HEARTCORE
ENTERPRISES, INC.
CONSOLIDATED
BALANCE SHEETS
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 12,463,179 | | |
$ | 3,136,839 | |
Accounts receivable, net | |
| 1,119,990 | | |
| 960,964 | |
Prepaid expenses | |
| 852,270 | | |
| 444,405 | |
Due from related party | |
| 46,639 | | |
| 50,559 | |
Loan receivable from employee | |
| - | | |
| 8,341 | |
Other current assets | |
| 23,304 | | |
| 15,654 | |
Total current assets | |
| 14,505,382 | | |
| 4,616,762 | |
| |
| | | |
| | |
Non-current assets: | |
| | | |
| | |
Property and equipment, net | |
| 211,180 | | |
| 261,414 | |
Operating lease right-of-use assets | |
| 2,677,171 | | |
| 3,319,749 | |
Deferred tax assets | |
| 239,176 | | |
| 297,990 | |
Security deposits | |
| 235,274 | | |
| 278,237 | |
Long-term loan receivable from related party | |
| 260,592 | | |
| 335,756 | |
Loan receivable from employee, non-current | |
| - | | |
| 4,518 | |
Other non-current assets | |
| 4,012 | | |
| 8,737 | |
Total non-current assets | |
| 3,627,405 | | |
| 4,506,401 | |
| |
| | | |
| | |
Total assets | |
$ | 18,132,787 | | |
$ | 9,123,163 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 818,222 | | |
$ | 646,425 | |
Accrued payroll and other employee costs | |
| 364,123 | | |
| 255,082 | |
Due to related party | |
| 5,857 | | |
| 1,110 | |
Current portion of long-term debts | |
| 733,235 | | |
| 849,995 | |
Insurance premium financing | |
| 220,583 | | |
| - | |
Operating lease liabilities, current | |
| 280,789 | | |
| 332,277 | |
Finance lease liabilities, current | |
| 20,717 | | |
| 37,459 | |
Income tax payables | |
| 1,322 | | |
| 10,919 | |
Deferred revenue | |
| 1,991,090 | | |
| 1,690,917 | |
Mandatorily redeemable financial interest | |
| - | | |
| 447,986 | |
Other current liabilities | |
| 65,547 | | |
| 281,673 | |
Total current liabilities | |
| 4,501,485 | | |
| 4,553,843 | |
| |
| | | |
| | |
Non-current liabilities: | |
| | | |
| | |
Long-term debts | |
| 1,367,101 | | |
| 1,871,580 | |
Operating lease liabilities, non-current | |
| 2,467,546 | | |
| 3,076,204 | |
Finance lease liabilities, non-current | |
| 9,279 | | |
| 23,861 | |
Other non-current liabilities | |
| 132,648 | | |
| 156,627 | |
Total non-current liabilities | |
| 3,976,574 | | |
| 5,128,272 | |
| |
| | | |
| | |
Total liabilities: | |
| 8,478,059 | | |
| 9,682,115 | |
| |
| | | |
| | |
Shareholders’ equity (deficit): | |
| | | |
| | |
Preferred shares ($0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of June 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; 18,440,467 and 15,546,454 shares outstanding as of June 30, 2022 and December 31, 2021, respectively) | |
| 1,899 | | |
| 1,554 | |
Additional paid-in capital | |
| 17,883,555 | | |
| 3,350,779 | |
Treasury shares, at cost (558,809 and 0 shares as of June 30, 2022 and December 31, 2021, respectively) | |
| (1,336,762 | ) | |
| - | |
Accumulated deficit | |
| (7,178,205 | ) | |
| (3,896,113 | ) |
Accumulated other comprehensive income (loss) | |
| 284,241 | | |
| (15,172 | ) |
Total shareholders’ equity (deficit) | |
| 9,654,728 | | |
| (558,952 | ) |
| |
| | | |
| | |
Total liabilities and shareholders’ equity (deficit) | |
$ | 18,132,787 | | |
$ | 9,123,163 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
HEARTCORE
ENTERPRISES, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
* |
Retrospectively restated for effect of share issuances on July 16, 2021. |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
HEARTCORE
ENTERPRISES, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
* |
Retrospectively restated for effect of share issuances on July 16, 2021. |
| |
Number of shares | | |
Amount | | |
paid-in capital | | |
Number of shares | | |
Amount | | |
Accumulated deficit | | |
comprehensive income (loss) | | |
equity (deficit) | |
| |
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 | |
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
HEARTCORE
ENTERPRISES, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
HEARTCORE
ENTERPRISES, INC.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
HeartCore
Enterprises, Inc. (“HeartCore USA” or the “Company”), a holding company, was incorporated under the laws of the
State of Delaware on May 18, 2021.
On
July 16, 2021, the Company executed a Share Exchange Agreement with certain shareholders of HeartCore Co. Ltd. (“HeartCore Japan”),
a company that was incorporated in Japan on June 12, 2009. Pursuant to the terms of the Share Exchange Agreement, the Company issued
15,999,994 shares of its common shares to the shareholders of HeartCore Japan in exchange for 10,706 shares out of 10,984 shares of common
shares issued by HeartCore Japan, representing approximately 97.5% of HeartCore Japan’s outstanding common shares. On February
24, 2022, the Company purchased the remaining 278 shares of common shares of HeartCore Japan. As a result, HeartCore Japan became a wholly
owned operating subsidiary of the Company.
The
share exchange on July 16, 2021 has been accounted for as a recapitalization between entities under common control since the same controlling
shareholders controlled these two entities before and after the transaction. The consolidation of the Company and its subsidiary has
been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the
earliest period presented in the accompanying unaudited consolidated financial statements.
The
Company, via its wholly-owned operating subsidiary, HeartCore Japan, is mainly engaged in the business of developing and sales of comprehensive
software. HeartCore USA and HeartCore Japan are hereafter referred to as the Company.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations
of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements include the accounts of
the Company and its subsidiary. Prior to February 24, 2022, ownership interest of non-controlling party is presented as mandatorily redeemable
financial interest or non-controlling interest as applicable. All significant intercompany accounts and transactions have been eliminated.
These
unaudited interim consolidated financial statements do not include all of the information and disclosure required by the U.S. GAAP for
complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management,
all adjustments consisting of normal recurring nature considered necessary for a fair presentation of the financial position and the
results of operations and cash flows for the interim periods have been included. The unaudited interim consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021.
Use
of Estimates
In
preparing the consolidated financial statements in conformity U.S. GAAP, the management is required to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available
as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not
limited to, the allowance for doubtful accounts, useful lives of property and equipment, the impairment of long-lived assets, valuation
of share-based compensation, valuation allowance of deferred tax assets, implicit interest rate of operating and financing leases, valuation
of asset retirement obligations and revenue recognition. Actual results could differ from those estimates.
COVID-19
While
the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such
as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects
of the pandemic continue to be unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing
operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent
to which COVID-19 may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain
uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance
that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities.
These estimates may change, as new events occur and additional information is obtained, which will be recognized in the consolidated
financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be
material to the Company’s financial statements.
Asset
Retirement Obligations
Pursuant
to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the
time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other
non-current liabilities in the consolidated balance sheets, in accordance with Accounting Standards Codification (“ASC”)
410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing
the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations:
SCHEDULE OF CHANGES IN ASSET RETIREMENT OBLIGATIONS
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Beginning balance | |
$ | 155,666 | | |
$ | 173,043 | |
Accretion expense | |
| 242 | | |
| 730 | |
Foreign currency translation adjustment | |
| (23,260 | ) | |
| (18,107 | ) |
Ending balance | |
$ | 132,648 | | |
$ | 155,666 | |
Software
Development Costs
Software
development costs are expensed as incurred until the point the Company establishes technological feasibility. Technological feasibility
is established upon completion of a detailed program design or the completion of a working model. Costs incurred by the Company between
establishment of technological feasibility and the point at which the product is ready for general release are capitalized and amortized
over the economic life of the related products. The Company’s software development costs incurred subsequent to achieving technological
feasibility have not been significant and all software development costs have been expensed as incurred.
In
the six months ended June 30, 2022 and 2021, software development costs expensed as incurred amounted to $525,487 and $132,171, respectively.
These software development costs were included in the research and development expenses.
Impairment
of Long-Lived Assets
Long-lived
assets with finite lives, primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition
are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no
impairments of these assets during the six months ended June 30, 2022 and 2021.
Foreign
Currency Translation
The
Company maintains its books and record in its local currency, Japanese YEN (“JPY”), which is a functional currency as being
the primary currency of the economic environment in which its operation is conducted. Transactions denominated in currencies other than
the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency
using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of
operations.
