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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, 2023

 

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 13, 2023, there were 20,842,690 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 F-1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
     
Item 4. Controls and Procedures 17
     
PART II – OTHER INFORMATION 17
     
Item 1. Legal Proceedings 17
     
Item 1A. Risk Factors 17
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
     
Item 3. Defaults Upon Senior Securities 17
     
Item 4. Mine Safety Disclosures 17
     
Item 5. Other Information 17
     
Item 6. Exhibits 18
     
Signatures 19

 

 2 

 

 

Item 1. Financial Statements.

 

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2023   2022 
   (Unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $2,199,565   $7,177,326 
Accounts receivable   2,562,239    551,064 
Investments in marketable securities   757,106    - 
Prepaid expenses   683,327    538,230 
Note receivable   300,000    - 
Current portion of long-term note receivable   100,000    - 
Due from related party   42,439    48,447 
Other current assets   111,326    220,070 
Total current assets   6,756,002    8,535,137 
           
Non-current assets:          
Property and equipment, net   752,940    203,627 
Operating lease right-of-use assets   2,413,814    2,644,957 
Intangible asset, net   4,675,000    - 
Goodwill   3,276,441    - 
Long-term investments in warrants   2,456,902    - 
Long-term note receivable   200,000    - 
Deferred tax assets   222,172    263,339 
Security deposits   338,220    244,395 
Long-term loan receivable from related party   184,076    246,472 
Other non-current assets   67    661 
Total non-current assets   14,519,632    3,603,451 
           
Total assets  $21,275,634   $12,138,588 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable and accrued expenses  $1,779,953   $497,742 
Accrued payroll and other employee costs   558,394    360,222 
Due to related party   7,859    402 
Current portion of long-term debts   525,440    697,877 
Insurance premium financing   122,279    - 
Factoring liability   217,250    - 
Operating lease liabilities, current   365,241    291,863 
Finance lease liabilities, current   17,076    19,294 
Income tax payables   103,935    2,747 
Deferred revenue   1,740,877    1,724,519 
Other current liabilities   222,089    53,027 
Total current liabilities   5,660,393    3,647,693 
           
Non-current liabilities:          
Long-term debts   1,351,830    1,123,735 
Operating lease liabilities, non-current   2,113,917    2,421,054 
Finance lease liabilities, non-current   68,535    459 
Deferred tax liabilities   1,309,000    - 
Other non-current liabilities   197,817    138,018 
Total non-current liabilities   5,041,099    3,683,266 
           
Total liabilities   10,701,492    7,330,959 
           
Shareholders’ equity:          
Preferred shares ($0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively)   -    - 
Common shares ($0.0001 par value, 200,000,000 shares authorized; 20,842,690 and 17,649,886 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively)   2,083    1,764 
Additional paid-in capital   19,431,987    15,014,607 
Accumulated deficit   (11,910,310)   (10,573,579)
Accumulated other comprehensive income   282,734    364,837 
Total HeartCore Enterprises, Inc. shareholders’ equity   7,806,494    4,807,629 
Non-controlling interest   2,767,648    - 
Total shareholders’ equity   10,574,142    4,807,629 
           
Total liabilities and shareholders’ equity  $21,275,634   $12,138,588 

 

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

 

 F-1 

 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

                     
  

For the Three Months

Ended September 30,

  

For the Nine Months

Ended September 30,

 
   2023   2022   2023   2022 
Revenues  $4,688,908   $1,872,476   $18,518,431   $6,818,774 
                     
Cost of revenues   3,860,241    1,543,256    10,548,245    3,935,908 
                     
Gross profit   828,667    329,220    7,970,186    2,882,866 
                     
Operating expenses:                    
Selling expenses   274,043    771,496    1,330,747    1,706,250 
General and administrative expenses   2,172,298    1,513,028    7,305,392    5,832,276 
Research and development expenses   170,071    58,275    289,303    583,762 
                     
Total operating expenses   2,616,412    2,342,799    8,925,442    8,122,288 
                     
Loss from operations   (1,787,745)   (2,013,579)   (955,256)   (5,239,422)
                     
Other income (expenses):                    
Changes in fair value of investments in marketable securities   (271,740)   -    (500,762)   - 
Changes in fair value of investments in warrants   (460,672)   -    (294,565)   - 
Interest income   14,363    21,707    64,633    32,256 
Interest expenses   (42,619)   (10,500)   (125,073)   (39,361)
Other income   52,640    15,195    176,641    40,645 
Other expenses   (25,947)   (2,826)   (62,701)   (58,050)
Total other income (expenses)   (733,975)   23,576    (741,827)   (24,510)
                     
Loss before income tax provision   (2,521,720)   (1,990,003)   (1,697,083)   (5,263,932)
                     
Income tax expense (benefit)   19,413    (19,069)   58,859    (10,906)
                     
Net loss   (2,541,133)   (1,970,934)   (1,755,942)   (5,253,026)
                     
Less: net loss attributable to non-controlling interest   (233,913)   -    (419,211)   - 
                     
Net loss attributable to HeartCore Enterprises, Inc.  $(2,307,220)  $(1,970,934)  $(1,336,731)  $(5,253,026)
                     
Other comprehensive income (loss):                    
Foreign currency translation adjustment   (90,743)   128,705    (85,244)   428,118 
                     
