating lease liabilities,
non-current | |
| 2,259,284 | | |
| 3,076,204 | |
Finance lease liabilities,
non-current | |
| 3,573 | | |
| 23,861 | |
Other
non-current liabilities | |
| 124,963 | | |
| 156,627 | |
Total
non-current liabilities | |
| 3,521,765 | | |
| 5,128,272 | |
| |
| | | |
| | |
Total
liabilities: | |
| 6,643,631 | | |
| 9,682,115 | |
| |
| | | |
| | |
Shareholders’ equity
(deficit): | |
| | | |
| | |
Preferred shares ($0.0001 par value, 20,000,000
shares authorized, no shares issued and outstanding as of September 30, 2022 and December 31, 2021) | |
| - | | |
| - | |
Common shares ($0.0001 par value, 200,000,000
shares authorized; 18,999,276 and 15,819,943 shares issued; 17,649,886 and 15,546,454 shares outstanding as of September 30, 2022
and December 31, 2021, respectively) | |
| 1,899 | | |
| 1,554 | |
Additional paid-in capital | |
| 18,220,206 | | |
| 3,350,779 | |
Treasury shares, at cost (1,349,390 and 0
shares as of September 30, 2022 and December 31, 2021, respectively) | |
| (3,500,000 | ) | |
| - | |
Accumulated deficit | |
| (9,149,139 | ) | |
| (3,896,113 | ) |
Accumulated
other comprehensive income (loss) | |
| 412,946 | | |
| (15,172 | ) |
Total
shareholders’ equity (deficit) | |
| 5,985,912 | | |
| (558,952 | ) |
| |
| | | |
| | |
Total
liabilities and shareholders’ equity (deficit) | |
$ | 12,629,543 | | |
$ | 9,123,163 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
HEARTCORE
ENTERPRISES, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
HEARTCORE
ENTERPRISES, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
* | Retrospectively
restated for effect of share issuances on July 16, 2021. |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Common
shares | | |
Additional | | |
Treasury
shares | | |
| | |
Accumulated
other | | |
Total
shareholders’ | |
| |
Number
of shares | | |
Amount | | |
paid-in
capital | | |
Number
of shares | | |
Amount | | |
Accumulated
deficit | | |
comprehensive
income (loss) | | |
equity
(deficit) | |
Balance, December 31, 2021 | |
| 15,546,454 | | |
$ | 1,554 | | |
$ | 3,350,779 | | |
| - | | |
$ | - | | |
$ | (3,896,113 | ) | |
$ | (15,172 | ) | |
$ | (558,952 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,578,451 | ) | |
| - | | |
| (1,578,451 | ) |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 80,053 | | |
| 80,053 | |
Issuance of common shares for cash | |
| 3,096,000 | | |
| 310 | | |
| 13,643,969 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 13,644,279 | |
Issuance of common shares from exercise of share options | |
| 273,489 | | |
| 27 | | |
| (11 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| 16 | |
Share-based compensation | |
| - | | |
| - | | |
| 422,164 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 422,164 | |
Balance, March 31, 2022 | |
| 18,915,943 | | |
| 1,891 | | |
| 17,416,901 | | |
| - | | |
| - | | |
| (5,474,564 | ) | |
| 64,881 | | |
| 12,009,109 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,703,641 | ) | |
| - | | |
| (1,703,641 | ) |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 219,360 | | |
| 219,360 | |
Share-based compensation | |
| 83,333 | | |
| 8 | | |
| 466,654 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 466,662 | |
Repurchase of common shares | |
| - | | |
| - | | |
| - | | |
| (558,809 | ) | |
| (1,336,762 | ) | |
| - | | |
| - | | |
| (1,336,762 | ) |
Balance, June 30, 2022 | |
| 18,999,276 | | |
| 1,899 | | |
| 17,883,555 | | |
| (558,809 | ) | |
| (1,336,762 | ) | |
| (7,178,205 | ) | |
| 284,241 | | |
| 9,654,728 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,970,934 | ) | |
| - | | |
| (1,970,934 | ) |
Net
income (loss) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,970,934 | ) | |
| - | | |
| (1,970,934 | ) |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 128,705 | | |
| 128,705 | |
Share-based compensation | |
| - | | |
| - | | |
| 336,651 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 336,651 | |
Repurchase of common shares | |
| - | | |
| - | | |
| - | | |
| (790,581 | ) | |
| (2,163,238 | ) | |
| - | | |
| - | | |
| (2,163,238 | ) |
Balance, September
30, 2022 | |
| 18,999,276 | | |
$ | 1,899 | | |
$ | 18,220,206 | | |
| (1,349,390 | ) | |
$ | (3,500,000 | ) | |
$ | (9,149,139 | ) | |
$ | 412,946 | | |
$ | 5,985,912 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
HEARTCORE
ENTERPRISES, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
| | | |
| | |
| |
For
the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
Cash flows from operating
activities: | |
| | | |
| | |
Net income
(loss) | |
$ | (5,253,026 | ) | |
$ | 414,826 | |
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
| | | |
| | |
Depreciation expenses | |
| 64,398 | | |
| 80,297 | |
Amortization of debt issuance
costs | |
| 3,051 | | |
| 4,358 | |
Non-cash lease expense | |
| 207,549 | | |
| 254,848 | |
Deferred income taxes | |
| (5,843 | ) | |
| 85,004 | |
Share-based compensation | |
| 1,225,477 | | |
| - | |
| |
| | | |
| | |
Changes
in assets and liabilities: | |
| | | |
| | |
Accounts receivable, net | |
| 168,021 | | |
| (634,711 | ) |
Prepaid expenses | |
| (56,553 | ) | |
| (177,880 | ) |
Other assets | |
| (142,967 | ) | |
| 34,568 | |
Accounts payable and accrued
expenses | |
| (96,238 | ) | |
| 684,960 | |
Accrued payroll and other
employee costs | |
| 59,059 | | |
| 63,126 | |
Due to related party | |
| 3,098 | | |
| - | |
Operating lease liabilities | |
| (213,691 | ) | |
| (265,984 | ) |
Finance lease liabilities | |
| (370 | ) | |
| (961 | ) |
Income tax payables | |
| (7,704 | ) | |
| 2,092 | |
Deferred revenue | |
| 45,938 | | |
| 639,643 | |
Other
liabilities | |
| (206,569 | ) | |
| 55,064 | |
| |
| | | |
| | |
Net
cash flows provided by (used in) operating activities | |
| (4,206,370 | ) | |
| 1,239,250 | |
| |
| | | |
| | |
Cash flows from investing
activities: | |
| | | |
| | |
Purchases of property and
equipment | |
| (41,672 | ) | |
| (24,675 | ) |
Advance and loan provided
to related parties | |
| - | | |
| (126,390 | ) |
Repayment
of loan provided to related party | |
| 33,042 | | |
| - | |
| |
| | | |
| | |
Net
cash flows used in investing activities | |
| (8,630 | ) | |
| (151,065 | ) |
| |
| | | |
| | |
Cash flows from financing
activities: | |
| | | |
| | |
Proceeds from initial public
offering, net of issuance cost | |
| 13,602,554 | | |
| - | |
Proceeds from issuance
of common shares prior to initial public offering | |
| 220,572 | | |
| - | |
Repurchase of common shares | |
| (3,500,000 | ) | |
| - | |
Payments for finance leases | |
| (29,051 | ) | |
| (42,941 | ) |
Proceeds from long-term
debt | |
| 258,087 | | |
| - | |
Repayment of long-term
debts | |
| (699,407 | ) | |
| (770,181 | ) |
Repayment of insurance
premium financing | |
| (298,886 | ) | |
| - | |
Payments for debt issuance
costs | |
| (1,030 | ) | |
| (3,033 | ) |
Payment
for mandatorily redeemable financial interest | |
| (430,489 | ) | |
| - | |
| |
| | | |
| | |
Net
cash flows provided by (used in) financing activities | |
| 9,122,350 | | |
| (816,155 | ) |
| |
| | | |
| | |
Effect of exchange rate
changes | |
| (200,981 | ) | |
| (239,423 | ) |
| |
| | | |
| | |
Net change in cash and cash equivalents | |
| 4,706,369 | | |
| 32,607 | |
| |
| | | |
| | |
Cash and cash equivalents
- beginning of the period | |
| 3,136,839 | | |
| 3,058,175 | |
| |
| | | |
| | |
Cash
and cash equivalents - end of the period | |
$ | 7,843,208 | | |
$ | 3,090,782 | |
| |
| | | |
| | |
Supplemental cash flow disclosure: | |
| | | |
| | |
Interest
paid | |
$ | 38,387 | | |
$ | 22,100 | |
Income
taxes paid | |
$ | 3,013 | | |
$ | 9,738 | |
| |
| | | |
| | |
Non-cash investing and financing
transactions | |
| | | |
| | |
| |
| | | |
| | |
Remeasurement of the lease
liability and right-of-use asset due to lease modification | |
$ | - | | |
$ | 225,983 | |
Payroll
withheld as repayment of loan receivable from employees | |
$ | 12,034 | | |
$ | 9,399 | |
Expense
paid by related party on behalf of the Company | |
$ | - | | |
$ | 107,178 | |
Reclassification
of non-controlling interest to mandatorily redeemable financial interest | |
$ | - | | |
$ | 447,986 | |
Liabilities
assumed in connection with purchase of property and equipment | |
$ | 17,731 | | |
$ | - | |
Share
repurchase liability settled by issuance of common shares | |
$ | 16 | | |
$ | - | |
Deferred
offering costs recognized against the proceeds from the offering | |
$ | 178,847 | | |
$ | - | |
Insurance premium financing | |
$ | 388,538 | | |
$ | - | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
HEARTCORE
ENTERPRISES, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
HeartCore
Enterprises, Inc. (“HeartCore USA” or the “Company”), a holding company, was incorporated under the laws of the
State of Delaware on May 18, 2021.
