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 June 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.
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.
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
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 the Financial Accounting Standards Board’s (the
“FASB”) 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
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Beginning balance | |
$ | 155,666 | | |
$ | 173,043 | |
Accretion expense | |
| 128 | | |
| 730 | |
Foreign currency translation adjustment | |
| (7,721 | ) | |
| (18,107 | ) |
Ending balance | |
$ | 148,073 | | |
$ | 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 three months ended March 31, 2022 and 2021, software development costs expensed as incurred amounted to $108,259 and $52,146, respectively.
These software development costs were included in the research and development expenses.
Impairment
of Long-Lived Assets
Long-lived
assets with finite lives, primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition
are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no
impairments of these assets during the three months ended March 31, 2022 and 2021.
Foreign
Currency Translation
The
Company maintains its books and record in its local currency, Japanese YEN (“JPY”), which is a functional currency as being
the primary currency of the economic environment in which its operation is conducted. Transactions denominated in currencies other than
the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency
using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of
operations.
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
The
reporting currency of the Company is the United States Dollars (“US$”), 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
| |
March 31, 2022 | | |
March 31, 2021 | |
Current JPY: US$1 exchange rate | |
| 121.83 | | |
| 110.70 | |
Average JPY: US$1 exchange rate | |
| 116.24 | | |
| 106.01 | |
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. The 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-Premises Software
Licenses
for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. The
Company provides on-premises 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-premises licenses is recognized upfront at the point in time when the software is made available
to the customer. Licenses for on-premises 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-premises
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-premises software is typically estimated using the residual approach
as the Company is unable to establish the SSP for on-premises 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.
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
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 recognized 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.
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 three months ended March 31, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $0.8
million and $0.9 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 months ended March 31, 2022 and 2021 is as following:
Schedule of Disaggregation of Revenues
| |
|
2022 | | |
|
2021 | |
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Revenue from On-Premise Software | |
$ | 801,601 | | |
$ | 249,608 | |
Revenue from Maintenance and Support Service | |
| 845,339 | | |
| 942,215 | |
Revenue from Software as a Service (“SaaS”) | |
| 126,654 | | |
| 151,808 | |
Revenue from Software Development and other Miscellaneous Services | |
| 502,407 | | |
| 766,678 | |
Total Revenue | |
$ | 2,276,001 | | |
$ | 2,110,309 | |
The
Company’s disaggregation of revenues by product is as following:
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Revenue from Customer Experience Management Platform | |
$ | 1,755,053 | | |
$ | 1,614,356 | |
Revenue from Process Mining | |
| 266,488 | | |
| 256,784 | |
Revenue from Robotic Process Automation | |
| 98,386 | | |
| 106,679 | |
Revenue from Task Mining | |
| 86,877 | | |
| 55,799 | |
Revenue from Others | |
| 69,197 | | |
| 76,691 | |
Total Revenue | |
$ | 2,276,001 | | |
$ | 2,110,309 | |
As
of March 31, 2022 and 2021, and for the periods then ended, all long-lived assets and almost all of the revenue generated are
attributed to the Company’s operation in Japan.
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
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 three months ended March 31, 2022, customer A represents 13.3% of the Company’s total revenues. For the three months ended
March 31, 2021, customer B and C represents 11.9% and 10.9%, respectively, of the Company’s total revenues.
For
the three months ended March 31, 2022, vendor A, B and C represents 36.1%, 29.4% and 10.8%, respectively, of the Company’s total
purchases. For the three months ended March 31, 2021, vendor A and B represents 59.4% and 23.1%, 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
| |
|
March 31, | | |
|
December 31, | |
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accounts receivable | |
$ | 1,116,254 | | |
$ | 960,964 | |
Less: allowance for doubtful accounts | |
| - | | |
| - | |
Accounts receivable, net | |
$ | 1,116,254 | | |
$ | 960,964 | |
NOTE
4 — PREPAID EXPENSES
Prepaid
expenses consist of the following:
Schedule of Prepaid Expenses
| |
|
March 31, | | |
|
December 31, | |
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Prepayments to software vendors | |
$ | 128,418 | | |
$ | 157,060 | |
Prepaid selling expenses | |
| 426,972 | | |
| - | |
Prepaid subscription fees | |
| 50,852 | | |
| 53,413 | |
Deferred offering expenses | |
| - | | |
| 180,630 | |
Prepaid insurance premium | |
| 465,019 | | |
| 18,252 | |
Others | |
| 51,789 | | |
| 35,050 | |
Total | |
$ | 1,123,050 | | |
$ | 444,405 | |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
Deferred
offering expenses, consisting of legal fees and road show expenses relating to the Company’s planned 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 our initial public offering on
February 14, 2022.