Total comprehensive loss   (2,631,876)   (1,842,229)   (1,841,186)   (4,824,908)
Less: comprehensive loss attributable to non-controlling interest   (235,094)   -    (422,352)   - 
Comprehensive loss attributable to HeartCore Enterprises, Inc.  $(2,396,782)  $(1,842,229)  $(1,418,834)  $(4,824,908)
                     
Net loss per common share attributable to HeartCore Enterprises, Inc.                    
Basic  $(0.11)  $(0.11)  $(0.07)  $(0.29)
Diluted  $(0.11)  $(0.11)  $(0.07)  $(0.29)
Weighted average common shares outstanding                    
Basic   20,842,690    17,835,027    20,257,020    18,014,483 
Diluted   20,842,690    17,835,027    20,257,020    18,014,483 

 

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

 

 F-2 

 

 

HEARTCORE ENTERPRISES, INC.

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

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

 

                                                                 
    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  
Stock-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  
Stock-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  
Stock-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  

 

 

                                                                 
    Common Shares     Additional           Accumulated Other     Total HeartCore Enterprises, Inc.     Non-     Total  
    Number of
Shares
    Amount    

 Paid-in
Capital

    Accumulated
Deficit
    Comprehensive
Income
   

Shareholders’

Equity

    controlling
Interest
    Shareholders’
Equity
 
Balance, December 31, 2022     17,649,886     $ 1,764     $ 15,014,607     $ (10,573,579 )   $  364,837     $ 4,807,629     $ -     $ 4,807,629  
Net income (loss)     -       -       -       1,882,289       -       1,882,289       (74,252 )     1,808,037  
Foreign currency translation adjustment     -       -       -       -       (22,744 )     (22,744 )     (2,290 )     (25,034 )
Issuance of common shares for acquisition of subsidiary     2,500,000       250       3,149,750       -       -       3,150,000       -       3,150,000  
Non-controlling interests arising from acquisition of subsidiary     -       -       -       -       -       -       3,190,000       3,190,000  
Stock-based compensation     692,804       69       915,159       -       -       915,228       -       915,228  
Balance, March 31, 2023     20,842,690       2,083       19,079,516       (8,691,290 )     342,093       10,732,402       3,113,458       13,845,860  
Net loss     -       -       -       (911,800 )     -       (911,800 )     (111,046 )     (1,022,846 )
Foreign currency translation adjustment     -       -       -       -       30,203       30,203       330       30,533  
Stock-based compensation     -       -       179,165       -       -       179,165       -       179,165  
Balance, June 30, 2023     20,842,690       2,083       19,258,681       (9,603,090 )     372,296       10,029,970       3,002,742       13,032,712  
Net loss     -       -       -       (2,307,220 )     -       (2,307,220 )     (233,913 )     (2,541,133 )
Foreign currency translation adjustment     -       -       -       -       (89,562 )     (89,562 )     (1,181 )     (90,743 )
Stock-based compensation     -       -       173,306       -       -       173,306       -       173,306  
Balance, September 30, 2023     20,842,690     $ 2,083     $ 19,431,987     $ (11,910,310 )   $ 282,734     $ 7,806,494     $ 2,767,648     $ 10,574,142  

 

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

 

 F-3 

 

 

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

           
  

For the Nine Months Ended

September 30,

 
   2023   2022 
Cash flows from operating activities:          
Net loss  $(1,755,942)  $(5,253,026)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization expenses   495,200    64,398 
Gain on disposal of property and equipment   (4,737)   - 
Amortization of debt issuance costs   2,257    3,051 
Non-cash lease expense   254,876    207,549 
Loss on termination of lease   76    - 
Deferred income taxes   (109,690)   (5,843)
Stock-based compensation   1,267,699    1,225,477 
Warrants received as noncash consideration   (4,009,335)   - 
Changes in fair value of investments in marketable securities   500,762    - 
Changes in fair value of investments in warrants   294,565    - 
           
Changes in assets and liabilities:          
Accounts receivable   (322,583)   168,021 
Prepaid expenses   187,269    (56,553)
Other assets   (23,982)   (142,967)
Accounts payable and accrued expenses   597,247    (96,238)
Accrued payroll and other employee costs   7,471    59,059 
Due to related party   7,562    3,098 
Operating lease liabilities   (231,499)   (213,691)
Finance lease liabilities   -    (370)
Income tax payables   101,058    (7,704)
Deferred revenue   200,256    45,938 
Other liabilities   83,809    (206,569)
           
Net cash flows used in operating activities   (2,457,661)   (4,206,370)
           
Cash flows from investing activities:          
Purchases of property and equipment   (516,658)   (41,672)
Proceeds from disposal of property and equipment   24,935    - 
Advances on note receivable   (600,000)   - 
Repayment of loan provided to related party   34,823    33,042 
Payment for acquisition of subsidiary, net of cash acquired   (724,910)   - 
           
Net cash flows used in investing activities   (1,781,810)   (8,630)
           
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   (16,537)   (29,051)
Proceeds from long-term debt   219,427    258,087 
Repayment of long-term debts   (584,779)   (699,407)
Repayment of insurance premium financing   (266,756)   (298,886)
Net proceeds from factoring arrangement   217,250    - 
Payments for debt issuance costs   (656)   (1,030)
Payment for mandatorily redeemable financial interest   -    (430,489)
           