The
reporting currency of the Company is the United States Dollars (“US$”), and the accompanying unaudited consolidated financial
statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets
and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet
date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation
of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of
changes in shareholders’ equity (deficit).
Translation
of amounts from the local currency of the Company into US$1 has been made at the following exchange rates:
SCHEDULE OF FOREIGN CURRENCY TRANSLATION
| |
June 30, 2022 | | |
June 30, 2021 | |
Current JPY: US$1 exchange rate | |
| 136.11 | | |
| 110.74 | |
Average JPY: US$1 exchange rate | |
| 122.98 | | |
| 107.74 | |
Revenue
Recognition
The
Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with customers”.
To
determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s)
with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price
to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance
obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local
government levies. The Consumption Tax on sales is calculated at 10% of gross sales.
The
Company currently generates its revenue from the following main sources:
Revenue
from On-Premise Software
Licenses
for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company
provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right
for a specified term. Revenue from on-premise licenses is recognized upfront at the point in time when the software is made available
to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle.
Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise
software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions
when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach
as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for
a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions
or other observable evidence.
Revenue
from Maintenance and Support service
Maintenance
and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified
software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time
as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted
by the customers.
Revenue
from Software as a Service (“SaaS”)
The
Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing
the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over
the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts
are generally one year or less in length.
Revenue
from Software Development and other Miscellaneous Services
The
Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose
of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services,
such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers
and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.
Revenue
from Consulting Service
The
Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts,
which primarily include communicating with intermediary parties, preparing required documents and supporting the listing process. Revenues
from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less
than one year in length.
The
timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is
included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records
deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred
revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized
during the six months ended June 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $1.1
million and $1.2 million, respectively.
Disaggregation
of Revenue
The
Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing
and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues by type
for the three and six months ended June 30, 2022 and 2021 is as following:
SCHEDULE OF DISAGGREGATION OF REVENUES
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
For the Three Months
Ended | | |
For the Six Months
Ended | |
| |
June 30, | | |
June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenue from On-Premise Software | |
$ | 716,532 | | |
$ | 1,132,608 | | |
$ | 1,518,133 | | |
$ | 1,382,216 | |
Revenue from Maintenance and Support Service | |
| 727,277 | | |
| 890,552 | | |
| 1,572,616 | | |
| 1,832,767 | |
Revenue from Software as a Service (“SaaS”) | |
| 103,250 | | |
| 139,712 | | |
| 229,904 | | |
| 291,520 | |
Revenue from Software Development and other Miscellaneous Services | |
| 674,883 | | |
| 702,320 | | |
| 1,177,290 | | |
| 1,468,998 | |
Revenue from Consulting Service | |
| 448,355 | | |
| - | | |
| 448,355 | | |
| - | |
Total Revenue | |
$ | 2,670,297 | | |
$ | 2,865,192 | | |
$ | 4,946,298 | | |
$ | 4,975,501 | |
The
Company’s disaggregation of revenues by product/service is as following:
| |
For the Three Months
Ended | | |
For the Six Months
Ended | |
| |
June 30, | | |
June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenue from Customer Experience Management Platform | |
$ | 1,831,166 | | |
$ | 2,397,068 | | |
$ | 3,586,219 | | |
$ | 4,011,424 | |
Revenue from Process Mining | |
| 118,320 | | |
| 148,894 | | |
| 384,808 | | |
| 405,678 | |
Revenue from Robotic Process Automation | |
| 149,031 | | |
| 192,569 | | |
| 247,417 | | |
| 299,248 | |
Revenue from Task Mining | |
| 98,558 | | |
| 76,807 | | |
| 185,435 | | |
| 132,606 | |
Revenue from Consulting Service | |
| 448,355 | | |
| - | | |
| 448,355 | | |
| - | |
Revenue from Others | |
| 24,867 | | |
| 49,854 | | |
| 94,064 | | |
| 126,545 | |
Total Revenue | |
$ | 2,670,297 | | |
$ | 2,865,192 | | |
$ | 4,946,298 | | |
$ | 4,975,501 | |
As
of June 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 six months ended June 30, 2022, customer A and B represents 12.9% and 10.4%, respectively, of the Company’s total revenues.
For the six months ended June 30, 2021, customer B and C represents 11.5% and 12.7%, respectively, of the Company’s total revenues.
For
the six months ended June 30, 2022, vendor A and B represents 44.5% and 29.8%, respectively, of the Company’s total purchases.
For the six months ended June 30, 2021, vendor A, B, and C represents 40.2%, 36.3%, and 14.1%, respectively, of the Company’s total
purchases.
Share-based
Compensation
The
Company accounts for share-based compensation awards in accordance with ASC 718, “Compensation – Stock Compensation”.
The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the consolidated statements of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line
basis over the requisite service period or vesting period. The Company records forfeitures as they occur.
NOTE
3 — ACCOUNTS RECEIVABLE, NET
Accounts
receivable consists of the following:
SCHEDULE OF ACCOUNTS RECEIVABLE NET
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accounts receivable | |
$ | 1,119,990 | | |
$ | 960,964 | |
Less: allowance for doubtful accounts | |
| - | | |
| - | |
Accounts receivable, net | |
$ | 1,119,990 | | |
$ | 960,964 | |
NOTE
4 — PREPAID EXPENSES
Prepaid
expenses consist of the following:
SCHEDULE OF PREPAID EXPENSES
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Prepayments to software vendors | |
$ | 151,852 | | |
$ | 157,060 | |
Prepaid selling expenses | |
| 262,417 | | |
| - | |
Prepaid subscription fees | |
| 48,077 | | |
| 53,413 | |
Deferred offering expenses | |
| - | | |
| 180,630 | |
Prepaid insurance premium | |
| 329,709 | | |
| 18,252 | |
Others | |
| 60,215 | | |
| 35,050 | |
Total | |
$ | 852,270 | | |
$ | 444,405 | |
Deferred
offering expenses, consisting of legal fees and road show expenses relating to the Company’s planned initial public offering, are
capitalized and recorded on the balance sheet. The deferred offering expenses were reclassified to shareholders’ equity and recorded
against the proceeds received upon the closing of our initial public offering on February 14, 2022.
NOTE
5 — RELATED PARTY TRANSACTIONS
As
of June 30, 2022 and December 31, 2021, the Company has a due to related party balance of $5,885
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 six months ended June 30, 2022, the related party paid operating expenses on behalf of the Company and
received the payments in a net amount of $5,448.
During the six months ended June 30, 2021, the Company advanced $26,603
to this related party, and the related party paid expenses of $25,482
on behalf of the Company.
As
of June 30, 2022 and December 31, 2021, the Company has a loan receivable balance of $307,231 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 six months ended June 30, 2022 and 2021, the Company loaned nil and $57,195, respectively, to this related party, and the related
party paid expenses of nil and $14,197, respectively, on behalf of the Company. During the six months ended June 30, 2022 and 2021, the
Company received repayments of $21,508 and nil, respectively, from this related party.
In
June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. During the six months ended June 30, 2021, the
Company has revenue from this related party of $146,083 from software sales and incurred cost with this related party of $338,029 for
software development services provided. As of June 30, 2021, the Company has deferred revenue with this related party of $57,593. In
July 2021, Suzuyo Shinwart Corporation sold all its shares of the Company to the Company’s CEO and ceased to be the Company’s
related party.
During
the period from January 1, 2022 through January 13, 2022, the Company completed a private placement, in which, it issued 30,000 shares
of common shares at a purchase price of $2.50 per share to the officers of the Company for an aggregate amount of $75,000.
NOTE
6 — PROPERTY AND EQUIPMENT, NET
Property
and equipment consist of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT NET
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Leasehold improvement | |
$ | 279,549 | | |
$ | 320,257 | |
Machinery and equipment | |
| 290,884 | | |
| 316,126 | |
Vehicle | |
| 102,515 | | |
| 121,235 | |
Software | |
| 156,964 | | |
| 185,627 | |
Subtotal | |
| 829,912 | | |
| 943,245 | |
Accumulated depreciation | |
| (618,732 | ) | |
| (681,831 | ) |
Property and equipment, net | |
$ | 211,180 | | |
$ | 261,414 | |
Depreciation
expense was $46,688 and $55,458 for the six months ended June 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 $28,487 and $57,167 are included in property
and equipment as of June 30, 2022 and December 31, 2021, respectively.