NOTE
5 — RELATED PARTY TRANSACTIONS
As
of March 31, 2022 and December 31, 2021, the Company has a due to related party balance of $185
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 three months ended March 31, 2022 and 2021, the Company advanced $25,480
and $3,075,
respectively, to this related party, and the related party paid expenses of $25,480
and $10,695,
respectively, on behalf of the Company. The Company also repaid $903 to the related party during the three months ended March 31,
2022.
As
of March 31, 2022 and December 31, 2021, the Company has a loan receivable balance of $356,268
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 three months ended March 31, 2022 and 2021, the Company
loaned nil
and $57,195,
respectively, to this related party, and the related party paid expenses of nil
and $14,197,
respectively, on behalf of the Company. During the three months ended March 31, 2022 and 2021, the Company received repayments of $9,102
and nil,
respectively, from this related party.
In
June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. During the three months ended March 31, 2021, the
Company has revenue from this related party of $73,569 from software sales and incurred cost with this related party of $185,875 for
software development services provided. As of March 31, 2021, the Company has deferred revenue and other payable with this related party
of $36,012 and $181,328, respectively. 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, 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
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Leasehold improvement | |
$ | 302,547 | | |
$ | 320,257 | |
Machinery and equipment | |
| 314,220 | | |
| 316,126 | |
Vehicle | |
| 114,531 | | |
| 121,235 | |
Software | |
| 175,362 | | |
| 185,627 | |
Subtotal | |
| 906,660 | | |
| 943,245 | |
Accumulated depreciation | |
| (667,873 | ) | |
| (681,831 | ) |
Property and equipment, net | |
$ | 238,787 | | |
$ | 261,414 | |
Depreciation
expense was $24,889 and $28,070 for the three months ended March 31, 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 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 $42,054 and $57,167 are included in property and equipment as of March 31, 2022 and December 31, 2021, respectively.
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
The
components of lease costs are as follows:
Schedule of Lease Costs
| |
|
2022 | | |
|
2021 | |
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Finance lease costs | |
| | | |
| | |
Amortization of right-of-use assets | |
$ | 12,526 | | |
$ | 13,735 | |
Interest on lease liabilities | |
| 174 | | |
| 375 | |
Total finance lease costs | |
| 12,700 | | |
| 14,110 | |
Operating lease costs | |
| 87,051 | | |
| 101,474 | |
Total lease costs | |
$ | 99,751 | | |
$ | 115,584 | |
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 Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| |
Operating cash flows from finance leases | |
$ | 174 | | |
$ | 375 | |
Operating cash flows from operating leases | |
| 89,290 | | |
| 103,815 | |
Financing cash flows from finance leases | |
| 14,916 | | |
| 16,172 | |
| |
| | | |
| | |
Weighted average remaining lease term (years) | |
| | | |
| | |
Finance leases | |
| 1.4 | | |
| 2.1 | |
Operating leases | |
| 9.9 | | |
| 10.9 | |
| |
| | | |
| | |
Weighted-average discount rate: (per annum) | |
| | | |
| | |
Finance leases | |
| 1.32 | % | |
| 1.32 | % |
Operating leases | |
| 1.32 | % | |
| 1.32 | % |
As
of March 31, 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 lease | | |
Operating lease | |
Remaining of 2022 | |
$ | 22,755 | | |
$ | 255,580 | |
2023 | |
| 20,947 | | |
| 340,773 | |
2024 | |
| 308 | | |
| 340,773 | |
2025 | |
| - | | |
| 340,773 | |
2026 | |
| - | | |
| 340,773 | |
Thereafter | |
| - | | |
| 1,743,870 | |
Total lease payments | |
| 44,010 | | |
| 3,362,542 | |
Less: imputed interest | |
| (313 | ) | |
| (217,181 | ) |
Total lease liabilities | |
| 43,697 | | |
| 3,145,361 | |
Less: current portion | |
| 29,272 | | |
| 313,737 | |
Non-current lease liabilities | |
$ | 14,425 | | |
$ | 2,831,624 | |
Pursuant
to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $262,851 and
$278,237 as of March 31, 2022 and December 31, 2021, respectively.