Net cash flows provided by (used in) financing activities   (432,051)   9,122,350 
           
Effect of exchange rate changes   (306,239)   (200,981)
           
Net change in cash and cash equivalents   (4,977,761)   4,706,369 
           
Cash and cash equivalents - beginning of the period   7,177,326    3,136,839 
           
Cash and cash equivalents - end of the period  $2,199,565   $7,843,208 
           
Supplemental cash flow disclosure:          
Interest paid  $59,290   $38,387 
Income taxes paid  $91,657   $3,013 
           
Non-cash investing and financing transactions:          
Payroll withheld as repayment of loan receivable from employees  $-   $12,034 
Liabilities assumed in connection with purchase of property and equipment  $9,602   $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  $389,035   $388,538 
Common shares issued for acquisition of subsidiary  $3,150,000   $- 
Investments in warrants converted to marketable securities  $1,257,868   $- 
Finance lease right-of-use asset obtained in exchange for finance lease liability  $93,117   $- 
Operating lease right-of-use asset obtained in exchange for operating lease liability  $317,040   $- 
Remeasurement of operating lease liability and right-of-use asset due to lease modification  $12,579   $- 

 

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

 

 F-4 

 

 

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 June 12, 2009. Pursuant to the terms of the Share Exchange Agreement, the Company issued 15,999,994 shares of its common shares to the shareholders of HeartCore Japan in exchange for 10,706 shares out of 10,984 shares of common shares issued by HeartCore Japan, representing approximately 97.5% of HeartCore Japan’s outstanding common shares. On February 24, 2022, the Company purchased the remaining 278 shares of common shares of HeartCore Japan. As a result, HeartCore Japan became a wholly-owned operating subsidiary of the Company.

 

The share exchange on July 16, 2021 has been accounted for as a recapitalization between entities under common control since the same controlling shareholders controlled these two entities before and after the transaction. The consolidation of the Company and its subsidiary has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the earliest period presented in the accompanying unaudited consolidated financial statements.

 

The Company, via its wholly-owned operating subsidiary, HeartCore Japan, is mainly engaged in the business of developing and sales of comprehensive software. Beginning from early 2022, HeartCore USA is engaged in business of providing consulting services to Japanese companies with intention to go public in the United States capital market.

 

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 in April 2006, and its wholly-owned subsidiaries, Sigmaways B.V. and Sigmaways Technologies Ltd. (“Sigmaways Technologies”). Sigmaways B.V. was incorporated in Netherlands in November 2019. Sigmaways Technologies was incorporated in Canada in August 2020. Sigmaways and its wholly-owned subsidiaries are primarily engaged in the business of developing and sales of software in the United States. The acquisition was closed on February 1, 2023.

 

In January 2023, HeartCore USA incorporated a wholly-owned subsidiary, HeartCore Financial, Inc. (“HeartCore Financial”), under the laws of the State of Delaware. HeartCore Financial is engaged in the business of providing financial consulting services.

 

In February 2023, HeartCore USA incorporated a wholly-owned subsidiary, HeartCore Capital Advisors, Inc. (“HeartCore Capital Advisors”), in Japan. HeartCore Capital Advisors is engaged in the business of providing financial consulting services to Japanese companies.

 

HeartCore USA, HeartCore Japan, Sigmaways, Sigmaways B.V., Sigmaways Technologies, HeartCore Financial and HeartCore Capital Advisors are hereafter referred to as the Company.

 

 F-5 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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 subsidiaries. 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2022.

 

Use of Estimates

 

In preparing the unaudited 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 unaudited consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for credit losses, useful lives of property and equipment, the impairment of long-lived assets and goodwill, valuation of stock-based compensation, valuation allowance of deferred tax assets, implicit interest rate of operating and financing leases, valuation of asset retirement obligations, valuation of investments in warrants, revenue recognition and purchase price allocation with respect to business combination. 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 unaudited 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 unaudited consolidated financial statements.

 

 F-6 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Asset Retirement Obligations

 

Pursuant to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other non-current liabilities in the consolidated balance sheets, in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 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, 
   2023   2022 
Beginning balance  $138,018   $155,666 
Liabilities incurred   83,821    - 
Accretion expense   328    459 
Foreign currency translation adjustment   (24,350)   (18,107)
Ending balance  $197,817   $138,018 

 

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, 2023 and 2022, software development costs expensed as incurred amounted to $289,303 and $583,762, respectively. These software development costs were included in the research and development expenses.

 

Investments in Warrants

 

Investments in warrants represent stock warrants of its consulting service customers and are not registered for public sale. The warrants are measured at fair value and any changes in fair value are recognized in other income (expenses). Investments in warrants are classified as long-term if the warrants are exercisable over one year after the date of receipt.

 

Investments in Marketable Securities

 

Investments in marketable securities represent equity securities registered for public sale with readily determinable fair value. The marketable securities as of September 30, 2023 were obtained through exercise of stock warrants of its consulting service customers and measured at fair value with changes in fair value recognized in other income (expenses).