On
July 16, 2021, the Company executed a Share Exchange Agreement with certain shareholders of HeartCore Co. Ltd. (“HeartCore Japan”),
a company that was incorporated in Japan on September 12, 2009. Pursuant to the terms of the Share Exchange Agreement, the Company issued
15,999,994 shares of its common shares to the shareholders of HeartCore Japan in exchange for 10,706 shares out of 10,984 shares of common
shares issued by HeartCore Japan, representing approximately 97.5% of HeartCore Japan’s outstanding common shares. On February
24, 2022, the Company purchased the remaining 278 shares of common shares of HeartCore Japan. As a result, HeartCore Japan became a wholly
owned operating subsidiary of the Company.
The
share exchange on July 16, 2021 has been accounted for as a recapitalization between entities under common control since the same controlling
shareholders controlled these two entities before and after the transaction. The consolidation of the Company and its subsidiary has
been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the
earliest period presented in the accompanying unaudited consolidated financial statements.
The
Company, via its wholly-owned operating subsidiary, HeartCore Japan, is mainly engaged in the business of developing and sales of comprehensive
software. HeartCore USA and HeartCore Japan are hereafter referred to as the Company.
On
September 6, 2022, HeartCore USA entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51%
of the outstanding shares of Sigmaways, Inc. (“Sigmaways”), a company incorporated under the laws of the State of
California. The consideration will be determined by the parties prior to the closing of the acquisition. As of the date of this
filing, the transaction has not been closed.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations
of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements include the accounts of
the Company and its subsidiary. Prior to February 24, 2022, ownership interest of non-controlling party is presented as mandatorily redeemable
financial interest or non-controlling interest as applicable. All significant intercompany accounts and transactions have been eliminated.
These
unaudited interim consolidated financial statements do not include all of the information and disclosure required by the U.S. GAAP for
complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management,
all adjustments consisting of normal recurring nature considered necessary for a fair presentation of the financial position and the
results of operations and cash flows for the interim periods have been included. The unaudited interim consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021.
Use
of Estimates
In
preparing the consolidated financial statements in conformity U.S. GAAP, the management is required to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available
as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not
limited to, the allowance for doubtful accounts, useful lives of property and equipment, the impairment of long-lived assets, valuation
of share-based compensation, valuation allowance of deferred tax assets, implicit interest rate of operating and financing leases, valuation
of asset retirement obligations and revenue recognition. Actual results could differ from those estimates.
COVID-19
While
the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such
as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects
of the pandemic continue to be unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing
operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent
to which COVID-19 may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain
uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance
that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities.
These estimates may change, as new events occur and additional information is obtained, which will be recognized in the consolidated
financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be
material to the Company’s financial statements.
Asset
Retirement Obligations
Pursuant
to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the
time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other
non-current liabilities in the consolidated balance sheets, in accordance with Accounting Standards Codification (“ASC”)
410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing
the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations:
SCHEDULE OF CHANGES IN ASSET RETIREMENT OBLIGATIONS
| |
September
30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Beginning balance | |
$ | 155,666 | | |
$ | 173,043 | |
Accretion expense | |
| 350 | | |
| 730 | |
Foreign currency translation
adjustment | |
| (31,053 | ) | |
| (18,107 | ) |
Ending balance | |
$ | 124,963 | | |
$ | 155,666 | |
Software
Development Costs
Software
development costs are expensed as incurred until the point the Company establishes technological feasibility. Technological feasibility
is established upon completion of a detailed program design or the completion of a working model. Costs incurred by the Company between
establishment of technological feasibility and the point at which the product is ready for general release are capitalized and amortized
over the economic life of the related products. The Company’s software development costs incurred subsequent to achieving technological
feasibility have not been significant and all software development costs have been expensed as incurred.
In
the nine months ended September 30, 2022 and 2021, software development costs expensed as incurred amounted to $583,762 and $321,857,
respectively. These software development costs were included in the research and development expenses.
Impairment
of Long-Lived Assets
Long-lived
assets with finite lives, primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition
are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no
impairments of these assets during the nine months ended September 30, 2022 and 2021.
Foreign
Currency Translation
The
Company maintains its books and record in its local currency, Japanese YEN (“JPY”), which is a functional currency as being
the primary currency of the economic environment in which its operation is conducted. Transactions denominated in currencies other than
the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency
using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of
operations.
The
reporting currency of the Company is the United States Dollars (“US$”), and the accompanying unaudited consolidated financial
statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets
and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet
date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation
of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of
changes in shareholders’ equity (deficit).
Translation
of amounts from the local currency of the Company into US$1 has been made at the following exchange rates:
SCHEDULE OF FOREIGN CURRENCY TRANSLATION
| |
September
30, 2022 | | |
September
30, 2021 | |
Current JPY: US$1 exchange rate | |
| 144.60 | | |
| 111.70 | |
Average JPY: US$1 exchange rate | |
| 128.08 | | |
| 108.52 | |
Revenue
Recognition
The
Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with customers”.
To
determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s)
with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price
to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance
obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local
government levies. The Consumption Tax on sales is calculated at 10% of gross sales.
The
Company currently generates its revenue from the following main sources:
Revenue
from On-Premise Software
Licenses
for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company
provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right
for a specified term. Revenue from on-premise licenses is recognized upfront at the point in time when the software is made available
to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle.
Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise
software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions
when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach
as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for
a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions
or other observable evidence.
Revenue
from Maintenance and Support Service
Maintenance
and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified
software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time
as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted
by the customers.
Revenue
from Software as a Service (“SaaS”)
The
Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing
the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over
the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts
are generally one year or less in length.
Revenue
from Software Development and other Miscellaneous Services
The
Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose
of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services,
such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers
and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.
Revenue
from Consulting Service
The
Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts,
which primarily include communicating with intermediary parties, preparing required documents and supporting the listing process. Revenues
from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less
than one year in length.
The
timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is
included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records
deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred
revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized
during the nine months ended September 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately
$1.2 million and $2.0 million, respectively.
Disaggregation
of Revenue
The
Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing
and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues by type
for the three and nine months ended September 30, 2022 and 2021 is as following:
SCHEDULE OF DISAGGREGATION OF REVENUES
| |
| | | |
| | | |
| | | |
| | |
| |
For
the Three Months Ended | | |
For
the Nine Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenue from On-Premise Software | |
$ | 257,121 | | |
$ | 1,204,326 | | |
$ | 1,775,254 | | |
$ | 2,586,542 | |
Revenue from Maintenance and Support Service | |
| 678,521 | | |
| 1,009,640 | | |
| 2,251,137 | | |
| 2,842,407 | |
Revenue from Software as a Service (“SaaS”) | |
| 122,347 | | |
| 323,836 | | |
| 352,251 | | |
| 615,356 | |
Revenue from Software Development and other
Miscellaneous Services | |
| 340,742 | | |
| 932,708 | | |
| 1,518,032 | | |
| 2,401,706 | |
Revenue from Consulting
Service | |
| 473,745 | | |
| - | | |
| 922,100 | | |
| - | |
Total Revenue | |
$ | 1,872,476 | | |
$ | 3,470,510 | | |
$ | 6,818,774 | | |
$ | 8,446,011 | |
The
Company’s disaggregation of revenues by product/service is as following:
| |
| | | |
| | | |
| | | |
| | |
| |
For
the Three Months Ended | | |
For
the Nine Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenue from Customer Experience
Management Platform | |
$ | 1,171,150 | | |
$ | 3,000,705 | | |
$ | 4,757,369 | | |
$ | 7,012,129 | |
Revenue from Process Mining | |
| 68,560 | | |
| 182,629 | | |
| 453,368 | | |
| 588,307 | |
Revenue from Robotic Process Automation | |
| 69,693 | | |
| 134,488 | | |
| 317,110 | | |
| 433,736 | |
Revenue from Task Mining | |
| 66,799 | | |
| 96,106 | | |
| 252,234 | | |
| 228,712 | |
Revenue from Consulting Service | |
| 473,745 | | |
| - | | |
| 922,100 | | |
| - | |
Revenue from Others | |
| 22,529 | | |
| 56,582 | | |
| 116,593 | | |
| 183,127 | |
Total Revenue | |
$ | 1,872,476 | | |
$ | 3,470,510 | | |
$ | 6,818,774 | | |
$ | 8,446,011 | |
As
of September 30, 2022 and 2021, and for the period then ended, all long-lived assets and the predominant portion of the revenue generated
are attributed to the Company’s operation in Japan.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does
not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition
and payment practices of its customers to minimize collection risk on accounts receivable.
For
the nine months ended September 30, 2022, customer A represents 10.0% of the Company’s total revenues. For the nine months ended
September 30, 2021, customer B and C represent 18.5% and 10.5%, respectively, of the Company’s total revenues.
For
the nine months ended September 30, 2022, vendor A, B, C, and D represent 25.9%, 19.7%, 16.3% and 15.5%, respectively, of the Company’s
total purchases. For the nine months ended September 30, 2021, vendor A, B, and D represents 30.7%, 33.6%, and 23.2%, respectively, of
the Company’s total purchases.
Share-based
Compensation
The
Company accounts for share-based compensation awards in accordance with ASC 718, “Compensation – Stock Compensation”.
The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the consolidated
statements of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over
the requisite service period or vesting period. The Company records forfeitures as they occur.