The
components of lease costs are as follows:
SCHEDULE OF LEASE COSTS
| |
2022 | | |
2021 | |
| |
For the Six Months Ended | |
| |
June 30, | |
| |
2022 | | |
2021 | |
Finance lease costs | |
| | | |
| | |
Amortization of right-of-use assets | |
$ | 21,972 | | |
$ | 26,883 | |
Interest on lease liabilities | |
| 288 | | |
| 689 | |
Total finance lease costs | |
| 22,260 | | |
| 27,572 | |
Operating lease costs | |
| 164,513 | | |
| 199,318 | |
Total lease costs | |
$ | 186,773 | | |
$ | 226,890 | |
The
following table presents supplemental information related to the Company’s leases:
SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO THE COMPANY'S LEASES
| |
2022 | | |
2021 | |
| |
For the Six Months Ended | |
| |
June 30, | |
| |
2022 | | |
2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows from finance leases | |
$ | 288 | | |
$ | 689 | |
Operating cash flows from operating leases | |
| 168,793 | | |
| 204,296 | |
Financing cash flows from finance leases | |
| 24,189 | | |
| 29,561 | |
| |
| | | |
| | |
Weighted average remaining lease term (years) | |
| | | |
| | |
Finance leases | |
| 1.3 | | |
| 1.9 | |
Operating leases | |
| 9.6 | | |
| 10.6 | |
| |
| | | |
| | |
Weighted-average discount rate: (per annum) | |
| | | |
| | |
Finance leases | |
| 1.32 | % | |
| 1.32 | % |
Operating leases | |
| 1.32 | % | |
| 1.32 | % |
As
of June 30, 2022, the future maturity of lease liabilities is as follows:
SCHEDULE OF FINANCE LEASE AND OPERATING LEASE FUTURE MATURITY OF LEASE LIABILITIES
Year ending December 31, | |
Finance
leases | | |
Operating
leases | |
Remaining of 2022 | |
$ | 11,140 | | |
$ | 152,511 | |
2023 | |
| 18,750 | | |
| 305,021 | |
2024 | |
| 276 | | |
| 305,021 | |
2025 | |
| - | | |
| 305,021 | |
2026 | |
| - | | |
| 305,021 | |
Thereafter | |
| - | | |
| 1,560,912 | |
Total lease payments | |
| 30,166 | | |
| 2,933,507 | |
Less: imputed interest | |
| (170 | ) | |
| (185,172 | ) |
Total lease liabilities | |
| 29,996 | | |
| 2,748,335 | |
Less: current portion | |
| 20,717 | | |
| 280,789 | |
Non-current lease liabilities | |
$ | 9,279 | | |
$ | 2,467,546 | |
Pursuant
to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $235,274 and
$278,237 as of June 30, 2022 and December 31, 2021, respectively.
NOTE
8 — LONG-TERM DEBTS
The
Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions, which consist of
the following:
SCHEDULE OF LONG-TERM DEBTS
Name of Financial Institutions | |
Original Amount Borrowed (JPY) | | |
Loan Duration | |
Annual Interest Rate | | |
Balance
as of
June 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 | % | |
$ | 293,880 | | |
$ | 434,431 | |
Loans with banks and other financial institutions | |
| | | |
| |
| | | |
| | | |
| | |
Resona Bank, Limited. | |
| 30,000,000 | (a) | |
12/29/2017—12/30/2022 | |
| 1.475 | % | |
| 22,041 | | |
| 56,476 | |
Resona Bank, Limited. | |
| 50,000,000 | (a)(b) | |
12/29/2017—12/29/2024 | |
| 0.675 | % | |
| 131,291 | | |
| 191,454 | |
Resona Bank, Limited. | |
| 10,000,000 | (a)(b) | |
9/30/2020—9/30/2027 | |
| 0.000 | % | |
| 55,110 | | |
| 72,411 | |
Resona Bank, Limited. | |
| 40,000,000 | (a)(b) | |
9/30//2020—9/30/2027 | |
| 0.000 | % | |
| 220,439 | | |
| 289,644 | |
Resona Bank, Limited. | |
| 20,000,000 | (a)(b) | |
11/13/2020—10/31/2027 | |
| 1.600 | % | |
| 111,968 | | |
| 146,890 | |
Sumitomo Mitsui Banking Corporation | |
| 100,000,000 | | |
12/28/2018—12/28/2023 | |
| 1.475 | % | |
| 220,307 | | |
| 361,925 | |
Sumitomo Mitsui Banking Corporation | |
| 10,000,000 | (b) | |
12/30/2019—12/30/2026 | |
| 1.975 | % | |
| 47,241 | | |
| 63,105 | |
The Shoko Chukin Bank, Ltd. | |
| 30,000,000 | | |
9/28/2018—8/31/2023 | |
| 1.200 | % | |
| 51,796 | | |
| 92,273 | |
The Shoko Chukin Bank, Ltd. | |
| 50,000,000 | | |
7/27/2020—6/30/2027 | |
| 1.290 | % | |
| 265,961 | | |
| 351,020 | |
Japan Finance Corporation | |
| 40,000,000 | | |
12/15/2017—11/30/2022 | |
| 0.300 | % | |
| 28,066 | | |
| 73,940 | |
Japan Finance Corporation | |
| 80,000,000 | | |
11/17/2020—11/30/2027 | |
| 0.210 | % | |
| 460,804 | | |
| 603,339 | |
Higashi-Nippon Bank | |
| 30,000,000 | (a) | |
3/31/2022—3/31/2025 | |
| 1.400 | % | |
| 201,896 | | |
| - | |
Aggregate outstanding principal balances | |
| | | |
| |
| | | |
| 2,110,800 | | |
| 2,736,908 | |
Less: unamortized debt issuance costs | |
| | | |
| |
| | | |
| (10,464 | ) | |
| (15,333 | ) |
Less: current portion | |
| | | |
| |
| | | |
| (733,235 | ) | |
| (849,995 | ) |
Non-current portion | |
| | | |
| |
| | | |
$ | 1,367,101 | | |
$ | 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 $14,676 and $23,232 for the six months ended June 30, 2022 and 2021, respectively.
As
of June 30, 2022, future minimum loan payments are as follows:
SCHEDULE OF FUTURE MINIMUM LOAN PAYMENTS
Year ending December 31, | |
Loan | |
| |
Payment | |
Remaining of 2022 | |
$ | 348,542 | |
2023 | |
| 687,055 | |
2024 | |
| 425,972 | |
2025 | |
| 244,391 | |
2026 | |
| 222,372 | |
Thereafter | |
| 182,468 | |
Total | |
$ | 2,110,800 | |
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
June 30, 2022, the balance of the insurance premium financing was $220,583. During the six months ended June 30, 2022, the interest incurred
was $14,185.
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 six months ended June 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
30.62% for the six months ended June 30, 2022 and 2021.
For
the six months ended June 30, 2022 and 2021, the Company’s income tax expenses are as follows:
SCHEDULE OF INCOME TAX EXPENSES
| |
2022 | | |
2021 | |
| |
For the Six Months Ended | |
| |
June 30, | |
| |
2022 | | |
2021 | |
Current | |
$ | (1,464 | ) | |
$ | (7,117 | ) |
Deferred | |
| 9,627 | | |
| 91,032 | |
Income tax expense | |
$ | 8,163 | | |
$ | 83,915 | |
The
effective tax rate was (0.25)% and 27.30% for the six months ended June 30, 2022 and 2021, respectively.
NOTE
11 – STOCK BASED COMPENSATION
Options
In
May 2016, the Company granted 507 units stock options to its employees each to acquire one share of common shares of HeartCore Japan
(an equivalent of approximately 1,494 shares of common shares of HeartCore USA) at JPY10 each (approximately $0.09). All options are
exercisable upon issuance with a repurchase provision before the completion of the Company’s initial public offering, which serves
as a vesting condition. All employees that were granted these stock options had early exercised their stock options in 2016 prior to
the vesting of the related stock options. As of June 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 six months ended June 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 six months ended June 30,
2022 and 2021:
SCHEDULE OF UNVESTED STOCK OPTION
| |
| | |
| |
Number of stock options | |
Issued and unvested as of January 1, 2021 | |
| 194 | |
Forfeited | |
| 11 | |
Vested and exercised | |
| | |
Issued and unvested as of June 30, 2021 | |
| 183 | |
| |
| | |
Issued and unvested as of January 1, 2022 | |
| 183 | |
Vested and exercised | |
| 183 | |
Exercisable as of June 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.
The
following table summarizes the share options activity and related information for the six months ended June 30, 2022:
SCHEDULE OF STOCK OPTION ACTIVITY
| |
Number of
Options/
Warrants | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Term (Years) | | |
Intrinsic
Value | |
As of January 1, 2022 | |
| 1,534,500 | | |
$ | 2.5 | | |
| 9.99 | | |
$ | - | |
Granted | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | | |
| - | | |
| - | |
As of June 30, 2022 | |
| 1,534,500 | | |
$ | 2.5 | | |
| 9.49 | | |
$ | - | |
Vested and exercisable as of June 30, 2022 | |
| - | | |
| - | | |
| - | | |
| - | |
Options
granted historically were valued using the binomial model with the assistance of an independent valuation specialist. Significant assumptions
used in the valuation include expected volatility, risk-free interest rate, dividend yield and expected exercise term.