 

Intangible Asset, Net

 

Intangible asset represents the customer relationship acquired from business acquisition of Sigmaways and its subsidiaries. The acquired intangible asset is recognized and measured at fair value at the time of acquisition and is amortized on a straight-line basis over the estimated economic useful life of the respective assets. The estimated useful life of the customer relationship is 8 years.

 

Impairment of Long-Lived Assets Other Than Goodwill

 

Long-lived assets with finite lives, primarily property and equipment, operating lease right-of-use assets and intangible asset, 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, 2023 and 2022.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. In accordance with ASC Topic 350, “Intangibles – Goodwill and Others”, goodwill is subject to at least an annual assessment for impairment or more frequently if events or changes in circumstances indicate that an impairment may exist, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis.

 

Foreign Currency Translation

 

The functional currency of HeartCore Japan and HeartCore Capital Advisors is the Japanese Yen (“JPY”). The functional currency of HeartCore USA, HeartCore Financial and Sigmaways is the United States Dollar (“US$”). The functional currency of Sigmaways B.V. is the Euro (“EUR”). The functional currency of Sigmaways Technologies is the Canada Dollar (“CAD”). 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 unaudited consolidated statements of operations.

 

 F-7 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The reporting currency of the Company is the 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 unaudited statements of changes in shareholders’ equity (deficit).

 

Revenue Recognition

 

The Company recognizes revenues under ASC Topic 606, “Revenue from Contracts with customers”.

 

To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of value-added taxes and applicable local government levies.

 

The Company currently generates its revenues from the following main sources:

 

Revenues from On-Premise Software

 

Licenses for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenues from on-premise licenses are recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence.

 

Revenues from Maintenance and Support Services

 

Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers.

 

Revenues from Software as a Service (“SaaS”)

 

The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length.

 

 F-8 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Revenues from Software Development and Other Miscellaneous Services

 

The Company provides customers with software development and support services pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.

 

Revenues from Customized Software Development and Services

 

The Company’s customized software development and services revenues primarily include revenues from providing software development solutions and other support services to its customers. The contract pricing is at stated billing rates per hour. These contracts are generally short-term in nature and not longer than one year in duration. For services provided under the contract that result in the transfer of control over time, the underlying deliverable in the contract is owned and controlled by the customer and does not create an asset with an alternative use to the Company. The Company recognizes revenue on rate per hour contracts based on the amount billable to the customer, as the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date.

 

Revenues from Consulting Services

 

The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents related to the initial public offering and supporting the listing process. The consulting service contracts are generally less than one year in length and normally include both cash and noncash consideration. Cash consideration is paid in installment payments and is recognized in revenue over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. Noncash consideration is in the form of warrants of the customers and is measured at fair value at contract inception. Noncash consideration that is variable for reasons other than only the form of the consideration is included in the transaction price, but is subject to the constraint on variable consideration. The Company assesses the estimated amount of the variable noncash consideration at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved. Only when the significant revenues reversal is concluded probable of not occurring can variable consideration be included in revenues. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the variable noncash consideration is recognized in revenues until the underlying uncertainties have been resolved.

 

The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company has determined that its contracts do not include a significant financing component. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company factors certain accounts receivable upon or after the performance obligation is being met. The Company records deferred revenue on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenue is reported net of related uncollected deferred revenue in the consolidated balance sheets. The amount of revenues recognized during the nine months ended September 30, 2023 and 2022 that were included in the opening deferred revenues balance was approximately $1.5 million and $1.2 million, respectively.

 

Disaggregation of Revenues

 

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 revenues and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the three and nine months ended September 30, 2023 and 2022 is as following:

 

                     
  

For the Three Months

Ended September 30,

  

For the Nine Months

Ended September 30,

 
   2023   2022   2023   2022 
Revenues from on-premise software  $396,647   $257,121   $1,457,836   $1,775,254 
Revenues from maintenance and support services   650,603    678,521    2,226,802    2,251,137 
Revenues from software as a service (“SaaS”)   148,857    122,347    497,430    352,251 
Revenues from software development and other miscellaneous services   474,859    340,742    1,561,655    1,518,032 
Revenues from customized software development and services   2,405,907    -    6,332,479    - 
Revenues from consulting services   612,035    473,745    6,442,229    922,100 
Total revenues  $4,688,908   $1,872,476   $18,518,431   $6,818,774 

 

 F-9 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s disaggregation of revenues by product/service is as following:

 

   2023   2022   2023   2022 
  

For the Three Months

Ended September 30,

  

For the Nine Months

Ended September 30,

 
   2023   2022   2023   2022 
Revenues from customer experience management platform  $1,403,932   $1,171,150   $4,696,241   $4,757,369 
Revenues from process mining   99,618    68,560    390,374    453,368 
Revenues from robotic process automation   58,051    69,693    271,520    317,110 
Revenues from task mining   74,958    66,799    277,725    252,234 
Revenues from customized software development and services   2,405,907    -    6,332,479    - 
Revenues from consulting services   612,035    473,745    6,442,229    922,100 
Revenues from others   34,407    22,529    107,863    116,593 
Total revenues  $4,688,908   $1,872,476   $18,518,431   $6,818,774 

 

As of September 30, 2023 and 2022, and for the periods then ended, substantially all of the long-lived assets (excluding intangible asset) and the majority of revenues generated were 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 usually 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, 2023, customer B and C represent 14.2% and 13.6%, respectively, of the Company’s total revenues. 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, 2023, vendor D, B, A and E represent 26.4%, 26.2%, 22.1% and 15.9%, respectively, of the Company’s total purchases. 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.