NOTE
3 — ACCOUNTS RECEIVABLE, NET
Accounts
receivable consists of the following:
SCHEDULE OF ACCOUNTS RECEIVABLE NET
| |
| | | |
| | |
| |
September
30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accounts receivable | |
$ | 621,345 | | |
$ | 960,964 | |
Less: allowance for
doubtful accounts | |
| - | | |
| - | |
Accounts receivable,
net | |
$ | 621,345 | | |
$ | 960,964 | |
NOTE
4 — PREPAID EXPENSES
Prepaid
expenses consist of the following:
SCHEDULE OF PREPAID EXPENSES
| |
| | | |
| | |
| |
September
30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Prepayments to software vendors | |
$ | 150,603 | | |
$ | 157,060 | |
Prepaid selling expenses | |
| 148,680 | | |
| - | |
Prepaid subscription fees | |
| 69,749 | | |
| 53,413 | |
Deferred offering expenses | |
| - | | |
| 180,630 | |
Prepaid insurance premium | |
| 186,040 | | |
| 18,252 | |
Others | |
| 63,883 | | |
| 35,050 | |
Total | |
$ | 618,955 | | |
$ | 444,405 | |
Deferred
offering expenses, consisting of legal fees and road show expenses relating to the Company’s initial public offering, are capitalized
and recorded on the balance sheet. The deferred offering expenses were reclassified to shareholders’ equity and recorded against
the proceeds received upon the closing of the Company’s initial public offering on February 14, 2022.
NOTE
5 — RELATED PARTY TRANSACTIONS
As
of September 30, 2022 and December 31, 2021, the Company has a due to related party balance of $3,622 and $1,110, respectively, from
Sumitaka Yamamoto, the CEO and major shareholder of the Company. The balance is unsecured, non-interest bearing and due on demand. During
the nine months ended September 30, 2022, the related party paid operating expenses on behalf of the Company and received the payments
in a net amount of $3,098. During the nine months ended September 30, 2021, the Company advanced $70,518 to this related party, and the
related party paid expenses of $93,310 on behalf of the Company.
As
of September 30, 2022 and December 31, 2021, the Company has a loan receivable balance of $278,216 and $386,315, respectively, from Heartcore
Technology Inc., a company controlled by the CEO of the Company. The loan was made to the related party to support its operation. The
balance is unsecured, bears an annual interest of 1.475%, and requires repayments in installments starting from February 2022. During
the nine months ended September 30, 2022 and 2021, the Company loaned nil and $55,872, respectively, to this related party, and the related
party paid expenses of nil and $13,868, respectively, on behalf of the Company. During the nine months ended September 30, 2022 and 2021,
the Company received repayments of $33,042 and nil, respectively, from this related party.
In
June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. In July 2021, Suzuyo Shinwart Corporation sold
all its shares of the Company to the Company’s CEO and ceased to be the Company’s related party. During the period from January
1, 2021 to July 2021, when Suzuyo Shinwart Corporation was a related party of the Company, the Company has revenue from this related
party of $159,677 from software sales and incurred cost with this related party of $336,645 for software development services provided.
During
the period from January 1, 2022 through January 13, 2022, the Company completed a private placement, in which, it issued 30,000 shares
of common shares at a purchase price of $2.50 per share to the officers of the Company for an aggregate amount of $75,000.
NOTE
6 — PROPERTY AND EQUIPMENT, NET
Property
and equipment consist of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT NET
| |
September
30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Leasehold improvement | |
$ | 270,611 | | |
$ | 320,257 | |
Machinery and equipment | |
| 284,212 | | |
| 316,126 | |
Vehicle | |
| 96,496 | | |
| 121,235 | |
Software | |
| 147,748 | | |
| 185,627 | |
Subtotal | |
| 799,067 | | |
| 943,245 | |
Accumulated depreciation | |
| (599,738 | ) | |
| (681,831 | ) |
Property and equipment,
net | |
$ | 199,329 | | |
$ | 261,414 | |
Depreciation
expense was $64,398 and $80,297 for the nine months ended September 30, 2022 and 2021, respectively.
NOTE
7 — LEASES
The
Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases
for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were classified as finance
leases. Right-of-use assets of these finance leases in the amount of $21,741 and $57,167 are included in property and equipment as of
September 30, 2022 and December 31, 2021, respectively.
The
components of lease costs are as follows:
SCHEDULE OF LEASE COSTS
| |
2022 | | |
2021 | |
| |
For the Nine
Months Ended | |
| |
September
30, | |
| |
2022 | | |
2021 | |
Finance lease costs | |
| | | |
| | |
Amortization
of right-of-use assets | |
$ | 26,825 | | |
$ | 40,100 | |
Interest
on lease liabilities | |
| 370 | | |
| 961 | |
Total finance lease costs | |
| 27,195 | | |
| 41,061 | |
Operating lease costs | |
| 244,688 | | |
| 294,946 | |
Total lease costs | |
$ | 271,883 | | |
$ | 336,007 | |
The
following table presents supplemental information related to the Company’s leases:
SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO THE COMPANY'S LEASES
| |
2022 | | |
2021 | |
| |
For the Nine
Months Ended | |
| |
September
30, | |
| |
2022 | | |
2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| |
Operating cash
flows from finance leases | |
$ | 370 | | |
$ | 961 | |
Operating cash flows from
operating leases | |
| 243,108 | | |
| 306,082 | |
Financing cash flows from
finance leases | |
| 29,051 | | |
| 42,941 | |
| |
| | | |
| | |
Weighted average remaining lease term (years) | |
| | | |
| | |
Finance leases | |
| 1.1 | | |
| 1.7 | |
Operating leases | |
| 9.4 | | |
| 10.4 | |
| |
| | | |
| | |
Weighted-average discount rate: (per annum) | |
| | | |
| | |
Finance leases | |
| 1.32 | % | |
| 1.32 | % |
Operating leases | |
| 1.32 | % | |
| 1.32 | % |
As
of September 30, 2022, the future maturity of lease liabilities is as follows:
SCHEDULE OF FINANCE LEASE AND OPERATING LEASE FUTURE MATURITY OF LEASE LIABILITIES
Year
ending December 31, | |
Finance leases | | |
Operating leases | |
Remaining of 2022 | |
$ | 5,243 | | |
$ | 71,778 | |
2023 | |
| 17,649 | | |
| 287,112 | |
2024 | |
| 259 | | |
| 287,112 | |
2025 | |
| - | | |
| 287,112 | |
2026 | |
| - | | |
| 287,112 | |
Thereafter | |
| - | | |
| 1,469,265 | |
Total lease payments | |
| 23,151 | | |
| 2,689,491 | |
Less: imputed interest | |
| (76 | ) | |
| (165,820 | ) |
Total lease liabilities | |
| 23,075 | | |
| 2,523,671 | |
Less: current portion | |
| 19,502 | | |
| 264,387 | |
Non-current lease liabilities | |
$ | 3,573 | | |
$ | 2,259,284 | |
Pursuant
to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $221,460 and
$278,237 as of September 30, 2022 and December 31, 2021, respectively.
NOTE
8 — LONG-TERM DEBTS
The
Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions, which consist of
the following:
SCHEDULE OF LONG-TERM DEBTS
Name
of Financial Institutions | |
Original
Amount Borrowed (JPY) | | |
|
Loan Duration | |
Annual
Interest Rate | | |
Balance
as of September 30, 2022 | | |
Balance
as of December 31, 2021 | |
Bond payable | |
| | | |
|
| |
| | | |
| | | |
| | |
Corporate bond issued through Resona
Bank | |
| 100,000,000 | (a)(b) | |
|
1/10/2019—
1/10/2024 | |
| 0.430 | % | |
$ | 207,469 | | |
$ | 434,431 | |
Loans with banks and other
financial institutions | |
| | | |
|
| |
| | | |
| | | |
| | |
Resona Bank, Limited. | |
| 30,000,000 | (a) | |
|
12/29/2017—
12/30/2022 | |
| 1.475 | % | |
| 10,373 | | |
| 56,476 | |
Resona Bank, Limited. | |
| 50,000,000 | (a)(b) | |
|
12/29/2017—
12/29/2024 | |
| 0.675 | % | |
| 111,238 | | |
| 191,454 | |
Resona Bank, Limited. | |
| 10,000,000 | (a)(b) | |
|
9/30/2020—
9/30/2027 | |
| 0.000 | % | |
| 49,405 | | |
| 72,411 | |
Resona Bank, Limited. | |
| 40,000,000 | (a)(b) | |
|
9/30//2020—
9/30/2027 | |
| 0.000 | % | |
| 197,621 | | |
| 289,644 | |
Resona Bank, Limited. | |
| 20,000,000 | (a)(b) | |
|
11/13/2020—
10/31/2027 | |
| 1.600 | % | |
| 100,456 | | |
| 146,890 | |
Sumitomo Mitsui Banking Corporation | |
| 100,000,000 | | |
|
12/28/2018—
12/28/2023 | |
| 1.475 | % | |
| 172,787 | | |
| 361,925 | |
Sumitomo Mitsui Banking Corporation | |
| 10,000,000 | (b) | |
|
12/30/2019—
12/30/2026 | |
| 1.975 | % | |
| 41,999 | | |
| 63,105 | |
The Shoko Chukin Bank, Ltd. | |
| 30,000,000 | | |
|
9/28/2018—
8/31/2023 | |
| 1.200 | % | |
| 38,174 | | |
| 92,273 | |
The Shoko Chukin Bank, Ltd. | |
| 50,000,000 | | |
|
7/27/2020—
6/30/2027 | |
| 1.290 | % | |
| 237,898 | | |
| 351,020 | |
Japan Finance Corporation | |
| 40,000,000 | | |
|
12/15/2017—
11/30/2022 | |
| 0.300 | % | |
| 12,517 | | |
| 73,940 | |
Japan Finance Corporation | |
| 80,000,000 | | |
|
11/17/2020—
11/30/2027 | |
| 0.210 | % | |
| 413,831 | | |
| 603,339 | |
Higashi-Nippon Bank | |
| 30,000,000 | (a) | |
|
3/31/2022—
3/31/2025 | |
| 1.400 | % | |
| 172,614 | | |
| - | |
Aggregate outstanding principal balances | |
| | | |
|
| |
| | | |
| 1,766,382 | | |
| 2,736,908 | |
Less: unamortized debt issuance costs | |
| | | |
|
| |
| | | |
| (9,500 | ) | |
| (15,333 | ) |
Less: current portion | |
| | | |
|
| |
| | | |
| (622,937 | ) | |
| (849,995 | ) |
Non-current portion | |
| | | |
|
| |
| | | |
$ | 1,133,945 | | |
$ | 1,871,580 | |
|
(a) |
These
debts are guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder. |
|
(b) |
These
debts are guaranteed by Tokyo Credit Guarantee Association, and the Company has paid guarantee expenses for these debts. |
In
March 2022, the Company entered into a loan agreement with Higashi-Nippon Bank with a term of three years payable monthly. The loan is
guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder.