For
the three and six months ended June 30, 2022, share-based compensation related to the options totaled $284,938 and $577,750, respectively.
For the three and six months ended June 30, 2021, share-based compensation related to the options was nil. The outstanding unamortized
share-based compensation related to options was $1,608,803 (which will be recognized through December 2025) as of June 30, 2022.
Restricted
Stock Units (“RSUs”)
The
following table summarizes the RSUs activity for the six months ended June 30, 2022:
SCHEDULE
OF RESTRICTED STOCK UNITS
| |
Number of RSUs | | |
Weighted Average Grant Date Fair Value per Share | |
Unvested as of January 1, 2022 | |
| - | | |
$ | - | |
Granted | |
| 169,153 | | |
| 3.84 | |
Vested | |
| (83,333 | ) | |
| 2.70 | |
Forfeited | |
| - | | |
| - | |
Unvested as of June 30, 2022 | |
| 85,820 | | |
$ | 4.95 | |
On
February 9, 2022, the Company entered into executive employment agreements with five executives and granted 85,820 RSUs pursuant to the
2021 Equity Incentive Plan. The RSUs vest on each annual anniversary of the date of the employment agreement, in an amount equal to 25%
of the applicable shares of common shares. The fair value of the RSUs at grant date was $424,809.
On
February 25, 2022, the Company entered into a service agreement with a marketing company to purchase 6-month marketing services and granted
83,333 RSUs. The RSUs were issued and vested on May 15, 2022. The fair value of the RSUs at grant date was $224,999.
For
the three and six months ended June 30, 2022, the Company recognized RSU-related share-based compensation of $181,724 and $311,076, respectively.
The outstanding unamortized share-based compensation related to RSUs was $338,732 (which will through February 2026) as of June 30, 2022.
NOTE
12 – SHAREHOLDERS’ EQUITY (DEFICIT)
The
Company was authorized to issue 200,000,000 shares of common shares, par value of $0.0001 per share, and 20,000,000 shares of preferred
shares, par value of $0.0001 per share.
During
the period from January 1, 2022 through January 13, 2022, the Company issued 96,000 shares of common shares at a purchase price of $2.50
per share for an aggregate net proceeds of $220,572 in a private placement, including 30,000 shares of common shares issued to the officers
of the Company.
On
February 14, 2022, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “HTCR”.
The Company offered 3,000,000 common shares at $5.00 per share. Net proceeds raised by the Company from the initial public offering amounted
to $13,724,167 after deducting underwriting discounts and commissions and other offering expenses. The Company has deferred costs of
$300,460 directly attributed to the offering, among which $178,847 offering costs were paid and deferred as of December 31, 2021. Those
costs were also charged against the proceeds from the offering.
On
February 14, 2022, 273,489 shares of common shares were issued from exercise of stock options by settling share repurchase liability
of $16 (also see NOTE 11).
On
May 15, 2022, 83,333 shares of restricted shares were issued to a marketing company as compensation of services received (also see NOTE
11).
Share
Repurchase Program
On
June 1, 2022, the Board of Directors approved a share repurchase program (“2022 Share Repurchase Program”), pursuant to
which the Company is authorized to repurchase up to $3.5
million of its outstanding common shares. The timing and amount of repurchases under the program are determined by the
Company’s management based on its evaluation of market conditions and other factors. This program has no set termination date
and may be suspended or discontinued by at any time.
During
the period from June 1, 2022 through June 30, 2022, the Company repurchased 558,809 shares of common shares at an average price of $2.39
per share totaling approximately $1.3 million (including commissions) under the 2022 Share Repurchase Program. As of June 30, 2022, approximately
$2.2 million remained available under the 2022 Share Repurchase Program.
As
of June 30, 2022 and December 31, 2021, there were 18,999,276 and 15,819,943 shares, respectively, of common shares issued; and 18,440,467
and 15,546,454 shares, respectively, of common shares outstanding.
No
preferred shares were issued and outstanding as of June 30, 2022 and December 31, 2021.
NOTE
13 – MANDATORILY REDEEMABLE FINANCIAL INTEREST
On
August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore
Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan
held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier
of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public
offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022. The Company has determined such shares to be
a mandatorily redeemable financial instrument and is recorded as a liability of JPY50,040,000 (approximately $448,000) in the consolidated
balance sheet as of December 31, 2021. On February 24, 2022, the Company purchased the 278 shares of HeartCore Japan from Dentsu Digital
for JPY50,040,000 (approximately $430,000). As a result, HeartCore Japan became a wholly-owned subsidiary of the Company.
NOTE
14 – EARNINGS (LOSS) PER SHARE
Basic
earnings (loss) per share is calculated on the basis of weighted-average outstanding common shares. Diluted earnings (loss) per share
is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options, restricted
stock unit awards and other dilutive securities.
The
computation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2022 and 2021 is as follows:
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
| |
| | | |
| | | |
| | | |
| | |
| |
For the Three Months
Ended | | |
For the Six Months
Ended | |
| |
June 30, | | |
June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Earnings (loss) per share – basic Numerator: | |
| | | |
| | | |
| | | |
| | |
Allocation of net income (loss) attributable to HeartCore
Enterprises, Inc.’s common shareholders used in calculating earnings (loss) per common share — basic | |
$ | (1,703,641 | ) | |
$ | 400,790 | | |
$ | (3,282,092 | ) | |
$ | 217,541 | |
Net income (loss) attributable to common shareholders | |
| (1,703,641 | ) | |
| 400,790 | | |
$ | (3,282,092 | ) | |
$ | 217,541 | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding used in calculating basic earnings (loss) per share | |
| 18,936,829 | | |
| 15,242,454 | | |
| 18,105,698 | | |
| 15,242,454 | |
Denominator used for earnings (loss) per share | |
| 18,936,829 | | |
| 15,242,454 | | |
| 18,105,698 | | |
| 15,242,454 | |
Earnings (loss) per share — basic | |
$ | (0.09 | ) | |
$ | 0.03 | | |
$ | (0.18 | ) | |
$ | 0.01 | |
| |
For the Three Months
Ended | | |
For the Six Months
Ended | |
| |
June 30, | | |
June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Earnings (loss) per share – diluted Numerator: | |
| | | |
| | | |
| | | |
| | |
Allocation of net income (loss) attributable to HeartCore
Enterprises, Inc.’s common shareholders used in calculating earnings (loss) per common share — diluted | |
$ | (1,703,641 | ) | |
$ | 400,790 | | |
$ | (3,282,092 | ) | |
$ | 217,541 | |
Net income (loss) attributable to common shareholders | |
| (1,703,641 | ) | |
| 400,790 | | |
| (3,282,092 | ) | |
| 217,541 | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding used in calculating diluted earnings (loss) per share | |
| 18,936,829 | | |
| 15,242,454 | | |
| 18,105,698 | | |
| 15,242,454 | |
Conversion of share repurchase liability to common shares* | |
| - | | |
| 273,489 | | |
| - | | |
| 273,489 | |
Denominator used for earnings (loss) per share | |
| 18,936,829 | | |
| 15,515,943 | | |
| 18,105,698 | | |
| 15,515,943 | |
Earnings (loss) per share — diluted | |
$ | (0.09 | ) | |
$ | 0.03 | | |
$ | (0.18 | ) | |
$ | 0.01 | |
* |
The share repurchase liability is related to the early exercised
stock options that are issued and unvested as of June 30, 2021, see NOTE 11. Each option is convertible into one share of common stock
of HeartCore Japan, which is an equivalent of approximately 1,494 shares of common shares of the Company. |
For
the three and six months ended June 30, 2022, the weighted average shares outstanding are the same for basic and diluted loss per share
calculations, as the inclusion of common shares equivalents of 1,620,320 would have an anti-dilutive effect.
NOTE
15 - SUBSEQUENT EVENTS
During
the period from July 1, 2022 through August 9, 2022, the Company paid approximately $1.9 million
(including commissions) in connection with the repurchase of 651,251 shares
of its common shares under the 2022 Share Repurchase Program. As of the filing date of this report, approximately $0.3 million
remained available under the 2022 Share Repurchase Program.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking
statements made by or on behalf of HeartCore Enterprises, Inc. (the “Company”). The Company and its representatives may from
time to time make written or oral statements that are “forward-looking,” including statements contained in this report and
other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or
potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,”
“anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking
statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A,
“Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as the same
may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q.