 

Stock-based Compensation

 

The Company accounts for stock-based compensation awards in accordance with ASC Topic 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 unaudited 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.

 

 F-10 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Business Combinations

 

The Company accounts its business combinations using the acquisition method of accounting in accordance with ASC Topic 805. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible asset acquired and non-controlling interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses are expensed as incurred.

 

Consideration transferred in a business combination is measured at the fair value as of the date of acquisition. Where the consideration in an acquisition includes contingent consideration, and the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and is recorded as a liability. It is subsequently carried at fair value with changes in fair value reflected in earnings.

 

In a business combination achieved in stages, the Company remeasures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the remeasurement gain or loss, if any, is recognized in the unaudited consolidated statements of operations and comprehensive loss.

 

Fair value is determined based upon the guidance of ASC Topic 820, “Fair Value Measurements and Disclosures,” and generally are determined using Level 2 inputs and Level 3 inputs. The determination of fair value involves the use of significant judgments and estimates. The Company utilizes the assistance of a third-party valuation appraiser to determine the fair value as of the date of acquisition.

 

Fair Value Measurements

 

The Company performs fair value measurements in accordance with ASC Topic 820. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or a liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value:

 

  Level 1: quoted prices in active markets for identical assets or liabilities;
  Level 2: inputs other than Level 1 that are observable, either directly or indirectly; or
  Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

 

As of September 30, 2023 and December 31, 2022, the carrying values of current assets, except for investments in marketable securities, and current liabilities approximated their fair values reported in the consolidated balance sheets due to the short-term maturities of these instruments.

 

Investments in Warrants

 

The Company received warrants from its customers as noncash consideration from consulting services. The warrants are not registered for public sale and are measured at fair value at contract inception. The Company’s investments in warrants are measured on a recurring basis and carried on the balance sheet at an estimated fair value at the end of the period. The valuation of investments in warrants was determined using a Black-Scholes model of value based upon the stock price, exercise price, expected volatility, time to maturity, and a risk-free interest rate for the term of the warrants exercise. Such valuations are classified within Level 3 of the fair value hierarchy.

 

The following table summarizes the Company’s investments in warrants activity for the nine months ended September 30, 2023 and 2022:

 

SCHEDULE OF INVESTMENTS IN WARRANTS

          
   For the Nine Months Ended 
   September 30, 
   2023   2022 
Fair value of investments in warrants at beginning of the period  $-   $      - 
Warrants received as noncash consideration   4,009,335    - 
Changes in fair value of investments in warrants   (294,565)   - 
Investments in warrants converted to marketable securities   (1,257,868)   - 
Fair value of investments in warrants at end of the period  $2,456,902   $- 

 

Investments in Marketable Securities

 

The Company’s investments in marketable securities registered for public sale with readily determinable fair value are measured at quoted prices on a recurring basis at the end of the period. Marketable securities are classified within Level 1 of the fair value hierarchy.

 

The following table summarizes the Company’s investments in marketable securities activity for the nine months ended September 30, 2023 and 2022:

 

SCHEDULE OF INVESTMENTS IN MARKETABLE SECURITIES

           
   For the Nine Months Ended 
   September 30, 
   2023   2022 
Fair value of investments in marketable securities at beginning of the period  $-   $      - 
Investments in warrants converted to marketable securities   1,257,868    - 
Changes in fair value of investments in marketable securities   (500,762)   - 
Marketable securities sold   -    - 
Fair value of investments in marketable securities at end of the period  $757,106   $- 

 

 F-11 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Recent Accounting Pronouncements

 

New Accounting Pronouncements Recently Adopted

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 was further amended in November 2020 by ASU No. 2020-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). As a result, ASC Topic 326, “Financial Instruments – Credit Losses” is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2020. For all other entities, it is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As the Company is an “emerging growth company” and elects to apply for the new and revised accounting standards at the effective date for a private company, the Company adopted ASU No. 2016-13 on January 1, 2023 and the adoption did not have a material impact on the Company’s unaudited consolidated financial statements.

 

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC Topic 606, “Revenue from Contracts with Customers”. This ASU is expected to improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU No. 2021-08 on January 1, 2023 and the adoption did not have a material impact on the Company’s unaudited consolidated financial statements.

 

New Accounting Pronouncements Not Yet Effective

 

The Company has reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a material impact on the Company’s unaudited consolidated financial statements.