Interest
expense for long-term debts was $19,502 and $24,909 for the nine months ended September 30, 2022 and 2021, respectively.
As
of September 30, 2022, future minimum loan payments are as follows:
SCHEDULE OF FUTURE MINIMUM LOAN PAYMENTS
Year ending December 31, | |
Loan | |
| |
Payment | |
Remaining of 2022 | |
$ | 107,593 | |
2023 | |
| 646,715 | |
2024 | |
| 400,961 | |
2025 | |
| 230,041 | |
2026 | |
| 209,315 | |
Thereafter | |
| 171,757 | |
Total | |
$ | 1,766,382 | |
NOTE
9 — INSURANCE PREMIUM FINANCING
In
February 2022, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $388,538 at an annual
interest rate of 12.80% for nine months from February 1, 2022, payable in nine monthly installments of principal and interest. As of
September 30, 2022, the balance of the insurance premium financing was $89,652. During the nine months ended September 30, 2022, the
interest incurred was $19,859.
NOTE
10 — INCOME TAXES
United
States (U.S.)
HeartCore
USA is a holding company registered in the State of Delaware incorporated in May 2021. The U.S. federal income tax rate is 21%. No provision
for income taxes in the U.S. has been made as the Company has no U.S. taxable income for the nine months ended September 30, 2022 and
2021.
Japan
The
Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. As a result of its business activities, the
Company files tax returns that are subject to examination by the local tax authority. Income taxes in Japan applicable to the Company
are imposed by the national, prefectural, and municipal governments and in the aggregate resulted in an effective statutory rate of approximately
34.59% and 30.62%, respectively, for the nine months ended September 30, 2022 and 2021.
For
the nine months ended September 30, 2022 and 2021, the Company’s income tax expenses (benefits) are as follows:
SCHEDULE OF INCOME TAX EXPENSES
| |
2022 | | |
2021 | |
| |
For the Nine
Months Ended | |
| |
September
30, | |
| |
2022 | | |
2021 | |
Current | |
$ | (2,108 | ) | |
$ | 9,970 | |
Deferred | |
| (8,798 | ) | |
| 87,467 | |
Income tax expense (benefit) | |
$ | (10,906 | ) | |
$ | 97,437 | |
The
effective tax rate was 0.21% and 19.02% for the nine months ended September 30, 2022 and 2021, respectively.
NOTE
11 – STOCK BASED COMPENSATION
Options
In
May 2016, the Company granted 507 units stock options to its employees each to acquire one share of common shares of HeartCore Japan
(an equivalent of approximately 1,494 shares of common shares of HeartCore USA) at JPY10 each (approximately $0.09). All options are
exercisable upon issuance with a repurchase provision before the completion of the Company’s initial public offering, which serves
as a vesting condition. All employees that were granted these stock options had early exercised their stock options in 2016 prior to
the vesting of the related stock options. As of September 30, 2021, 324 units of the options were forfeited, and the CEO of the Company
has repurchased and held the shares issued related to the early exercise of such stock options on behalf of the Company. On November
3, 2021, the Company redeemed 484,056 shares (equivalent to 324 shares of common shares of HeartCore Japan) from the CEO of the Company.
The
consideration received for the remaining early exercised options were recorded by the Company as a share repurchase liability included
in other current liabilities in the consolidated balance sheets with JPY1,830 (approximately $16) as of December 31, 2021. The shares
issued related to the early exercise of the above-mentioned stock options were not considered outstanding as of December 31, 2021. On
February 14, 2022, the 183 units of stock options were vested upon the completion of the Company’s initial public offering and
the Company recognized share-based compensation of $11,005 during the nine months ended September 30, 2022. In the same period, the share
repurchase liability of $16 was settled by issuance of 273,489 shares of common shares (equivalent to 183 shares of common shares of
HeartCore Japan) from exercise of stock options.
The
following summarized the Company’s stock options activity for the stock option issued in 2016 for the nine months ended September
30, 2022 and 2021:
SCHEDULE OF UNVESTED STOCK OPTION
| |
| | |
| |
Number
of stock options | |
Issued and unvested as of January 1, 2021 | |
| 194 | |
Forfeited | |
| 11 | |
Vested and exercised | |
| | |
| |
| | |
Issued and unvested as of September 30,
2021 | |
| 183 | |
| |
| | |
Issued and unvested as of January 1, 2022 | |
| 183 | |
Vested and exercised | |
| 183 | |
Exercisable as of September 30, 2022 | |
| - | |
On
December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common shares at an exercise price of $2.50 per share
to various officers, directors, employees and consultants of the Company. The options vest on each annual anniversary of the date of
issuance, in an amount equal to 25% of the applicable shares of common shares, with the expiration date on December 25, 2031.
On
August 2, 2022, the Company awarded options to purchase 2,000 shares of common shares at an exercise price of $2.94 per share to an employee
of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to 25% of the applicable shares
of common shares, with the expiration date on August 2, 2032.
On
August 9, 2022, the Company awarded options to purchase 14,500 shares of common shares at an exercise price of $2.48 per share to three
prior employees of the Company. The options were fully vested and exercisable on the grant date, with the expiration
date on August 9, 2026. As of September 30, 2022, none of the options were exercised.
The
following table summarizes the share options activity and related information for the nine months ended September 30, 2022:
SCHEDULE OF STOCK OPTION ACTIVITY
| |
Number
of Options/ Warrants | | |
Weighted
Average Exercise Price | | |
Weighted
Average Remaining Term (Years) | | |
Intrinsic
Value | |
As of January 1, 2022 | |
| 1,534,500 | | |
$ | 2.50 | | |
| 9.99 | | |
$ | - | |
Granted | |
| 16,500 | | |
| 2.54 | | |
| 4.59 | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited | |
| (39,500 | ) | |
| 2.50 | | |
| - | | |
| - | |
As of September 30, 2022 | |
| 1,511,500 | | |
$ | 2.50 | | |
| 9.19 | | |
$ | - | |
Vested and exercisable as of September
30, 2022 | |
| 14,500 | | |
$ | 2.48 | | |
| 3.86 | | |
$ | - | |
Options
granted historically were valued using the binomial model with the assistance of an independent valuation specialist. The Company calculated
the fair value of options granted in the nine months ended September 30, 2022 using the Black-Scholes model. Significant assumptions
used in the valuations include expected volatility, risk-free interest rate, dividend yield and expected exercise term.
For
the three and nine months ended September 30, 2022, share-based compensation related to the options totaled $280,883 and $858,633, respectively.
For the three and nine months ended September 30, 2021, share-based compensation related to the options was nil. The outstanding unamortized
share-based compensation related to options was $1,289,747 (which will be recognized through August 2026) as of September 30, 2022.
Restricted
Stock Units (“RSUs”)
On
February 9, 2022, the Company entered into executive employment agreements with five executives and granted 85,820 RSUs pursuant to the
2021 Equity Incentive Plan. The RSUs vest on each annual anniversary of the date of the employment agreement, in an amount equal to 25%
of the applicable shares of common shares. The fair value of the RSUs at grant date was $424,809.
On
February 25, 2022, the Company entered into a service agreement with a marketing company to purchase 6-month marketing services and granted
83,333 RSUs. The RSUs were issued and vested on May 15, 2022. The fair value of the RSUs at grant date was $224,999.
The
following table summarizes the RSUs activity for the nine months ended September 30, 2022:
SCHEDULE
OF RESTRICTED STOCK UNITS
| |
Number
of RSUs | | |
Weighted
Average Grant Date Fair Value per Share | |
Unvested as of January 1, 2022 | |
| - | | |
$ | - | |
Granted | |
| 169,153 | | |
| 3.84 | |
Vested | |
| (83,333 | ) | |
| 2.70 | |
Forfeited | |
| - | | |
| - | |
Unvested as of September 30, 2022 | |
| 85,820 | | |
$ | 4.95 | |
For
the three and nine months ended September 30, 2022, the Company recognized RSU-related share-based compensation of $55,768 and $366,844,
respectively. The outstanding unamortized share-based compensation related to RSUs was $282,964 (which will be recognized through February
2026) as of September 30, 2022.
NOTE
12 – SHAREHOLDERS’ EQUITY (DEFICIT)
The
Company was authorized to issue 200,000,000 shares of common shares, par value of $0.0001 per share, and 20,000,000 shares of preferred
shares, par value of $0.0001 per share.
During
the period from January 1, 2022 through January 13, 2022, the Company issued 96,000 shares of common shares at a purchase price of $2.50
per share for an aggregate net proceeds of $220,572 in a private placement, including 30,000 shares of common shares issued to the officers
of the Company.
On
February 14, 2022, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “HTCR”.