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 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 | % | |
$ | 328,326 | | |
$ | 434,431 | |
Loans with banks and other financial institutions | |
| | | |
| |
| | | |
| | | |
| | |
Resona Bank, Limited. | |
| 30,000,000 | (a) | |
12/29/2017—
12/30/2022 | |
| 1.475 | % | |
| 36,937 | | |
| 56,476 | |
Resona Bank, Limited. | |
| 50,000,000
| (a)(b) | |
12/29/2017—
12/29/2024 | |
| 0.675 | % | |
| 161,331 | | |
| 191,454 | |
Resona Bank, Limited. | |
| 10,000,000
| (a)(b) | |
9/30/2020—
9/30/2027 | |
| 0.000 | % | |
| 64,500 | | |
| 72,411 | |
Resona Bank, Limited. | |
| 40,000,000
| (a)(b) | |
9/30//2020—
9/30/2027 | |
| 0.000 | % | |
| 257,999 | | |
| 289,644 | |
Resona Bank, Limited. | |
| 20,000,000 | (a)(b) | |
11/13/2020—
10/31/2027 | |
| 1.600 | % | | | 130,953 | | |
| 146,890 | |
Sumitomo Mitsui Banking Corporation | |
| 100,000,000 | | |
12/28/2018—
12/28/2023 | |
| 1.475 | % | |
| 287,179 | | |
| 361,925 | |
Sumitomo Mitsui Banking Corporation | |
| 10,000,000 | (b) | |
12/30/2019—
12/30/2026 | |
| 1.975 | % | |
| 55,709 | | |
| 63,105 | |
The Shoko Chukin Bank, Ltd. | |
| 30,000,000 | | |
9/28/2018—
8/31/2023 | |
| 1.200 | % | |
| 70,426 | | |
| 92,273 | |
The Shoko Chukin Bank, Ltd. | |
| 50,000,000 | | |
7/27/2020—
6/30/2027 | |
| 1.290 | % | |
| 311,910 | | |
| 351,020 | |
Japan Finance Corporation | |
| 40,000,000 | | |
12/15/2017—
11/30/2022 | |
| 0.300 | % | |
| 47,854 | | |
| 73,940 | |
Japan Finance Corporation | |
| 80,000,000 | | |
11/17/2020—
11/30/2027 | |
| 0.210 | % | |
| 538,455 | | |
| 603,339 | |
Higashi-Nippon Bank | |
| 30,000,000 | (a) | |
3/31/2022 – 3/31/2025 | |
| 1.400 | % | |
| 246,245 | | |
| - | |
Aggregate outstanding principal balances | |
| | | |
| |
| | | |
| 2,537,824 | | |
| 2,736,908 | |
Less: unamortized debt issuance costs | |
| | | |
| |
| | | |
| (13,660 | ) | |
| (15,333 | ) |
Less: current portion | |
| | | |
| |
| | | |
| (847,316 | ) | |
| (849,995 | ) |
Non-current portion | |
| | | |
| |
| | | |
$ | 1,676,848 | | |
$ | 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 $7,016 and $10,828 for the three months ended March 31, 2022 and 2021, respectively.
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
As
of March 31, 2022, future minimum loan payments are as follows:
Schedule of Future Minimum Loan Payments
Year ending December 31, | |
Loan | |
| |
Payment | |
Remaining of 2022 | |
$ | 569,006 | |
2023 | |
| 767,586 | |
2024 | |
| 475,901 | |
2025 | |
| 273,036 | |
2026 | |
| 248,436 | |
Thereafter | |
| 203,859 | |
Total | |
$ | 2,537,824 | |
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 March 31, 2022, the
balance of the insurance premium financing was $347,258.
During the three months ended March 31, 2022, the interest incurred was $4,255.
NOTE
10 — INCOME TAXES
United
States
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%.
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 30.62% for the three months ended March 31, 2022 and 2021.
For
the three months ended March 31, 2022 and 2021, the Company’s income tax expenses (benefits) are as follows:
Schedule of Income Tax Expenses
| |
|
2021 | | |
|
2020 | |
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Current | |
$ | (774 | ) | |
$ | (1,368 | ) |
Deferred | |
| (42 | ) | |
| 9,057 | |
Income tax expense (benefits) | |
$ | (816 | ) | |
$ | 7,689 | |
The
effective tax rate was 0.05%
and (4.26)%
for the three months ended March 31, 2022 and 2021,
respectively.
NOTE
11 – SHARE-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 March 31, 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.