 

NOTE 3 — ACCOUNTS RECEIVABLE

 

Accounts receivable consists of the following:

 

SCHEDULE OF ACCOUNTS RECEIVABLE NET

   September 30,   December 31, 
   2023   2022 
Accounts receivable – non-factored  $2,344,989   $551,064 
Accounts receivable – factored with recourse   217,250    - 
Accounts receivable, gross   2,562,239    551,064 
Less: allowance for credit losses   -    - 
Accounts receivable  $2,562,239   $551,064 

 

NOTE 4 — PREPAID EXPENSES

 

Prepaid expenses consist of the following:

 

SCHEDULE OF PREPAID EXPENSES

   September 30,   December 31, 
   2023   2022 
Prepayments to software vendors  $185,540   $162,046 
Prepaid marketing and consulting fees   102,839    99,770 
Prepaid subscription fees   83,207    113,685 
Prepaid insurance premium   208,385    66,023 
Others   103,356    96,706 
Total  $683,327   $538,230 

 

 F-12 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 — NOTE RECEIVABLE AND LONG-TERM NOTE RECEIVABLE

 

On May 2, 2023, the Company purchased a $300,000 promissory note from a non-related company. The note bears an interest rate of 8% per annum and matures on the earlier of 1) the date of the closing of capital-raising transactions in the amount of $300,000 or more consummated by the promissory note issuer, 2) the date on which the promissory note issuer completes its initial public offering (“IPO”) on the Nasdaq Capital Market or New York Stock Exchange, or 3) 180 days following the note issuance. The interest rate would be 12% per annum for any amount that is unpaid when due. On July 27, 2023, the Company entered into a note exchange agreement with the promissory note issuer pursuant to which all of the promissory note principal amount and accrued interest owed to the Company shall be converted into and exchanged for 600,000 shares of common shares of the promissory note issuer upon the effectiveness of its IPO. The promissory note issuer has not completed the IPO as of September 30, 2023.

 

On September 1, 2023, the Company purchased a $300,000 promissory note from a non-related company. The note bears an interest rate of 4% per annum and matures on September 2, 2026. On the first business day following each annual anniversary of September 1, 2023, the promissory note issuer shall pay to the Company the sum of one-third of the total promissory note amount due and outstanding, including all accrued and unpaid interest as of such time, unless such annual payment has been forgiven by the Company pursuant to certain conditions. The interest rate would be 10% per annum for any amount that is unpaid when due.

 

NOTE 6 — RELATED PARTY TRANSACTIONS

 

As of September 30, 2023 and December 31, 2022, the Company has a due to related party balance of $7,859 and $402, respectively, from Sumitaka Yamamoto, the Chief Executive Officer (“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, 2023, the related party paid operating expenses on behalf of the Company and received the payments in a net amount of $7,562. 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.

 

As of September 30, 2023 and December 31, 2022, the Company has a loan receivable balance of $226,515 and $294,919, 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, 2023 and 2022, the Company received repayments of $34,823 and $33,042, respectively, from this related party.

 

During the period from January 1, 2022 through January 13, 2022, the Company completed a private placement, in which it issued 30,000 shares of common shares at a purchase price of $2.50 per share to the officers of the Company for an aggregate amount of $75,000.

 

NOTE 7 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consist of the following:

 

SCHEDULE OF PROPERTY AND EQUIPMENT NET

   September 30,   December 31, 
   2023   2022 
Leasehold improvements  $471,069   $298,637 
Machinery and equipment   673,435    316,827 
Vehicle   85,111    106,490 
Software   142,829    163,049 
Subtotal   1,372,444    885,003 
Less: accumulated depreciation   (619,504)   (681,376)
Property and equipment, net  $752,940   $203,627 

 

Depreciation expenses were $70,200 and $64,398 for the nine months ended September 30, 2023 and 2022, respectively.

 

NOTE 8 — INTANGIBLE ASSET, NET

 

Intangible asset, net is as follows:

 

SCHEDULE OF INTANGIBLE ASSETS

   September 30,   December 31, 
   2023   2022 
Customer relationship  $5,100,000   $               - 
Less: accumulated amortization   (425,000)   - 
Intangible asset, net  $4,675,000   $- 

 

Amortization expenses were $425,000 and nil for the nine months ended September 30, 2023 and 2022, respectively.

 

As of September 30, 2023, the future estimated amortization cost for intangible asset is as follows:

 

SCHEDULE OF AMORTIZATION INTANGIBLE ASSET

    Estimated 
Year Ended December 31,   Amortization 
Remaining of 2023   $159,375 
2024    637,500 
2025    637,500 
2026    637,500 
2027    637,500 
Thereafter    1,965,625 
Total   $4,675,000 

 

 F-13 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 — LEASES

 

The Company has entered into four 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 two leases for vehicles, one of which was terminated in September 2023, and these leases were classified as finance leases. Right-of-use assets of these finance leases in the amount of $85,591 and $18,335 are included in property and equipment, net as of September 30, 2023 and December 31, 2022, respectively.

 

Operating lease expenses for lease payments are recognized on a straight-line basis over the lease term. Finance lease costs include amortization, which are recognized on a straight-line basis over the expected life of the leased assets, and interest expenses, which are recognized following an effective interest rate method. Leases with initial term of twelve months or less are not recorded on the consolidated balance sheets.