The Company offered 3,000,000 common shares at $5.00 per share. Net proceeds raised by the Company from the initial public offering amounted
to $13,724,167 after deducting underwriting discounts and commissions and other offering expenses. The Company has deferred costs of
$300,460 directly attributed to the offering, among which $178,847 offering costs were paid and deferred as of December 31, 2021. Those
costs were also charged against the proceeds from the offering.
On
February 14, 2022, 273,489 shares of common shares were issued from exercise of stock options by settling share repurchase liability
of $16 (also see NOTE 11).
On
May 15, 2022, 83,333 shares of restricted shares were issued to a marketing company as compensation of services received (also see NOTE
11).
Share
Repurchase Program
On
June 1, 2022, the Board of Directors approved a share repurchase program (“2022 Share Repurchase Program”), pursuant to which
the Company is authorized to repurchase up to $3.5 million of its outstanding common shares. The timing and amount of repurchases under
the program are determined by the Company’s management based on its evaluation of market conditions and other factors. This program
has no set termination date and may be suspended or discontinued by at any time.
During
the period from June 1, 2022 through September 30, 2022, the Company repurchased 1,349,390 shares of common shares at an average price
of $2.59 per share totaling approximately $3.5 million (including commissions) under the 2022 Share Repurchase Program. As of September
30, 2022, the Company has used up the entire balance authorized under the 2022 Share Repurchase Program.
As
of September 30, 2022 and December 31, 2021, there were 18,999,276 and 15,819,943 shares, respectively, of common shares issued; and
17,649,886 and 15,546,454 shares, respectively, of common shares outstanding.
No
preferred shares were issued and outstanding as of September 30, 2022 and December 31, 2021.
NOTE
13 – MANDATORILY REDEEMABLE FINANCIAL INTEREST
On
August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore
Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan
held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for 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. On February 24, 2022, the Company purchased the 278 shares of HeartCore Japan from Dentsu Digital
for JPY50,040,000 (approximately $430,000). As a result, HeartCore Japan became a wholly-owned subsidiary of the Company.
NOTE
14 – EARNINGS (LOSS) PER SHARE
Basic
earnings (loss) per share is calculated on the basis of weighted-average outstanding common shares. Diluted earnings (loss) per share
is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options, restricted
stock unit awards and other dilutive securities.
The
computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2022 and 2021 is as follows:
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
| |
| | | |
| | | |
| | | |
| | |
| |
For
the Three Months Ended | | |
For
the Nine Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Earnings (loss) per share
– basic Numerator: | |
| | | |
| | | |
| | | |
| | |
Allocation
of net income (loss) attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings (loss)
per common share — basic | |
$ | (1,970,934 | ) | |
$ | 186,173 | | |
$ | (5,253,026 | ) | |
$ | 403,714 | |
Net income (loss) attributable to common shareholders | |
| (1,970,934 | ) | |
| 186,173 | | |
| (5,253,026 | ) | |
| 403,714 | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted average number
of common shares outstanding used in calculating basic earnings (loss) per share | |
| 17,835,027 | | |
| 15,242,454 | | |
| 18,014,483 | | |
| 15,242,454 | |
Denominator used for
earnings (loss) per share | |
| 17,835,027 | | |
| 15,242,454 | | |
| 18,014,483 | | |
| 15,242,454 | |
Earnings (loss) per share — basic | |
$ | (0.11 | ) | |
$ | 0.01 | | |
$ | (0.29 | ) | |
$ | 0.03 | |
| |
For
the Three Months Ended | | |
For
the Nine Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Earnings (loss) per share
– diluted Numerator: | |
| | | |
| | | |
| | | |
| | |
Allocation
of net income (loss) attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating earnings (loss)
per common share — diluted | |
$ | (1,970,934 | ) | |
$ | 186,173 | | |
$ | (5,253,026 | ) | |
$ | 403,714 | |
Net income (loss) attributable to common shareholders | |
| (1,970,934 | ) | |
| 186,173 | | |
| (5,253,026 | ) | |
| 403,714 | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding
used in calculating diluted earnings (loss) per share | |
| 17,835,027 | | |
| 15,242,454 | | |
| 18,014,483 | | |
| 15,242,454 | |
Conversion
of share repurchase liability to common shares* | |
| - | | |
| 273,489 | | |
| - | | |
| 273,489 | |
Denominator used for
earnings (loss) per share | |
| 17,835,027 | | |
| 15,515,943 | | |
| 18,014,483 | | |
| 15,515,943 | |
Earnings (loss) per share — diluted | |
$ | (0.11 | ) | |
$ | 0.01 | | |
$ | (0.29 | ) | |
$ | 0.03 | |
* |
The
share repurchase liability is related to the early exercised stock options that are issued and unvested as of September 30, 2021,
see NOTE 11. Each option is convertible into one share of common stock of HeartCore Japan, which is an equivalent of approximately
1,494 shares of common shares of the Company. The liability was settled by issuance of common shares on February 14, 2022. |
For
the three and nine months ended September 30, 2022, the weighted average shares outstanding are the same for basic and diluted loss
per share calculations, as the inclusion of common shares equivalents of 1,636,820
would have an anti-dilutive effect.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking
statements made by or on behalf of HeartCore Enterprises, Inc. (the “Company”). The Company and its representatives may from
time to time make written or oral statements that are “forward-looking,” including statements contained in this report and
other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or
potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,”
“anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking
statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A,
“Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as the same
may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q.
Although
we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to
foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking
statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made,
in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate
under the circumstances.
Except
as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions
to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this
report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any
statement is based.
Business
Overview
We
are a leading software development company based in Tokyo, Japan. We provide software through two business units. The first business
unit includes a customer experience management business that has been in existence for 12 years. Our customer experience management platform
(the “CXM Platform”) includes marketing, sales, service and content management systems, as well as other tools and integrations,
that enable companies to attract and engage customers throughout the customer experience. We also provide education, services and support
to help customers be successful with our CXM Platform.
The
second business unit is a digital transformation business which provides customers with robotics process automation, process mining and
task mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software
that supports the narrow needs of large enterprise customers.
We
have made significant investments in our sales and marketing efforts globally. As of September 30, 2022, our sales and marketing organization
was comprised of 15 employees including our field sales organization, which maintains a physical sales presence in the Japanese software
market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified
revenue and customer base. As of September 30, 2022, our combined business units (customer experience management business unit and digital
transformation business unit) had a total of 889 customers in Japan.
We
were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly-owned subsidiary,
HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co”), which was established in Japan by Mr. Sumitaka Yamamoto, our
CEO, in 2009. We acquired 97.5% of the equity interest of HeartCore Co in July 2021 and acquired the remaining interest in February 2022.
HeartCore Co started out with helping companies effectively managing content with its powerful content management system. Since then,
HeartCore Co has expanded offerings to help companies manage all forms of business processes.
The
acquisition of HeartCore Co in July 2021 was accounted for as a recapitalization among entities under common control since the same controlling
shareholders controlled all these entities before and after the transaction. The consolidation of the Company and its subsidiary has
been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the
first period presented in the accompanying consolidated financial statements.
Recent
Developments
Amendment
No. 1 to SYLA Consulting and Services Agreement
As
previously disclosed in the Current Report on Form 8-K filed on May 25, 2022 with the SEC, on May 13, 2022, the Company entered into
a Consulting and Services Agreement (the “SYLA Consulting Agreement”) by and between the Company and Syla
Technologies Co., Ltd. f/k/a SYLA Holdings Co. Ltd. (“SYLA”), pursuant to which the Company agreed to provide SYLA
certain services.
On
August 17, 2022, the Company and SYLA entered into Amendment No. 1 to the SYLA Consulting Agreement (“Amendment No. 1”).
In Amendment No. 1, the parties acknowledged and agreed that pursuant to the terms of the SYLA Consulting Agreement, SYLA agreed to
pay to the Company, among other things, a cash “services fee” in the amount of $500,000, to be paid at certain times,
including $150,000 on August 13, 2022 (the “Second Payment”). Pursuant to the terms of Amendment No. 1, the parties
agreed that in lieu of making the Second Payment, SYLA would issue to the Company a warrant to acquire 37,500 shares of SYLA’s
capital stock (the “New Warrant”). Upon issuance of the New Warrant, the cash “services fee” will be deemed
reduced to $350,000, of which $200,000 was paid on May 13, 2022, and of which the remaining $150,000 will remain due and payable on
November 13, 2022.
On
August 17, 2022, SYLA issued the New Warrant to the Company. Pursuant to the terms of the New Warrant, the Company may, at any time on
or after the date (the “IPO Date”) that SYLA completes its first initial public offering of stock in the United States resulting
in any class of SYLA’s stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the
NYSE American (the “IPO”) and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the
New Warrant to purchase 37,500 shares of SYLA’s common stock for an exercise price per share of $0.01, subject to adjustment as
provided in the New Warrant. The number of shares for which the New Warrant will be exercisable will be automatically adjusted on the
IPO Date to be 3% of the fully diluted number and class of shares of capital stock of SYLA as of the IPO Date that are listed for trading.
The New Warrant contains a 9.99% equity blocker.
Sigmaways
Share Exchange and Purchase Agreement
On
September 6, 2022, the Company entered into a Share Exchange and Purchase Agreement (the “Sigmaways Agreement”), dated as
of September 6, 2022, by and among the Company, Sigmaways, Inc. (“Sigmaways”) and Prakash Sadasivam (the “Seller”).