Although
we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to
foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking
statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made,
in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate
under the circumstances.
Except
as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions
to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this
report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any
statement is based.
Business
Overview
We
are a leading software development company based in Tokyo, Japan. We provide software through two business units. The first business
unit includes a customer experience management business that has been in existence for 12 years. Our customer experience management platform
(the “CXM Platform”) includes marketing, sales, service and content management systems, as well as other tools and integrations,
that enable companies to attract and engage customers throughout the customer experience. We also provide education, services and support
to help customers be successful with our CXM Platform.
The
second business unit is a digital transformation business which provides customers with robotics process automation, process mining and
task mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software
that supports the narrow needs of large enterprise customers.
We
have made significant investments in our sales and marketing efforts globally. As of June 30, 2022, our sales and marketing organization
was comprised of 16 employees including our field sales organization, which maintains a physical sales presence in the Japanese software
market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified
revenue and customer base. As of June 30, 2022, our combined business units (customer experience management business unit and digital
transformation business unit) had a total of 877 customers in Japan.
We
were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly-owned subsidiary,
HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co”), which was established in Japan by Mr. Sumitaka Yamamoto, our
CEO, in 2009. We acquired 97.5% of the equity interest of HeartCore Co in July 2021 and acquired the remaining interest in February 2022.
HeartCore Co started out with helping companies effectively managing content with its powerful content management system. Since then,
HeartCore Co has expanded offerings to help companies manage all forms of business processes.
The
acquisition of HeartCore Co in July 2021 was accounted for as a recapitalization among entities under common control since the same controlling
shareholders controlled all these entities before and after the transaction. The consolidation of the Company and its subsidiary has
been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the
first period presented in the accompanying consolidated financial statements.
Recent
Developments
A.L.I.
Consulting Agreement
On
April 13, 2022, the Company entered into a Consulting and Services Agreement (the “ALI Consulting Agreement”) by and between
the Company and A.L.I. Technologies Inc. (“ALI”). Pursuant to the terms of the ALI Consulting Agreement, the Company agreed
to provide certain consulting services, including the following (collectively, the “Services”):
|
(i) |
Assistance
with the selection and negotiation of terms for a law firm, underwriter and auditing firm for ALI; |
|
(ii) |
Assisting
in the preparation of documentation for internal controls required for an initial public offering or de-SPAC by ALI; |
|
(iii) |
Providing
support services to remove problematic accounting accounts upon listing; |
|
(iv) |
Translation
of requested documents into English; |
|
(v) |
Attend
and, if requested by ALI, lead meetings with ALI’s management team and employees; |
|
(vi) |
Provide
ALI with support services related to ALI’s NASDAQ listing; |
|
(vii) |
Conversion
of accounting data from Japanese standards to US GAAP; |
|
(viii) |
Services
to remove problematic accounting accounts upon listing; |
|
(ix) |
Support
for the ALI’s negotiations with the audit firm; |
|
(x) |
Assist
in the preparation of S-1 or S-4 filings; |
|
(xi) |
Creation
of English language website; and |
|
(xii) |
Preparing
an investor presentation/deck and executive summary of ALI’s business and operations. |
In
providing the Services, the Company will not perform accounting services, and will not act as an investment advisor or broker/dealer.
Pursuant to the terms of the ALI Consulting Agreement, the parties agreed that the Company will not provide the following services, among
others: negotiation of the sale of ALI’s securities; participation in discussions between ALI and potential investors; assisting
in structuring any transactions involving the sale of ALI’s securities; pre-screening of potential investors; due diligence activities;
nor providing advice relating to valuation of or financial advisability of any investments in ALI.
Pursuant
to the terms of the ALI Consulting Agreement, ALI agreed to compensate the Company as follows in return for the provision of Services:
|
(a) |
$400,000,
to be paid as follows: (i) $200,000 on April 13, 2022; (ii) $100,000 on the three-month anniversary of April 13, 2022; and (iii)
$100,000 on the six-month anniversary of April 13, 2022; and |
|
(b) |
Issuance
by ALI to the Company of a warrant to acquire a number of shares of capital stock of ALI, to initially be equal to 1% of the fully
diluted share capital of ALI as of April 13, 2022, subject to adjustment as set forth in the warrant. |
The
ALI Consulting Agreement has a term of six months, which shall expire unless renewed upon mutual written agreement of the parties. For
any services performed by the Company beyond the initial term, ALI will compensate the Company for Services at the rate of $150 per hour.
As
provided in the ALI Consulting Agreement, on April 13, 2022, ALI issued to the Company the warrant. Pursuant to the terms of the warrant,
the Company may, at any time on or after the date that ALI completes its first initial public offering of stock in the United States
resulting in any class of ALI’s stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange
or the NYSE American (the “IPO Date”) and on or prior to the close of business on the tenth anniversary of the IPO Date,
exercise the warrant to purchase 1% of the fully diluted share capital of ALI as of April 13, 2022 for an exercise price per share of
$0.01, subject to adjustment as provided in the warrant. The number of shares for which the warrant will be exercisable will be automatically
adjusted on the IPO Date to be 1% of the fully diluted number and class of shares of capital stock of ALI as of the IPO Date that are
listed for trading. The warrant contains a 9.99% equity blocker.
SYLA
Consulting Agreement
On
May 13, 2022, the Company entered into a Consulting and Services Agreement (the “SYLA Consulting Agreement”) by and between
the Company and SYLA Holdings Co. Ltd. (“SYLA”). Pursuant to the terms of the SYLA Consulting Agreement, the Company agreed
to provide SYLA certain services, including the Services.
In
providing the Services, the Company will not perform accounting services, and will not act as an investment advisor or broker/dealer.
Pursuant to the terms of the SYLA Consulting Agreement, the parties agreed that the Company will not provide the following services,
among others: negotiation of the sale of SYLA’s securities; participation in discussions between SYLA and potential investors;
assisting in structuring any transactions involving the sale of SYLA’s securities; pre-screening of potential investors; due diligence
activities; nor providing advice relating to valuation of or financial advisability of any investments in SYLA.
Pursuant
to the terms of the SYLA Consulting Agreement, SYLA agreed to compensate the Company as follows in return for the provision of Services:
|
(a) |
$500,000,
to be paid as follows: (i) $200,000 on the effective date of the SYLA Consulting Agreement; (ii) $150,000 on the three-month anniversary
of the effective date of the SYLA Consulting Agreement; and (iii) $150,000 on the six-month anniversary of the SYLA Consulting Agreement;
and |
|
|
|
|
(b) |
Issuance
by SYLA to the Company of a warrant, deemed fully earned and vested as of the effective date of the SYLA Consulting Agreement, to
acquire a number of shares of capital stock of SYLA, to initially be equal to 2% of the fully diluted share capital of SYLA as of
the effective date of the SYLA Consulting Agreement, subject to adjustment as set forth in the warrant. |
The
SYLA Consulting Agreement’s initial term of six months will expire unless renewed upon mutual written agreement of the parties.
For any services performed by the Company beyond the initial term, SYLA will compensate the Company for Services at the rate of $150
per hour, based on the hours spent by personnel of the Company.
As
provided in the SYLA Consulting Agreement, on the Effective Date, SYLA issued the warrant to the Company. Pursuant to the terms of the
warrant, the Company may, at any time on or after the date the IPO Date and on or prior to the close of business on the tenth anniversary
of the IPO Date, exercise the warrant to purchase 2% of the fully diluted share capital of SYLA as of the effective date of the SYLA
Consulting Agreement for an exercise price per share of $0.01, subject to adjustment as provided in the warrant. The number of shares
for which the warrant will be exercisable will be automatically adjusted on the IPO Date to be 2% of the fully diluted number and class
of shares of capital stock of SYLA as of the IPO Date that are listed for trading. The warrant contains a 9.99% equity blocker.
Going
forward, we expect that we will offer services substantially similar to the Services to other third parties, as well.
Stock
Repurchase Program
The
Company’s Board of Directors (the “Board”) authorized a share repurchase program, pursuant to which the Company may
repurchase up to $3.5 million of its outstanding shares of common stock. The Board authorized the Company to purchase its common stock
from time to time on a discretionary basis through open market purchases, privately negotiated transactions or other means, including
trading plans intended to qualify under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), in accordance with applicable federal securities laws and other applicable legal requirements. The Company expects to fund
these repurchases through existing cash balances. Decisions regarding the amount and the timing of purchases under the program will be
influenced by the Company’s cash on hand, cash flows from operations, general market conditions and other factors. HeartCore is
not obligated to acquire any particular amount of its common stock. This program has no set termination date and may be suspended or
discontinued by the Board at any time.