 

The components of lease costs are as follows:

 

 SCHEDULE OF LEASE COSTS

   2023   2022 
   For the Nine Months Ended 
   September 30, 
   2023   2022 
Finance lease costs          
Amortization of right-of-use assets  $15,215   $26,825 
Interest on lease liabilities   98    370 
Total finance lease costs   15,313    27,195 
Operating lease costs   286,934    244,688 
Total lease costs  $302,247   $271,883 

 

 F-14 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents supplemental information related to the Company’s leases:

 

SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO THE COMPANY’S LEASES

   2023   2022 
   For the Nine Months Ended 
   September 30, 
   2023   2022 
Cash paid for amounts included in the measurement of lease liabilities:          
Operating cash flows from finance leases  $98   $370 
Operating cash flows from operating leases   257,277    243,108 
Financing cash flows from finance leases   16,537    29,051 
Finance lease right-of-use asset obtained in exchange for finance lease liability   93,117    - 
Operating lease right-of-use asset obtained in exchange for operating lease liability   317,040    - 
Remeasurement of operating lease liability and right-of-use asset due to lease modification   12,579    - 
           
Weighted average remaining lease term (years)          
Finance leases   5.0    1.1 
Operating leases   7.7    9.4 
           
Weighted average discount rate (per annum)          
Finance leases   1.32%   1.32%
Operating leases   1.33%   1.32%

 

As of September 30, 2023, the future maturity of lease liabilities is as follows:

 

SCHEDULE OF FINANCE LEASE AND OPERATING LEASE FUTURE MATURITY OF LEASE LIABILITIES

Year Ended December 31,  Finance Lease   Operating Lease 
Remaining of 2023  $4,649   $101,255 
2024   17,844    388,730 
2025   17,593    383,300 
2026   17,593    321,614 
2027   17,593    277,553 
Thereafter   13,195    1,142,795 
Total lease payments   88,467    2,615,247 
Less: imputed interest   (2,856)   (136,089)
Total lease liabilities   85,611    2,479,158 
Less: current portion   (17,076)   (365,241)
Non-current lease liabilities  $68,535   $2,113,917 

 

Pursuant to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $338,220 and $244,395 as of September 30, 2023 and December 31, 2022, respectively.

 

 F-15 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 — FACTORING LIABILITY

 

Sigmaways, the newly acquired subsidiary of the Company, entered into a Factoring and Security Agreement (the “Factoring Agreement”) with The Southern Bank Company, an unrelated factor (the “Factor”), in 2017, for the purpose of factoring certain accounts receivable. Under the terms of the Factoring Agreement, the Company may offer for sale, and the Factor may purchase in its sole discretion, certain accounts receivable of the Company (the “Purchased Receivable”). The Factoring Agreement provided for a maximum of $850,000 in Purchased Receivable.

 

Selected accounts receivable is submitted to the Factor, and the Company receives 90% of the face value of the accounts receivable by wire transfer. Upon payment by the customers, the remainder of the amount due is received from the Factor after deducting certain fees.

 

The Factoring Agreement specifies that eligible accounts receivable is factored with recourse. Under the terms of the recourse provision, the Company is required to reimburse the Factor, upon demand, for Purchased Receivable that is not paid on time by the customers. The performance of all obligations and payments to the Factor is personally guaranteed by Prakash Sadasivam, CEO of Sigmaways and Chief Strategy Officer (“CSO”) of the Company, and secured by all Sigmaways’ now owned and hereafter assets and any sums maintained by the Factor that are identified as payable to the Company.

 

The Factoring Agreement has an initial term of twelve months and automatically renews for successive twelve-month renewal periods unless terminated pursuant to the terms of the Factoring Agreement. The Company may terminate the Factoring Agreement with sixty days’ written notice to the Factor and is subject to certain early termination fee.

 

The Factoring Agreement contained covenants that are customary for accounts receivable-based factoring agreements and also contained provisions relating to events of default that are customary for agreements of this type.

 

As of September 30, 2023, there was $217,250 borrowed and outstanding under the Factoring Agreement. There are various fees charged by the Factor, including initial discount purchase fee, factoring fee and interest expense. During the nine months ended September 30, 2023, the Company recorded $54,790 in interest expense related to the Factoring Agreement.

 

NOTE 11 — INSURANCE PREMIUM FINANCING

 

In January 2023, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $389,035 at an annual interest rate of 16.04% for ten months from February 1, 2023, payable in ten monthly installments of principal and interest.

 

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, 2023 and December 31, 2022, the balance of the insurance premium financing was $122,279 and nil, respectively. During the nine months ended September 30, 2023 and 2022, the interest incurred was $25,988 and $19,859, respectively.

 

 F-16 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 — 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      

Loan

Duration

 

Annual

Interest Rate

   

Balance as of

September 30,

2023

  

Balance as of

December 31,

2022

 
                         