HEARTCORE ENTERPRISES, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 sheet 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 three months ended March 31, 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 option activity for the stock options issued in 2016 for the three months ended March
31, 2022 and 2021:
Schedule of Unvested Stock Option
| |
|
Number of stock options | |
| |
Number of stock options | |
Issued and unvested as of January 1, 2021 | |
| 194 | |
Forfeited | |
| 11 | |
Issued and unvested as of March 31, 2021 | |
| 183 | |
| |
| | |
Issued and unvested as of January 1, 2022 | |
| 183 | |
Vested and exercised | |
| 183 | |
Issued and unvested as of March 31, 2022 | |
| - | |
The
following table summarizes the share options activity and related information for the three months ended March 31, 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 | | |
$ | 2.5 | | |
| 9.99 | | |
| - | |
Granted | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
As of March 31, 2022 | |
| 1,534,500 | | |
$ | 2.5 | | |
| 9.74 | | |
$ | 583,110 | |
Vested and exercisable as of March 31, 2022 | |
| - | | |
| - | | |
| - | | |
| - | |
Options
granted historically were valued using the binomial model with the assistance of an independent valuation specialist. Significant assumptions
used in the valuation include expected volatility, risk-free interest rate, dividend yield and expected exercise term.
For
the three months ended March 31, 2022 and 2021, share-based compensation related to the options totaled $292,812 and nil, respectively.
The outstanding unamortized share-based compensation related to options was $1,912,528 (which will be recognized through December 2025)
as of March 31, 2022.
HEARTCORE
ENTERPRISES, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Restricted
Stock Units (“RSUs”)
The
following table summarizes the RSUs activity for the three months ended March 31, 2022:
Schedule Of Restricted Stock units
| |
| Number
of RSUs | |
Issued as of January 1, 2022 | |
| - | |
Granted | |
| 169,153 | |
Forfeited | |
| - | |
Issued as of March 31, 2022 | |
| 169,153 | |
Vested as of March 31, 2022 | |
| - | |
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.
For
the three months ended March 31, 2022, the Company recognized RSU-related share-based compensation of $129,352.
The outstanding unamortized share-based compensation related to RSUs was $520,456
(which will through February 2026) as of March
31, 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).
As
of March 31, 2022 and December 31, 2021, there were 18,915,943 and 15,819,943 shares, respectively, of common shares issued; and 18,915,943
and 15,546,454 shares, respectively, of common shares outstanding.
No
preferred shares were issued and outstanding as of March 31, 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.
HEARTCORE
ENTERPRISES, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 –LOSS PER SHARE
Basic
loss per share is calculated on the basis of weighted-average outstanding common shares. Diluted 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 loss per share for the three months ended March 31, 2022 and 2021 is as follows:
Schedule of Computation of Basic and Diluted Earnings (Loss) Per Share
| |
|
2022 | | |
|
2021 | |
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Loss
per share – basic | |
| | | |
| | |
Numerator: | |
| | | |
| | |
Allocation of net loss attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating loss per common share — basic | |
$ | (1,578,451 | ) | |
$ | (183,249 | ) |
Net loss attributable to common shareholders | |
| (1,578,451 | ) | |
| (183,249 | ) |
Denominator: | |
| | | |
| | |
Weighted average number of common shares outstanding used in calculating basic loss per share | |
| 17,265,332 | | |
| 15,242,454 | |
Denominator used for loss per share | |
| 17,265,332 | | |
| 15,242,454 | |
Loss per share — basic | |
$ | (0.09 | ) | |
$ | (0.01 | ) |
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Loss per share – diluted | |
| | | |
| | |
Numerator: | |
| | | |
| | |
Allocation of net loss attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating loss per common share — diluted | |
$ | (1,578,451 | ) | |
$ | (183,249 | ) |
Net loss attributable to common shareholders | |
| (1,578,451 | ) | |
| (183,249 | ) |
Denominator: | |
| | | |
| | |
Weighted average number of common shares outstanding used in calculating diluted loss per share | |
| 17,265,332 | | |
| 15,242,454 | |
Denominator used for loss per share | |
| 17,265,332 | | |
| 15,242,454 | |
Loss per share — diluted | |
$ | (0.09 | ) | |
$ | (0.01 | ) |
For
the three months ended March 31, 2022 and 2021, the weighted average shares outstanding is the same for basic and diluted loss per share
calculations, as the inclusion of common shares equivalents of 273,489 and 1,703,653, respectively, would have an anti-dilutive effect.
NOTE
15 - SUBSEQUENT EVENTS
On February 25, 2022, the Company entered into
a service agreement with a marketing company pursuant to which the Company agreed to issue 83,333 RSUs for 6-month marketing services
to be provided from February 25, 2022 to August 26, 2022. The RSUs were issued on May 15, 2022.