Financial
Overview
For
the three months ended June 30, 2022 and 2021, we generated revenues of $2,670,297 and $2,865,192, respectively, and reported net losses
of $1,703,641 and net income of $411,714, respectively. For the six months ended June 30, 2022 and 2021, we generated revenues of $4,946,298
and $4,975,501, respectively, and reported net losses of $3,282,092 and net income of $223,477, respectively, and cash out flow used
in operating activities of $2,093,867 and cash in flow provided by operating activities of $347,683, respectively. As noted in our unaudited
consolidated financial statements, as of June 30, 2022, we had an accumulated deficit of $7,178,205.
Results
of Operations
Comparison
of Results of Operations for the Three Months ended June 30, 2022 and 2021
The
following table summarizes our operating results as reflected in our statements of income during the three months ended June 30, 2022
and 2021, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.
| |
For the Three Months ended June 30, | |
| |
2022 | | |
2021 | | |
Variance | |
| |
| | |
% of | | |
| | |
% of | | |
| | |
| |
| |
Amount | | |
revenue | | |
Amount | | |
revenue | | |
Amount | | |
% of | |
| |
| | |
| | |
| | |
| | |
| | |
| |
REVENUES | |
$ | 2,670,297 | | |
| 100.0 | % | |
$ | 2,865,192 | | |
| 100.0 | % | |
$ | (194,895 | ) | |
| -6.8 | % |
COST OF REVENUES | |
| 1,337,296 | | |
| 50.1 | % | |
| 1,175,387 | | |
| 41.0 | % | |
| 161,909 | | |
| 13.8 | % |
GROSS PROFIT | |
| 1,333,001 | | |
| 49.9 | % | |
| 1,689,805 | | |
| 59.0 | % | |
| (356,804 | ) | |
| -21.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 728,836 | | |
| 27.3 | % | |
| 101,124 | | |
| 3.5 | % | |
| 627,712 | | |
| 620.7 | % |
General and administrative expenses | |
| 1,850,315 | | |
| 69.3 | % | |
| 1,020,842 | | |
| 35.7 | % | |
| 829,473 | | |
| 81.3 | % |
Research and development expenses | |
| 417,228 | | |
| 15.6 | % | |
| 80,025 | | |
| 2.8 | % | |
| 337,203 | | |
| 421.4 | % |
Total operating expenses | |
| 2,996,379 | | |
| 112.2 | % | |
| 1,201,991 | | |
| 42.0 | % | |
| 1,794,388 | | |
| 149.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) from operations | |
| (1,663,378 | ) | |
| -62.3 | % | |
| 487,814 | | |
| 17.0 | % | |
| (2,151,192 | ) | |
| -441.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other income (expenses) | |
| (31,284 | ) | |
| -1.2 | % | |
| 126 | | |
| 0.0 | % | |
| (31,410 | ) | |
| -24,928.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (loss) before income tax provision | |
| (1,694,662 | ) | |
| -63.5 | % | |
| 487,940 | | |
| 17.0 | % | |
| (2,182,602 | ) | |
| -447.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income taxes expense | |
| 8,979 | | |
| 0.3 | % | |
| 76,226 | | |
| 2.6 | % | |
| (67,247 | ) | |
| -88.2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (1,703,641 | ) | |
| -63.8 | % | |
| 411,714 | | |
| 14.4 | % | |
| (2,115,355 | ) | |
| -513.8 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Less: net income attributable to non-controlling interest | |
| - | | |
| - | | |
| 10,924 | | |
| 0.4 | % | |
| (10,924 | ) | |
| -100.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. | |
$ | (1,703,641 | ) | |
| -63.8 | % | |
$ | 400,790 | | |
| 14.0 | % | |
$ | (2,104,431 | ) | |
| -525.1 | % |
Revenues
Our
total revenues decreased by $194,895, or 6.8%, to $2,670,297 for the three months ended June 30, 2022 from $2,865,192 for the three months
ended June 30, 2021. The decrease in our revenues was attributable to the following reasons:
| (i) | the
revenues
from sales of on-premise software decreased by $416,076,
or 36.7%, to $716,532 for the three months ended June 30, 2022 from $1,132,608 for the three
months ended June 30, 2021, mainly attributable to the concentration of sales of CMS licenses
in May 2021; |
| (ii) | our
revenue from maintenance and support services
decreased by $163,275, or 18.3%, to $727,277 for the three months ended June 30, 2022 from
$890,552 for the three months ended June 30, 2021. In addition to terminations of CMS major
maintenance contracts, sales decreased due to the ongoing depreciation of Japanese Yen; |
| (iii) | Offset
by our newly generated revenue of $448,355 from consulting services provided to three Japan-based
companies, which intend to go public in the US capital markets. |
Cost
of Revenues
Our
total costs of revenues increased by $161,909, or 13.8%, to $1,337,296 for the three months ended June 30, 2022 from $1,175,387 for the
three months ended June 30, 2021. The increase in our costs was attributable to the following reasons:
| (i) | the
increase of $175,194 in the costs of newly established consulting services; |
| (ii) | the
costs of software development and other miscellaneous services increased by $104,541, or
20.4%, to $616,461 for the three months ended June 30, 2022 from $511,920 for the three months
ended June 30, 2021. The Company incurred high subcontracting costs for projects and defect
handling in the current period; |
| (iii) | offset
by the costs of SaaS decreased by $90,343, or 77.6%, to $26,144 for the three months ended
June 30, 2022 from $116,487 for the three months ended June 30, 2021. The Company incurred
expenses for process mining product menu Japanese language additions and manual maintenance
in June 2021; |
Gross
Profit
Our
total gross profit decreased by $356,804, or 21.1%, to $1,333,001 for the three months ended June 30, 2022 from $1,689,805 for the three
months ended June 30, 2021. Our overall gross profit
margin decreased by 9.1% to 49.9% in the three months ended June 30, 2022 from 59.0% in the three months ended June 30, 2021.
Operating
Expenses
Our
operating expenses primarily include selling expenses, general and administrative expenses, and research and development expenses.
Selling
Expenses
Our
selling expenses primarily include advertising expenses, sale commissions, and sales promotion expenses.
Our
selling expenses increased by $627,712, or 620.7%, to $728,836 in the three months ended June 30, 2022 from $101,124 in the three months
ended June 30, 2021, primarily attributable to an increase in advertising expenses by $650,690, or 1,428.1%, to $696,252 in the three
months ended June 30, 2022 from $45,562 in the three months ended June 30, 2021. The U.S. parent
company launched advertising activities to increase its visibility in the U.S. after the Company going public in the U.S. In addition,
the Company increased advertising expenses for its newly established consulting services in Japan.
As
a percentage of revenues, our selling expenses accounted for 27.3% and 3.5% of our total revenue for the three months ended June 30,
2022 and 2021, respectively.
General
and Administrative Expenses
Our
general and administrative expenses primarily consist of employee salaries and welfare, consulting and professional service fees incurred
for maintaining the Company as a public company, depreciation and amortization expenses, rental expenses, office, utility and other
expenses, listing-related expenses, travel and entertainment expenses, and share-based compensation expense.
Our
general and administrative expenses increased by $829,473 or 81.3%, to $1,850,315 in the three months ended June 30, 2022 from $1,020,842
in the three months ended June 30, 2021, primarily attributable to:
| (i) | our
office, utility and other expenses increased by $146,359 or 154.7%, to $240,953 in the three
months ended June 30, 2022 from $94,594 in the three months ended June 30, 2021, primarily
due to the increase in the U.S. parent company’s office expenses, and D&O indemnity
insurance premiums of the parent company; |
| (ii) | our
consulting and professional
fees increased by $241,548 or 2,850.1%, to $250,023
in the three months ended June 30, 2022 from $8,475 in the three months ended June 30, 2021,
primarily due to the increase in consulting and legal fees related to maintaining as a public
company and stock promotion; |
| (iii) | an
increase in salaries and welfare by $235,262, or 45.2%, to $755,300 in the three months ended
June 30, 2022 from $520,038 in the three months ended June 30, 2021, primarily due to the
salaries paid to the parent company’s newly hired U.S. employees; |
| (iv) | an
increase in share-based compensation of $466,662, or 100.0%, to $466,662 in the three months
ended June 30, 2022 from nil in the three months ended June 30, 2021, primarily due to the
amortization of fair value of stock options and restricted stock units granted. |
The
overall increase in our general and administrative expenses in three months ended June 30, 2022 as compared to the three months ended
June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 69.3%
and 35.6% of our revenue for the three months ended June 30, 2022 and 2021, respectively.