Bond payable                             
Corporate bond issued through Resona Bank, Limited   JPY100,000,000    (a)(c)   1/10/2019 – 1/10/2024   0.430%   $66,854   $228,956 
Loans with banks and other financial institutions                             
Resona Bank, Limited   JPY50,000,000    (a)(b)   12/29/2017 – 12/29/2024   0.675%    63,779    113,677 
Resona Bank, Limited   JPY10,000,000    (a)(b)   9/30/2020 – 9/30/2027   0.000%    39,009    52,705 
Resona Bank, Limited   JPY40,000,000    (a)(b)   9/30/2020 – 9/30/2027   0.000%    156,037    210,822 
Resona Bank, Limited   JPY20,000,000    (a)(b)   11/13/2020 – 10/31/2027   1.600%    79,610    107,227 
Sumitomo Mitsui Banking Corporation   JPY100,000,000    (a)   12/28/2018 – 12/28/2023   1.475%    44,444    165,237 
Sumitomo Mitsui Banking Corporation   JPY10,000,000     (a)(b)   12/30/2019 – 12/30/2026   1.975%    31,849    44,532 
The Shoko Chukin Bank, Ltd.   JPY30,000,000        9/28/2018 – 8/31/2023   1.200%    -    34,343 
The Shoko Chukin Bank, Ltd.   JPY50,000,000        7/27/2020 – 6/30/2027   1.290%    185,854    253,377 
The Shoko Chukin Bank, Ltd.   JPY30,000,000        7/25/2023 – 6/30/2028   Tokyo Interbank Offered Rate + 1.950%    193,742    - 
Japan Finance Corporation   JPY80,000,000        11/17/2020 – 11/30/2027   0.210%    329,456    442,036 
Higashi-Nippon Bank   JPY30,000,000    (a)   3/31/2022 – 3/31/2025   1.400%    105,094    177,669 
First Home Bank   $350,000    (d)   4/18/2019 – 4/18/2029   Wall Street Journal U.S. Prime Rate + 2.750%    237,336    - 
U.S. Small Business Administration   $350,000    (d)   5/30/2020 – 5/30/2050   3.750%    350,000    - 
Aggregate outstanding principal balances                      1,883,064    1,830,581 
Less: unamortized debt issuance costs                      (5,794)   (8,969)
Less: current portion                      (525,440)   (697,877)
Non-current portion                     $1,351,830   $1,123,735 

 

(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.
(c) The bond is guaranteed by Resona Bank, Limited.
(d) These debts are guaranteed by Prakash Sadasivam, CEO of Sigmaways and CSO of the Company, and secured by all assets of Sigmaways.

 

Interest expense for long-term debts was $44,295 and $19,502 for the nine months ended September 30, 2023 and 2022, respectively.

 

As of September 30, 2023, future minimum loan payments are as follows:

 

SCHEDULE OF FUTURE MINIMUM LOAN PAYMENTS

    Loan 
Year Ended December 31,   Payment 
Remaining of 2023   $146,763 
2024    462,065 
2025    305,291 
2026    293,302 
2027    262,017 
Thereafter    413,626 
Total   $1,883,064 

 

 F-17 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 — INCOME TAXES

 

United States

 

HeartCore USA, Sigmaways and HeartCore Financial, incorporated in the United States, are subject to federal income tax at 21% statutory tax rate with respect to the profit generated from the United States.

 

Netherlands

 

Sigmaways B.V. is a company incorporated in Amsterdam in Netherlands in November 2019. The first EUR200,000 of taxable income will be taxed at 19% and the remaining taxable income will be taxed at statutory tax rate of 25.80%.

 

Canada

 

Sigmaways Technologies is a company incorporated in British Columbia in Canada in August 2020. It is subject to income tax on income arising in, or derived from, the tax jurisdiction in British Columbia it operates. The basic federal rate of Part I tax is 38% of taxable income, 28% after federal tax abatement. After the general tax reduction, the net federal tax rate is 15%. The provincial and territorial lower and higher tax rates in British Columbia are 2% and 12%, respectively.

 

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 tax rate of approximately 34.59% for the nine months ended September 30, 2023 and 2022.

 

For the nine months ended September 30, 2023 and 2022, the Company’s income tax expense (benefit) are as follows:

 

 SCHEDULE OF INCOME TAX EXPENSES

   2023   2022 
   For the Nine Months Ended 
   September 30, 
   2023   2022 
Current  $168,549   $(2,108)
Deferred   (109,690)   (8,798)
Income tax expense (benefit)  $58,859   $(10,906)

 

The effective tax rate was (3.47)% and 0.21% for the nine months ended September 30, 2023 and 2022, respectively.

 

 F-18 

 

 

HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 14 – 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 (approximately $0.09) each. 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 November 3, 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 was recorded by the Company as a share repurchase liability included in other current liabilities in the consolidated balance sheet with JPY1,830 (approximately $16) as of December 31, 2021. The shares issued related to the early exercise of the above-mentioned stock options were not considered outstanding as of December 31, 2021. On February 14, 2022, the 183 units of stock options were vested upon the completion of the Company’s initial public offering and the Company recognized stock-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 table summarizes the Company’s stock option activity for the stock options issued in 2016 for the nine months ended September 30, 2022:

 

SCHEDULE OF UNVESTED STOCK OPTION

   

Number of Stock Options

 
Issued and unvested as of January 1, 2022     183  
Vested and exercised     183  
Issued and unvested as of September 30, 2022     -  

 

On August 6, 2021, the Board of Directors and stockholders of the Company approved a 2021 Equity Incentive Plan (the “2021 Plan”), under which 2,400,000 shares of common shares are authorized for issuance. On December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common shares pursuant to the 2021 Plan 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 pursuant to the 2021 Plan 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 are fully vested and exercisable on the grant date, with the expiration date on August 9, 2026.

 

On February 3, 2023, the Company awarded options to purchase 100,000 shares of common shares pursuant to the 2021 Plan at an exercise price of $1.17 per share to an employee of the Company. The options vest 50% on the grant date and February 1, 2024, respectively, with the expiration date on February 3, 2033.

 

On August 25, 2023, the Company awarded options to purchase 2,000 shares of common shares pursuant to the 2021 Plan at an exercise price of $1.10 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 25, 2033.