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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-Q
|
☒ |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For
the quarterly period ended
September 30,
2022
|
☐ |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For
the transition period from ______, 20___, to _____,
20___.
Commission
File Number
001-41272
HeartCore Enterprises, Inc.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware |
|
87-0913420 |
(State
or Other Jurisdiction of
Incorporation or Organization) |
|
(I.R.S.
Employer
Identification
Number)
|
1-2-33,
Higashigotanda,
Shinagawa-ku
Tokyo,
Japan
(Address
of Principal Executive Offices) (Zip Code)
(206)
385-0488, ext. 100
(Registrant’s
Telephone Number, Including Area Code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each Exchange on which Registered |
|
Common Stock |
|
HTCR |
|
The
Nasdaq Capital Market |
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☐
No ☒
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer |
☐ |
Accelerated
filer |
☐ |
|
Non-accelerated filer |
☒ |
Smaller
reporting company |
☒ |
| Emerging
growth company |
☒ |
|
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
As of November 14, 2022, there were
17,649,886 shares of outstanding common stock, par value
$0.0001 per share, of the registrant.
HeartCore
Enterprises, Inc.
Contents
Item 1. Financial Statements.
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 |
|
|
|
|