Pursuant
to the terms of the Sigmaways Agreement, the Company agreed to acquire from the Seller, and the Seller agreed to sell to the Company,
229,500 shares of stock of Sigmaways, representing 51% of Sigmaways’ outstanding shares (the “Acquisition”). In exchange
therefor, the Company agreed to (i) issue to the Seller 2,000,000 shares of the Company’s common stock; (ii) pay to the Seller
cash consideration initially expected to be $1,000,000; provided that the final number of shares of Company common stock and the final
cash consideration each will be jointly determined by the parties prior to the closing of the Acquisition (the “Closing”)
based on the valuation of Sigmaways as of the Closing; and (iii) issue to the Seller a warrant to acquire 1,500,000 shares of the Company’s
common stock (the “Warrant”). The per share exercise price of the Warrant will be the VWAP for the Company’s common
stock calculated as of the last trading day prior to the Closing date.
In
addition, at the Closing, the Company will acquire from Sigmaways additional shares of Sigmaways stock (the “Additional
Shares”) to be issued as newly issued shares, for a total investment of $2,000,000. The parties will jointly determine and
agree to the following prior to Closing: (i) the valuation of Sigmaways as of immediately prior to the Closing, and (ii) therefore,
the number of shares of Sigmaways stock which will constitute the Additional Shares. Prior to Closing, Sigmaways will amend its articles of incorporation to increase the authorized number of
shares of Sigmaways stock to a number sufficient that the Additional Shares may be validly issued to the Company.
At
the Closing, two persons designated by the Company will be named to Sigmaways’ Board of Directors, and the sole other member of
the Sigmaways Board of Directors will be the Seller. In addition, at the Closing, the Seller will be named to the Company’s Board
of Directors. At the Closing, Sigmaways will enter into an employment agreement with the Seller and such other persons if agreed upon
by the parties.
The
Sigmaways Agreement contains certain covenants, representations and warranties customary for an agreement of this type. In addition,
the Closing is subject to the satisfaction or waiver of certain conditions, including, but not limited to, the following: (i) the parties
shall have agreed, in each party’s sole discretion, on the valuation of Sigmaways as of the Closing, the resulting cash purchase
price and the number of Additional Shares to be acquired by the Company pursuant to the terms of the Sigmaways Agreement; (ii) the Paycheck
Protection Program Loan received by Sigmaways shall have been forgiven.
The
Sigmaways Agreement may be terminated at any time prior to the Closing as follows:
|
● | By mutual written
consent of all parties; |
|
● | By the Seller and
Sigmaways, acting jointly, or by the Company, if there shall be in effect a final non-appealable order, judgment, injunction or decree
entered by or with any governmental authority restraining, enjoining or otherwise prohibiting the consummation of the transactions that
are the subject of the Sigmaways Agreement; |
|
● | By the Company
if there shall have been a breach in any material respect of any representation, warranty, covenant or agreement on the part of Sigmaways
or the Seller and such breach has not been cured as set forth in the Sigmaways Agreement; |
|
● | By the Seller and
Sigmaways, acting jointly, if there shall have been a breach in any material respect of any representation, warranty, covenant or agreement
on the part of the Company and such breach has not been cured as set forth in the Sigmaways Agreement; |
|
● | By either the Seller
and Sigmaways, acting jointly, or by the Company, if the Closing has not occurred by December 31, 2022; or |
|
● | By the Company
if, its sole discretion, at any time prior to the Closing, the Company determines that its due diligence review of Sigmaways is not satisfactory
to the Company. |
As of the date of this filing, Sigmaways and the Company
were still undergoing the process of the share exchange transaction. The transaction has not been closed yet.
Metros
Consulting and Services Agreement
On
October 20, 2022 (the “Effective Date”), the Company entered into a Consulting and Services Agreement (the “Metros
Consulting Agreement”) by and between the Company and Metros Development Co., Ltd., a Japanese corporation (“Metros”).
Pursuant to the terms of the Metros Consulting Agreement, the Company agreed to provide Metros certain services, including the following
(collectively, the “Company Services”):
|
(i) | Assistance with
the selection and negotiation of terms for a law firm, underwriter and auditing firm for Metros; |
|
(ii) | Assisting in the
preparation of documentation for internal controls required for an initial public offering or de-SPAC transaction or other Fundamental
Transaction (as defined below) by Metros; |
|
(iii) | Attend and, if
requested by Metros, lead meetings with Metros’ management and employees; |
|
(iv) | Provide Metros
with support services related to Metros’ NASDAQ listing; |
|
(v) | Assist in the preparation
of S-1 or F-1 filings; and |
|
(vi) | Preparing an investor
presentation/deck and executive summary of Metros’ business and operations. |
In
providing the Company Services, the Company will not render legal advice or perform accounting services, and will not act as an investment
advisor or broker/dealer. Pursuant to the terms of the Metros Consulting Agreement, the parties agreed that the Company will
not provide the following services, among others: negotiation of the sale of Metros’ securities; participation in discussions between
Metros and potential investors; assisting in structuring any transactions involving the sale of Metros’ securities; pre-screening
of potential investors; discuss details of the nature of the securities sold or whether recommendations were made concerning the sale
of securities; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in
Metros.
Pursuant
to the terms of the Metros Consulting Agreement, Metros agreed to compensate the Company as follows in return for the provision
of the Company Services during the nine-month term (the “Term”):
|
(a) | $300,000, to be
paid as follows: (i) $100,000 on the Effective Date; (ii) $100,000 on the three-month anniversary of the Effective Date; and (iii) $100,000
on the six-month anniversary of the Effective Date; and |
|
(b) | Issuance by Metros
to the Company of a warrant (the “Company Warrant”), deemed fully earned and vested as of the Effective Date, to acquire
a number of shares of capital stock of Metros, to initially be equal to 2% of the fully diluted share capital of Metros as of the Effective
Date (980 shares), subject to adjustment as set forth in the Company Warrant. |
For
any services performed by the Company beyond the Term, Metros will compensate the Company for such Company Services at the rate of $150
per hour, based on the hours spent by personnel of the Company.
The
Term of the Metros Consulting Agreement will expire unless renewed upon mutual written agreement of the parties.
As
provided in the Metros Consulting Agreement, on the Effective Date, Metros issued the Company Warrant to the Company. Pursuant
to the terms of the Company Warrant, the Company may, at any time on or after the date (the “Metros IPO Date”)
that either (i) Metros completes its first initial public offering of stock in the United States resulting in any class of Metros’
stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American (the “Metros
IPO”), or (ii) Metros undertakes any other Fundamental Transaction, and on or prior to the close of business on the
tenth anniversary of the Metros IPO Date, exercise the Company Warrant to purchase 980 shares of capital stock of Metros
for an exercise price per share of $0.01, subject to adjustment as provided in the Company Warrant. The Company Warrant contains a 9.99%
equity blocker.
Amendment
No. 1 to Metros Consulting and Services Agreement
On
October 26, 2022, the Company entered into Amendment No. 1 to Consulting and Services Agreement by and between the Company and Metros
(“Metros Amendment No. 1”). Pursuant to the terms of Metros Amendment No. 1, the Company and Metros agreed to amend
the Metros Consulting Agreement such that Metros agreed to compensate the Company as follows in return for the provision
of the Company Services during the nine-month Term:
|
(a) | $500,000, to be
paid as follows: (i) $200,000 on the Effective Date; (ii) $150,000 on the three-month anniversary of the Effective Date; and (iii) $150,000
on the six-month anniversary of the Effective Date; and |
|
(b) | Issuance by Metros
to the Company of a warrant (the “New Company Warrant”), deemed fully earned and vested as of the Effective Date, to acquire
a number of shares of capital stock of Metros, to initially be equal to 3% of the fully diluted share capital of Metros as of the Effective
Date (1,440 shares), subject to adjustment as set forth in the New Company Warrant. |
In
addition, pursuant to the terms of Metros Amendment No. 1, the Company Warrant was terminated as of October 26, 2022.
Except
as set forth in Metros Amendment No. 1, the Metros Consulting Agreement remains in full force and effect.
As
provided in Metros Amendment No. 1, on October 26, 2022, Metros issued the New Company Warrant to the Company. Pursuant to
the terms of the New Company Warrant, the Company may, at any time on or after the Metros IPO Date, and on or prior to the
close of business on the tenth anniversary of the Metros IPO Date, exercise the New Company Warrant to purchase 1,440 shares
of capital stock of Metros for an exercise price per share of $0.01, subject to adjustment as provided in the New Company Warrant. The
New Company Warrant contains a 9.99% equity blocker.
Stock
Repurchase Program
The
Company’s Board of Directors (the “Board”) authorized a share repurchase program, pursuant to which the Company may
repurchase up to $3.5 million of its outstanding shares of common stock (the “Repurchase Program”). The Board authorized
the Company to purchase its common stock from time to time on a discretionary basis through open market purchases, privately negotiated
transactions or other means, including trading plans intended to qualify under Rule 10b5-1 promulgated under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), in accordance with applicable federal securities laws and other applicable
legal requirements. The Company funded these repurchases through existing cash balances. Decisions regarding the amount and the timing
of purchases under the program were influenced by the Company’s cash on hand, cash flows from operations, general market conditions
and other factors. HeartCore was not obligated to acquire any particular amount of its common stock. This program had no set termination
date and could be suspended or discontinued by the Board at any time.
The
Repurchase Program was terminated on September 23, 2022. The Company has repurchased an aggregate of 1,349,390 shares of its common stock
pursuant to the Repurchase Program.
Financial
Overview
For
the three months ended September 30, 2022 and 2021, we generated revenues of $1,872,476 and $3,470,510, respectively, and reported net
losses of $1,970,934 and net income of $191,349, respectively. For the nine months ended September 30, 2022 and 2021, we generated revenues
of $6,818,774 and $8,446,011, respectively, and reported net losses of $5,253,026 and net income of $414,826, respectively, and cash
out flow used in operating activities of $4,206,370 and cash in flow provided by operating activities of $1,239,250, respectively. As
noted in our unaudited consolidated financial statements, as of September 30, 2022, we had an accumulated deficit of $9,149,139.