Research
and Development Expenses
Our
research and development expenses primarily consist of employee salaries and welfare, and outsourcing expenses.
Our
research and development expenses increased by $337,203 or 421.4%, to $417,228 in the three months ended June 30, 2022 from $80,025 in
the three months ended June 30, 2021, primarily attributable to an increase in outsourcing expenses by $323,308, or 403.5%, to $403,441
in the three months ended June 30, 2022 from $80,133 in the three months ended June 30, 2021, as
we outsourced certain development activities for more efficiency and experience, relating to development of a high quality 12K VR camera
and related data compression system.
The
overall increase in our research and development expenses in the three months ended June 30, 2022 as compared to the three months ended
June 30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 15.6%
and 2.8% of our revenue for the three months ended June 30, 2022 and 2021, respectively.
Other
Income (Expenses), net
Our
other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses
for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, increased by $31,410, from other income,
net of $126 in the three months ended June 30, 2021 to other expense, net of $31,284 in the three months ended June 30, 2022.
Income
Tax Expense
Our
income taxes expense was $8,979 in the three months ended June 30, 2022, as compared to the income taxes expense of $76,226 in the three
months ended June 30, 2021, mainly due to the decrease in deferred tax expense.
Net
Income (Loss)
As
a result of the foregoing, we reported a net loss of $1,703,641 for the three months ended June 30, 2022, representing a $2,115,355 or
513.8% increase from a net income of $411,714 for the three months ended June 30, 2021.
Net
Income attributable to Non-controlling Interest
We
own 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of June 30, 2021. Accordingly,
we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $10,924
in the three months ended June 30, 2021.
On
August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore
Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan
held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier
of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public
offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022.
On
February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when
paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest
income in the three months ended June 30, 2022.
Net
Income (Loss) attributable to HeartCore Enterprises, Inc.
As
a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,703,641 for the three months ended
June 30, 2022, representing a $2,104,431 or 525.1% increase from a net income attributable to HeartCore Enterprises, Inc. of $400,790
for the three months ended June 30, 2021.
Comparison
of Results of Operations for the Six Months ended June 30, 2022 and 2021
The
following table summarizes our operating results as reflected in our unaudited statements of operations during the six months ended June
30, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.
| |
For the Six Months ended June 30, | |
| |
2022 | | |
2021 | | |
Variance | |
| |
| | |
% of | | |
| | |
% of | | |
| | |
| |
| |
Amount | | |
revenue | | |
Amount | | |
revenue | | |
Amount | | |
% of | |
| |
| | |
| | |
| | |
| | |
| | |
| |
REVENUES | |
$ | 4,946,298 | | |
| 100.0 | % | |
$ | 4,975,501 | | |
| 100.0 | % | |
$ | (29,203 | ) | |
| -0.6 | % |
COST OF REVENUES | |
| 2,392,652 | | |
| 48.4 | % | |
| 2,583,019 | | |
| 51.9 | % | |
| (190,367 | ) | |
| -7.4 | % |
GROSS PROFIT | |
| 2,553,646 | | |
| 51.6 | % | |
| 2,392,482 | | |
| 48.1 | % | |
| 161,164 | | |
| 6.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling expenses | |
| 934,754 | | |
| 18.9 | % | |
| 147,465 | | |
| 3.0 | % | |
| 787,289 | | |
| 533.9 | % |
General and administrative expenses | |
| 4,319,248 | | |
| 87.3 | % | |
| 1,783,590 | | |
| 35.8 | % | |
| 2,535,658 | | |
| 142.2 | % |
Research and development expenses | |
| 525,487 | | |
| 10.6 | % | |
| 132,171 | | |
| 2.7 | % | |
| 393,316 | | |
| 297.6 | % |
Total operating expenses | |
| 5,779,489 | | |
| 116.8 | % | |
| 2,063,226 | | |
| 41.5 | % | |
| 3,716,263 | | |
| 180.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (Loss) from operations | |
| (3,225,843 | ) | |
| -65.2 | % | |
| 329,256 | | |
| 6.6 | % | |
| (3,555,099 | ) | |
| -1,079.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other expenses, net | |
| (48,086 | ) | |
| -1.0 | % | |
| (21,864 | ) | |
| -0.4 | % | |
| (26,222 | ) | |
| 119.9 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income (Loss) before income tax provision | |
| (3,273,929 | ) | |
| -66.2 | % | |
| 307,392 | | |
| 6.2 | % | |
| (3,581,321 | ) | |
| -1,165.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income taxes expense | |
| 8,163 | | |
| 0.2 | % | |
| 83,915 | | |
| 1.7 | % | |
| (75,752 | ) | |
| -90.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (3,282,092 | ) | |
| -66.4 | % | |
| 223,477 | | |
| 4.5 | % | |
| (3,505,569 | ) | |
| -1,568.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Less: net income attributable to non-controlling interest | |
| - | | |
| - | % | |
| 5,936 | | |
| 0.1 | % | |
| (5,936 | ) | |
| -100.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NET INCOME (LOSS) ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. | |
$ | (3,282,092 | ) | |
| -66.4 | % | |
$ | 217,541 | | |
| 4.4 | % | |
$ | (3,499,633 | ) | |
| -1,608.7 | % |
Revenues
Our
total revenues decreased by $29,203, or 0.6%, to $4,946,298 for the six months ended June 30, 2022 from $4,975,501 for the six months
ended June 30, 2021. The decrease in our revenues was attributable to the following reasons:
| (i) | our
revenue from maintenance and support services
decreased by $260,151, or 14.2%, to $1,572,616 for the six months ended June 30, 2022 from
$1,832,767 for the six months ended June 30, 2021. In addition to terminations of CMS major
maintenance contracts, sales decreased due to the ongoing depreciation of Japanese yen. The
depreciation amounted to approximately 14.1% from $1.00 to 107.74 Yen in the six months ended
June 30, 2021 to $1.00 to 122.98 Yen in the six months ended June 30, 2022; |
| (ii) | our
revenue from software development and other services decreased by $291,708, or 19.9%, to
$1,177,290 for the six months ended June 30, 2022 from $1,468,998 for the six months ended
June 30, 2021, because we did not retain new software development clients in the current
period, in addition to the ongoing depreciation of Japanese yen; |
| (iii) | Offset
by our newly generated revenue of $448,355 from consulting services provided to three Japan-based
companies, which intend to go public in the US capital markets. |
Cost
of Revenues
Our
total costs of revenues decreased by $190,367, or 7.4%, to $2,392,652 for the six months ended June 30, 2022 from $2,583,019 for the
six months ended June 30, 2021. The decrease in our costs was attributable to the following reasons:
| (i) | the
costs of on-premises software decreased by $95,989, or 20.1%, to $381,552 for the six months
ended June 30, 2022 from $477,541 for the six months ended June 30, 2021. In addition to
the depreciation of the yen, CMS license costs were fixed monthly and not proportional to
sales. On the other hands, the sales deceased in the six months ended June 30, 2022 for process
mining products, the costs of which were proportional to sales, resulting in a decrease in
cost of sales; |
| (ii) | the
costs of SaaS decreased by $134,960, or 58.2%, to $97,068 for the six months ended June 30,
2022 from $232,028 for the six months ended June 30, 2021. There were specialized supporting
employees and subcontractors for CXM Cloud (SaaS) in the first two quarters of 2021. As the
product entered into a mature phase and operations became stable in 2022, specialized supporting
employees and subcontractors were no longer needed, and the costs decreased accordingly; |
| (iii) | the
costs of software development and other miscellaneous services decreased by $117,767, or
9.9%, to $1,072,175 for the six months ended June 30, 2022 from $1,189,942 for the six months
ended June 30, 2021, in light of the decrease in sales as mentioned above; |
| (iv) | Offset
by the increase of $175,194 in the costs of newly established consulting services. |
Gross
Profit
Our
total gross profit increased by $161,164, or 6.7%, to $2,553,646 for the six months ended June 30, 2022 from $2,392,482 for the six months
ended June 30, 2021. Our overall gross profit margin
increased by 3.5% to 51.6% in the six months ended June 30, 2022 from 48.1% in the six months ended June 30, 2021.
Operating
Expenses
Our
operating expenses primarily include selling expenses, general and administrative expenses, and research and development expenses.
Selling
Expenses
Our
selling expenses primarily include advertising expenses, sales commissions, and sales promotion expenses.
Our
selling expenses increased by $787,289, or 533.9%, to $934,754 in the six months ended June 30, 2022 from $147,465 in the six months
ended June 30, 2021, primarily attributable to an increase in advertising expenses by $807,960, or 1,072.1%, to 883,322 in the six months
ended June 30, 2022 from $75,362 in the six months ended June 30, 2021. The U.S. parent company
launched advertising activities to increase its visibility in the U.S. after the Company going public in the U.S. In addition,
the Company increased advertising expenses for its newly established consulting services in Japan.
