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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

 

  Page
PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
     
Item 4. Controls and Procedures 34
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 35
     
Item 1A. Risk Factors 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 3. Defaults Upon Senior Securities 35
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 36
     
Signatures 37

 

2
 

 

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.

 

3
 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

                                 
   

For the Three Months

Ended

September 30,

   

For the Nine Months

Ended

September 30,

 
    2022     2021     2022     2021  
Revenues   $ 1,872,476     $ 3,470,510     $ 6,818,774     $ 8,446,011  
                                 
Cost of revenues     1,543,256       1,786,125       3,935,908       4,369,144  
                                 
Gross profit     329,220       1,684,385       2,882,866       4,076,867  
                                 
Operating expenses:                                
Selling expenses     771,496       79,438       1,706,250       226,903  
General and administrative expenses     1,513,028       1,202,701       5,832,276       2,986,291  
Research and development expenses     58,275       189,686       583,762       321,857  
                                 
Total operating expenses     2,342,799       1,471,825       8,122,288       3,535,051  
                                 
Income (loss) from operations     (2,013,579 )     212,560       (5,239,422 )     541,816  
                                 
Other income (expenses):                                
Interest income     21,707       1,598       32,256       5,446  
Interest expense     (10,500 )     (6,695 )     (39,361 )     (29,927 )
Other income     15,195       1,341       40,645       16,536  
Other expenses     (2,826 )     (3,933 )     (58,050 )     (21,608 )
Total other income (expenses)     23,576       (7,689 )     (24,510 )     (29,553 )
                                 
Income (loss) before income tax provision     (1,990,003 )     204,871       (5,263,932 )     512,263  
                                 
Income tax expense (benefit)     (19,069 )     13,522       (10,906 )     97,437  
                                 
Net income (loss)     (1,970,934 )     191,349       (5,253,026 )     414,826  
                                 
Less: net income attributable to non-controlling interest     -       5,176       -       11,112  
                                 
Net income (loss) attributable to HeartCore Enterprises, Inc.   $ (1,970,934 )   $ 186,173     $ (5,253,026 )   $ 403,714  
                                 
Other comprehensive income (loss):                                
Foreign currency translation adjustment     128,705       (15,309 )     428,118       68,365  
                                 
Total comprehensive income (loss)     (1,842,229 )     176,040       (4,824,908 )     483,191  
Less: comprehensive income attributable to non-controlling interest     -       4,770       -       12,923  
Comprehensive income (loss) attributable to HeartCore Enterprises, Inc.   $ (1,842,229 )   $ 171,270     $ (4,824,908 )   $ 470,268  
                                 
Net earnings (loss) per common share attributable to HeartCore Enterprises, Inc.                                
Basic   $ (0.11 )   $ 0.01     $ (0.29 )   $ 0.03  
Diluted   $ (0.11 )   $ 0.01     $ (0.29 )   $ 0.03  
Weighted average common shares outstanding                                
Basic     17,835,027       15,242,454       18,014,483       15,242,454  
Diluted     17,835,027       15,515,943       18,014,483       15,515,943  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4
 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

 

          -     -                                
    Common shares*     Additional    -       Accumulated other     Total HeartCore
Enterprises, Inc.
    Non-     Total  
    Number of
shares
    Amount     paid-in
capital*
   - Accumulated
deficit
    comprehensive
loss
    shareholders’
deficit
    controlling
interest
    shareholders’
deficit
 
Balance, December 31, 2020*     15,242,454     $ 1,524     $ 2,735,315    - $ (3,557,957 )   $ (136,890 )   $ (958,008 )   $ 353,825     $ (604,183 )
Net loss     -       -       -       (183,249 )     -       (183,249 )     (4,988 )     (188,237 )
Foreign currency translation adjustment     -       -       -    -   -       94,938       94,938       2,584       97,522  
Balance, March 31, 2021*     15,242,454       1,524       2,735,315    -   (3,741,206 )     (41,952 )     (1,046,319 )     351,421       (694,898 )
Net income     -       -       -    -   400,790       -       400,790       10,924       411,714  
Foreign currency translation adjustment     -       -       -    -   -       (13,481 )     (13,481 )     (367 )     (13,848 )
Balance, June 30, 2021*     15,242,454       1,524       2,735,315    -   (3,340,416 )     (55,433 )     (659,010 )   361,978       (297,032 )
Net income     -       -       -    -   186,173       -       186,173       5,176       191,349  
Foreign currency translation adjustment     -       -       -    -   -       (14,903 )     (14,903 )     (406 )     (15,309 )
Reclassification of non-controlling interest to mandatorily redeemable financial interest     -       -       (81,238 )  -   -       -       (81,238 )     (366,748 )     (447,986 )
Balance, September 30, 2021     15,242,454     $ 1,524     $ 2,654,077    - $ (3,154,243 )   $ (70,336 )   $ (568,978 )   $ -     $ (568,978 )

 

* 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 )
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.

 

5
 

 

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.

 

6
 

 

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.

 

7
 

 

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:

    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.

 

8
 

 

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:

 

    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.

 

9
 

 

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.

 

10
 

 

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:

 

                                 
   

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.

 

11
 

 

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:

 

                 
    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:

 

                 
    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.

 

12
 

 

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:

 

    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.

 

13
 

 

The components of lease costs are as follows:

 

    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:

 

    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:

 

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.

 

14
 

 

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:

 

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.

 

15
 

 

As of September 30, 2022, future minimum loan payments are as follows:

 

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:

 

    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.

 

16
 

 

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:

 

         
    Number of
stock options
 
Issued and unvested as of January 1, 2021     194  
Forfeited     11  
         
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:

 

    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