Results
of Operations
Comparison
of Results of Operations for the Three Months ended September 30, 2022 and 2021
The
following table summarizes our operating results as reflected in our statements of income during the three months ended September 30,
2022 and 2021, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.
| |
For the Three Months ended September 30, | |
| |
2022 | | |
2021 | | |
Variance | |
| |
| | |
% of | | |
| | |
% of | | |
| | |
| |
| |
Amount | | |
revenue | | |
Amount | | |
revenue | | |
Amount | | |
% of | |
| |
| | |
| | |
| | |
| | |
| | |
| |
REVENUES | |
$ | 1,872,476 | | |
| 100.0 | % | |
$ | 3,470,510 | | |
| 100.0 | % | |
$ | (1,598,034 | ) | |
| -46.0 | % |
COST OF REVENUES | |
| 1,543,256 | | |
| 82.4 | % | |
| 1,786,125 | | |
| 51.5 | % | |
| (242,869 | ) | |
| -13.6 | % |
GROSS PROFIT | |
| 329,220 | | |
| 17.6 | % | |
| 1,684,385 | | |
| 48.5 | % | |
| (1,355,165 | ) | |
| -80.5 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 771,496 | | |
| 41.2 | % | |
| 79,438 | | |
| 2.3 | % | |
| 692,058 | | |
| 871.2 | % |
General and administrative expenses | |
| 1,513,028 | | |
| 80.8 | % | |
| 1,202,701 | | |
| 34.6 | % | |
| 310,327 | | |
| 25.8 | % |
Research and development expenses | |
| 58,275 | | |
| 3.1 | % | |
| 189,686 | | |
| 5.5 | % | |
| (131,411 | ) | |
| -69.3 | % |
Total operating expenses | |
| 2,342,799 | | |
| 125.1 | % | |
| 1,471,825 | | |
| 42.4 | % | |
| 870,974 | | |
| 59.2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
| (2,013,579 | ) | |
| -107.5 | % | |
| 212,560 | | |
| 6.1 | % | |
| (2,226,139 | ) | |
| -1,047.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other income (expenses), net | |
| 23,576 | | |
| 1.2 | % | |
| (7,689 | ) | |
| -0.2 | % | |
| 31,265 | | |
| -406.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) before income tax provision | |
| (1,990,003 | ) | |
| -106.3 | % | |
| 204,871 | | |
| 5.9 | % | |
| (2,194,874 | ) | |
| -1,071.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income taxes expense (benefit) | |
| (19,069 | ) | |
| -1.0 | % | |
| 13,522 | | |
| 0.4 | % | |
| (32,591 | ) | |
| -241.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (1,970,934 | ) | |
| -105.3 | % | |
| 191,349 | | |
| 5.5 | % | |
| (2,162,283 | ) | |
| -1,130.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Less: net income attributable to non-controlling interest | |
| - | | |
| - | | |
| 5,176 | | |
| 0.1 | % | |
| (5,176 | ) | |
| -100.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. | |
$ | (1,970,934 | ) | |
| -105.3 | % | |
$ | 186,173 | | |
| 5.4 | % | |
$ | (2,157,107 | ) | |
| -1,158.7 | % |
Revenues
Our
total revenues decreased by $1,598,034, or 46.0%, to $1,872,476 for the three months ended September 30, 2022 from $3,470,510 for the
three months ended September 30, 2021, mainly attributable to the decrease in revenue from sales of on-premise software, because an important
customer renewed its software license in July 2021, and decrease in revenue from software development, offset by revenue from newly established
consulting services.
Cost
of Revenues
Our
total costs of revenues decreased by $242,869, or 13.6%, to $1,543,256 for the three months ended September 30, 2022 from $1,786,125
for the three months ended September 30, 2021, in light of the decrease in sales of on-promise software and software development, offset
by the costs related to the consulting services.
Gross
Profit
Our
total gross profit decreased by $1,355,165, or 80.5%, to $329,220 for the three months ended September 30, 2022 from $1,684,385 for the
three months ended September 30, 2021. Our overall gross
profit margin decreased by 30.9% to 17.6% in the three months ended September 30, 2022 from 48.5% in the three months ended September
30, 2021.
Selling
Expenses
Our
selling expenses increased by $692,058, or 871.2%, to $771,496 in the three months ended September 30, 2022 from $79,438 in the three
months ended September 30, 2021, primarily attributable to an increase in advertising expenses, as the
U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company went public in the U.S.
In addition, the Company increased advertising expenses for its newly established consulting services in Japan.
As
a percentage of revenues, our selling expenses accounted for 41.2% and 2.3% of our total revenue for the three months ended September
30, 2022 and 2021, respectively.
General
and Administrative Expenses
Our
general and administrative expenses increased by $310,327 or 25.8%, to $1,513,028 in the three months ended September 30, 2022 from $1,202,701
in the three months ended September 30, 2021, primarily attributable to the increase in stock-based compensation, the U.S. parent company’s
office expenses, and D&O indemnity insurance premiums, offset by the decrease in consulting and professional
fees as we finished the process of going public in early 2022.
As
a percentage of revenues, general and administrative expenses were 80.8% and 34.6% of our revenue for the three months ended September
30, 2022 and 2021, respectively.
Research
and Development Expenses
Our
research and development expenses decreased by $131,411 or 69.3%, to $58,275 in the three months ended September 30, 2022 from $189,686
in the three months ended September 30, 2021, primarily attributable to the decrease in outsourcing expenses relating
to the development of a high quality 12K VR camera and related data compression system, which was completed in June 2022.
As
a percentage of revenues, research and development expenses were 3.1% and 5.5% of our revenue for the three months ended September 30,
2022 and 2021, respectively.
Other
Income (Expenses), net
Our
other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses
for bank loans, bonds, and leases, other incomes, and other expenses. We recorded other income, net of $23,576 in the three months ended
September 30, 2022, as compared to other expense, net of $7,689 in the three months ended September 30, 2021, primarily attributable
to the increase in interest income and other income.
Income
Tax Expense (Benefit)
Our
income taxes benefit was $19,069 in the three months ended September 30, 2022, as compared to the income taxes expense of $13,522 in
the three months ended September 30, 2021, mainly due to the increase in the net loss and the decrease in deferred tax expense.
Net
Income (Loss)
As
a result of the foregoing, we reported a net loss of $1,970,934 for the three months ended September 30, 2022, representing a $2,162,283
or 1,130.0% decrease from a net income of $191,349 for the three months ended September 30, 2021.
Net
Income attributable to Non-controlling Interest
We
owned 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of September 30, 2021. Accordingly,
we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $5,176
in the three months ended September 30, 2021.
On
August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore
Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan
held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier
of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public
offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022.
On
February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when
paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest
income in the three months ended September 30, 2022.
Net
Income (Loss) attributable to HeartCore Enterprises, Inc.
As
a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,970,934 for the three months ended
September 30, 2022, representing a $2,157,107 or 1,158.7% decrease from a net income attributable to HeartCore Enterprises, Inc. of $186,173
for the three months ended September 30, 2021.
Comparison
of Results of Operations for the Nine Months ended September 30, 2022 and 2021
The
following table summarizes our operating results as reflected in our unaudited statements of operations during the nine months ended
September 30, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase (or decrease) during
such periods.
| |
For the Nine Months ended September 30, | |
| |
2022 | | |
2021 | | |
Variance | |
| |
| | |
% of | | |
| | |
% of | | |
| | |
| |
| |
Amount | | |
revenue | | |
Amount | | |
revenue | | |
Amount | | |
% of | |
| |
| | |
| | |
| | |
| | |
| | |
| |
REVENUES | |
$ | 6,818,774 | | |
| 100.0 | % | |
$ | 8,446,011 | | |
| 100.0 | % | |
$ | (1,627,237 | ) | |
| -19.3 | % |
COST OF REVENUES | |
| 3,935,908 | | |
| 57.7 | % | |
| 4,369,144 | | |
| 51.7 | % | |
| (433,236 | ) | |
| -9.9 | % |
GROSS PROFIT | |
| 2,882,866 | | |
| 42.3 | % | |
| 4,076,867 | | |
| 48.3 | % | |
| (1,194,001 | ) | |
| -29.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 1,706,250 | | |
| 25.0 | % | |
| 226,903 | | |
| 2.7 | % | |
| 1,479,347 | | |
| 652.0 | % |
General and administrative expenses | |
| 5,832,276 | | |
| 85.5 | % | |
| 2,986,291 | | |
| 35.4 | % | |
| 2,845,985 | | |
| 95.3 | % |
Research and development expenses | |
| 583,762 | | |
| 8.6 | % | |
| 321,857 | | |
| 3.8 | % | |
| 261,905 | | |
| 81.4 | % |
Total operating expenses | |
| 8,122,288 | | |
| 119.1 | % | |
| 3,535,051 | | |
| 41.9 | % | |
| 4,587,237 | | |
| 129.8 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
| (5,239,422 | ) | |
| -76.8 | % | |
| 541,816 | | |
| 6.4 | % | |
| (5,781,238 | ) | |
| -1,067.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other expenses, net | |
| (24,510 | ) | |
| -0.4 | % | |
| (29,553 | ) | |
| -0.3 | % | |
| 5,043 | | |
| -17.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) before income tax provision | |
| (5,263,932 | ) | |
| -77.2 | % | |
| 512,263 | | |
| 6.1 | % | |
| (5,776,195 | ) | |
| -1,127.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income taxes expense (benefit) | |
| (10,906 | ) | |
| -0.2 | % | |
| 97,437 | | |
| 1.2 | % | |
| (108,343 | ) | |
| -111.2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (5,253,026 | ) | |
| -77.0 | % | |
| 414,826 | | |
| 4.9 | % | |
| (5,667,852 | ) | |
| -1,366.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Less: net income attributable to non-controlling interest | |
| - | | |
| - | | |
| 11,112 | | |
| 0.1 | % | |
| (11,112 | ) | |
| -100.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. | |
$ | (5,253,026 | ) | |
| -77.0 | % | |
$ | 403,714 | | |
| 4.8 | % | |
$ | (5,656,740 | ) | |
| -1,401.2 | % |
Revenues
Our
total revenues decreased by $1,627,237, or 19.3%, to $6,818,774 for the nine months ended September 30, 2022 from $8,446,011 for the
nine months ended September 30, 2021, primarily attributable to the decrease in revenue from sales of on-premise software, because an
important customer renewed its software license in July 2021, and the decrease in revenue from software development, offset by revenue
from newly established consulting services. In addition, the ongoing depreciation of Japanese Yen in 2022 also caused the decrease in
our revenue.
Cost
of Revenues
Our
total costs of revenues decreased by $433,236 or 9.9%, to $3,935,908 for the nine months ended September 30, 2022 from $4,369,144 for
the nine months ended September 30, 2021, in light of the decrease in sales of on-promise software and software development, offset by
the costs related to the consulting services.
Gross
Profit
Our
total gross profit decreased by $1,194,001, or 29.3%, to $2,882,866 for the nine months ended September 30, 2022 from $4,076,867 for
the nine months ended September 30, 2021. Our overall
gross profit margin decreased by 6.0% to 42.3% in the nine months ended September 30, 2022 from 48.3% in the nine months ended September
30, 2021.
Selling
Expenses
Our
selling expenses increased by $1,479,347, or 652.0%, to $1,706,250 in the nine months ended September 30, 2022 from $226,903 in the nine
months ended September 30, 2021, primarily attributable to an increase in advertising expenses, as the
U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company went public in the U.S.
In addition, the Company increased advertising expenses for its newly established consulting services in Japan.
As
a percentage of revenues, our selling expenses accounted for 25.0% and 2.7% of our total revenue for the nine months ended September
30, 2022 and 2021, respectively.
General
and Administrative Expenses
Our
general and administrative expenses increased by $2,845,985 or 95.3%, to $5,832,276 in the nine months ended September 30, 2022 from
$2,986,291 in the nine months ended September 30, 2021, primarily attributable to the increase in stock-based compensation, salaries
and welfare, the U.S. parent company’s office expenses, and D&O indemnity insurance premiums.
As
a percentage of revenues, general and administrative expenses were 85.5% and 35.4% of our revenue for the nine months ended September
30, 2022 and 2021, respectively.
Research
and Development Expenses
Our
research and development expenses increased by $261,905 or 81.4%, to $583,762 in the nine months ended September 30, 2022 from $321,857
in the nine months ended September 30, 2021, primarily attributable to an increase in outsourcing expenses relating
to development of a high quality 12K VR camera and related data compression system in the nine months ended September 30, 2022.
As
a percentage of revenues, research and development expenses were 8.6% and 3.8% of our revenue for the nine months ended September 30,
2022 and 2021, respectively.
Other
Expenses, net
Our
other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses
for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, decreased by $5,043 or 17.1%, from $29,553
in the nine months ended September 30, 2021 to $24,510 in the nine months ended September 30, 2022.
Income
Tax Expense (Benefit)
Our
income taxes benefit was $10,906 in the nine months ended September 30, 2022, as compared to the income taxes expense of $97,437 in the
nine months ended September 30, 2021, mainly due to the increase in net loss and the decrease in deferred tax expense.
Net
Income (Loss)
As
a result of the foregoing, we reported a net loss of $5,253,026 for the nine months ended September 30, 2022, representing a $5,667,852
or 1,366.3% decrease from a net income of $414,826 for the nine months ended September 30, 2021.
Net
Income attributable to Non-controlling Interest
We
owned 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of September 30, 2021. Accordingly,
we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $11,112
in the nine months ended September 30, 2021.
On
August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore
Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan
held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier
of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public
offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022.
On
February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when
paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest
income in the nine months ended September 30, 2022.
Net
Income (Loss) attributable to HeartCore Enterprises, Inc.
As
a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $5,253,026 for the nine months ended
September 30, 2022, representing a $5,656,740 or 1,401.2% decrease from a net income attributable to HeartCore Enterprises, Inc. of $403,714
for the nine months ended September 30, 2021.
Liquidity
and Capital Resources
As
of September 30, 2022, we had $7,843,208 in cash as compared to $3,136,839 as of December 31, 2021. As of September 30, 2022, our working
capital was $6,149,541 as compared to $62,919 as of December 31, 2021. We also had $621,345 in accounts receivable as of September 30,
2022. Our accounts receivable primarily include balance due from customers for our on-premise software sold and services provided to
and accepted by customers.
The
following table sets forth summary of our cash flows for the periods indicated:
| |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
Net cash provided by (used in) operating activities | |
$ | (4,206,370 | ) | |
$ | 1,239,250 | |
Net cash used in investing activities | |
| (8,630 | ) | |
| (151,065 | ) |
Net cash provided by (used in) financing activities | |
| 9,122,350 | | |
| (816,155 | ) |
Effect of exchange rate changes | |
| (200,981 | ) | |
| (239,423 | ) |
Net increase in cash and cash equivalents | |
| 4,706,369 | | |
| 32,607 | |
Cash and cash equivalents, beginning of the period | |
| 3,136,839 | | |
| 3,058,175 | |
Cash and cash equivalents, end of the period | |
$ | 7,843,208 | | |
$ | 3,090,782 | |
Operating
Activities
Net
cash used in operating activities was $4,206,370 for the nine months ended September 30, 2022, as compared to the amount of $1,239,250
net cash provided by operating activities for the nine months ended September 30, 2021, primarily consisting of the following:
|
● |
Net
loss of $5,253,026 for the nine months ended September 30, 2022. |
|
● |
A
decrease of $213,691 in operating lease liabilities, due to the rent payment made. |
|
● |
A
decrease of $206,569 in other liabilities, primarily due to the decrease in sales tax payable. |
|
● |
Offset
by non-cash lease expense of $207,549. |
|
● |
Offset
by share-based compensation of $1,225,477. |
Investing
Activities
Net
cash used in investing activities amounted to $8,630 for the nine months ended September 30, 2022, as compared to net cash used in investing
activities amounted to $151,065 for the nine months ended September 30, 2021.
Financing
Activities
Net
cash provided by financing activities amounted to $9,122,350 for the nine months ended September 30, 2022, as compared to net cash used
in financing activities amounted to $816,155 for the nine months ended September 30, 2021, primarily consisting of net proceeds of $13,823,126
from the initial public offering and issuance of common shares prior to the initial public offering, and offset by payment for mandatorily
redeemable financial interest of $430,489, payment for repurchase of common stocks of $3,500,000, and repayment of long-term debts of
$699,407.
Contractual
obligations
Lease
commitment
The
Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases
for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were classified as finance
leases.
As
of September 30, 2022, future minimum lease payments under the non-cancelable lease agreements are as follows:
Year ending December 31, | |
Finance leases | | |
Operating
leases | |
Remaining of 2022 | |
$ | 5,243 | | |
$ | 71,778 | |
2023 | |
| 17,649 | | |
| 287,112 | |
2024 | |
| 259 | | |
| 287,112 | |
2025 | |
| - | | |
| 287,112 | |
2026 | |
| - | | |
| 287,112 | |
Thereafter | |
| - | | |
| 1,469,265 | |
Total lease payments | |
| 23,151 | | |
| 2,689,491 | |
Less: imputed interest | |
| (76 | ) | |
| (165,820 | ) |
Total lease liabilities | |
| 23,075 | | |
| 2,523,671 | |
Less: current portion | |
| 19,502 | | |
| 264,387 | |
Non-current lease liabilities | |
$ | 3,573 | | |
$ | 2,259,284 | |
Long
Term Debt
The
Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions.
As
of September 30, 2022, future minimum loan payments are as follows:
| | |
Loan | |
Year ending December 31, | | |
Payment | |
Remaining of 2022 | | |
$ | 107,593 | |
2023 | | |
| 646,715 | |
2024 | | |
| 400,961 | |
2025 | | |
| 230,041 | |
2026 | | |
| 209,315 | |
Thereafter | | |
| 171,757 | |
Total | | |
$ | 1,766,382 | |
Off-Balance
Sheet Arrangements
We
did not have any off-balance sheet arrangements as of September 30, 2022.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements.
These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S.
GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and
revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose
the reported amounts of revenue and expenses incurred during the financial reporting period. We continue to evaluate the estimates and
assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an
integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies
require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed herein reflect
the more significant judgments and estimates used in preparation of our unaudited consolidated financial statements.
Revenue
Recognition
The
Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with customers”.
To
determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s)
with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price
to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance
obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local
government levies. The Consumption Tax on sales is calculated at 10% of gross sales.
The
Company currently generates its revenue from the following main sources:
Revenue
from On-Premise Software
Licenses
for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company
provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right
for a specified term. Revenue from on-premise licenses is recognized upfront at the point in time when the software is made available
to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle.
Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise
software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions
when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach
as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for
a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions
or other observable evidence.
Revenue
from Maintenance and Support Service
Maintenance
and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified
software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time
as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted
by the customers.
Revenue
from Software as a Service (“SaaS”)
The
Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing
the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over
the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts
are generally one year or less in length.
Revenue
from Software Development and other Miscellaneous Services
The
Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose
of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services,
such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers
and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.
Revenue
from Consulting Service
The
Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts,
which primarily include communicating with intermediary parties, preparing required documents and supporting the listing process. Revenues
from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less
than one year in length.
The
timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is
included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records
deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred
revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized
during the nine months ended September 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately
$1.2 million and $2.0 million, respectively.