As
a percentage of revenues, our selling expenses accounted for 18.9% and 3.0% of our total revenue for the six months ended June 30, 2022
and 2021, respectively.
General
and Administrative Expenses
Our
general and administrative expenses primarily consist of employee salaries and welfare, consulting and professional service fees incurred
for company reorganization and going public, depreciation and amortization expenses, rental expenses, office, utility and other expenses,
listing-related expenses, travel and entertainment expenses, and share-based compensation expense.
Our
general and administrative expenses increased by $2,535,658 or 142.2%, to $4,319,248 in the six months ended June 30, 2022 from $1,783,590
in the six months ended June 30, 2021, primarily attributable to:
| (i) | our
office, utility and other expenses increased by $267,986 or 152.1%, to $444,210 in the six
months ended June 30, 2022 from $176,224 in the six months ended June 30, 2021, primarily
due to the increase in the U.S. parent company’s office expenses, and D&O indemnity
insurance premiums of the parent company; |
| (ii) | our
consulting and professional
fees increased by $654,261 or 585.0%, to $766,095 in
the six months ended June 30, 2022 from $111,834 in the six months ended June 30, 2021, primarily
due to the increase in consulting and legal fees related to going public and stock promotion; |
| (iii) | an
increase in salaries and welfare by $619,650, or 61.9%, to $1,621,507 in the six months ended
June 30, 2022 from $1,001,857 in the six months ended June 30, 2021, primarily due to the
salaries paid to the parent company’s newly hired U.S. employees. In addition, the
company paid approximately $150,000 in executive bonuses in the first quarter 2022; |
| (iv) | an
increase in share-based compensation of $888,826, or 100%, to $888,826 in the six months
ended June 30, 2022 from nil in the six months ended June 30, 2021, primarily due to the
amortization of fair value of stock options and restricted stock units granted. |
The
overall increase in our general and administrative expenses in six months ended June 30, 2022 as compared to the six months ended June
30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 87.3%
and 35.8% of our revenue for the six months ended June 30, 2022 and 2021, respectively.
Research
and Development Expenses
Our
research and development expenses primarily consist of employee salaries and welfare, and outsourcing expenses.
Our
research and development expenses increased by $393,316 or 297.6%, to $525,487 in the six months ended June 30, 2022 from $132,171 in
the six months ended June 30, 2021, primarily attributable to an increase in outsourcing expenses by $380,610, or 303.1%, to $506,191
in the six months ended June 30, 2022 from $125,581 in the six months ended June 30, 2021, as we
outsourced certain development activities for more efficiency and experience, relating to CMS UI renewal and development of a high quality
12K VR camera and related data compression system in the six months ended June 30,
2022.
The
overall increase in our research and development expenses in the six months ended June 30, 2022 as compared to the six months ended June
30, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 10.6% and
2.7% of our revenue for the six months ended June 30, 2022 and 2021, respectively.
Other
Expenses, net
Our
other income (expenses) primarily includes interest income generated from bank deposits and loan to a related-party, interest expenses
for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, increased by $26,222 or 119.9%, from
$21,864 in the six months ended June 30, 2021 to $48,086 in the six months ended June 30, 2022.
Income
Tax Expense
Our
income taxes expense was $8,163 in the six months ended June 30, 2022, as compared to the income taxes expense of $83,915 in the six
months ended June 30, 2021, mainly due to the decrease in deferred tax expense.
Net
Income (Loss)
As
a result of the foregoing, we reported a net loss of $3,282,092 for the six months ended June 30, 2022, representing a $3,505,569 or
1,568.6% decrease from a net income of $223,477 for the six months ended June 30, 2021.
Net
Income attributable to Non-controlling Interest
We
own 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of June 30, 2021. Accordingly,
we recorded net income attributable to the non-controlling interest. The net income attributable to non-controlling interest was $5,936
in the six months ended June 30, 2021.
On
August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore
Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan
held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier
of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public
offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022.
On
February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when
paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest
income in the six months ended June 30, 2022.
Net
Income (Loss) attributable to HeartCore Enterprises, Inc.
As
a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $3,282,092 for the six months ended
June 30, 2022, representing a $3,499,633 or 1,608.7% increase from a net income attributable to HeartCore Enterprises, Inc. of $217,541
for the six months ended June 30, 2021.
Liquidity
and Capital Resources
As
of June 30, 2022, we had $12,463,179 in cash as compared to $3,136,839 as of December 31, 2021. As of June 30, 2022, our working
capital was $10,003,897 as compared to $62,919 as of December 31, 2021. We also had $1,119,990 in accounts receivable as of June 30,
2022. Our accounts receivable primarily include balance due from customers for our on-premises software sold and services provided to
and accepted by customers.
The
following table sets forth summary of our cash flows for the periods indicated:
| |
For the Six Months Ended June 30, | |
| |
2022 | | |
2021 | |
Net cash provided by (used in) operating activities | |
$ | (2,093,867 | ) | |
$ | 347,911 | |
Net cash used in investing activities | |
| (9,455 | ) | |
| (103,692 | ) |
Net cash provided by (used in) financing activities | |
| 11,651,622 | | |
| (534,211 | ) |
Effect of exchange rate changes | |
| (221,960 | ) | |
| (149,784 | ) |
Net increase in cash and cash equivalents | |
| 9,326,340 | | |
| (439,776 | ) |
Cash and cash equivalents, beginning of the period | |
| 3,136,839 | | |
| 3,058,175 | |
Cash and cash equivalents, end of the period | |
$ | 12,463,179 | | |
$ | 2,618,399 | |
Operating
Activities
Net
cash used in operating activities was $2,093,867 for the six months ended June 30, 2022, primarily consisting of the following:
| ● | Net
loss of $3,282,092 for the six months ended June 30, 2022. |
| ● | An
increase in accounts receivable of $344,779. The increase was primarily due to the increase
in our sales in the current period. The collected accounts receivable is available cash,
which can be used as working capital for our business operation, if necessary. |
| ● | An
increase in prepaid expense of $266,030, primarily due to the increase in the prepayment
to an IR provider of $400,000. |
| ● | Offset
by an increase in accounts payable and accrued expenses of $281,567, primarily attributable
to the payoff the accrued expenses related to the IPO. |
| ● | Offset
by an increase of deferred revenue of $596,762, primarily due to the completion of software
development project. |
| ● | Offset
by share-based compensation of $888,826. |
Net
cash provided by operating activities was $347,911 for the six months ended June 30, 2021, primarily consisting of the following:
| ● | Net
income of $223,477 for the six months ended June 30, 2021. |
| ● | An
increase of deferred revenue of $621,707, primarily due to the upfront payment received for
software development projects. |
| ● | An
increase in accounts payable and accrued expenses of $128,308, primarily attributable to the increase in accrued expenses related to
the IPO. |
| ● | Non-cash
lease expense of 171,935. |
| ● | Offset
by an increase in accounts receivable of $570,886. The increase was primarily due to the
increase in sales. The collected accounts receivable is available cash, which can be used
as working capital for our business operation, if necessary. |
| ● | Offset
by an increase in prepaid expense of $282,508, primarily due to the increase in the prepayments
to software venders. |
Investing
Activities
Net
cash used in investing activities amounted to $9,455 for the six months ended June 30, 2022, primarily included the purchase of fixed
assets of $30,963, offset by repayment of loan provided to a related party of $21,508.
Net
cash used in investing activities amounted to $103,692 for the six months ended June 30, 2021, primarily included the purchase of fixed
assets of $19,894 and the loans provided to related parties of $83,798.
Financing
Activities
Net
cash provided by financing activities amounted to $11,651,622 for the six months ended June 30, 2022, primarily consisting of total proceeds
of $13,823,126 from the initial public offering and issuance of common shares prior to the initial public offering, and offset by payment
for mandatorily redeemable financial interest of $430,489, payment for repurchase of common stocks of $1,336,762, and repayment of long-term
debts of $469,166.
Net
cash used in financing activities amounted to $534,211 for the six months ended June 30, 2021, primarily consisting of repayment of long-term
debts of $503,230 and payments for finance leases of $29,561.
Contractual
obligations
Lease
commitment
The
Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases
for office equipment, one of which was terminated in June 2022, and a lease for a vehicle, and these leases were
classified as finance leases.
As
of June 30, 2022, future minimum lease payments under the non-cancelable lease agreements are as follows:
Year ending December 31, | |
Finance leases | | |
Operating leases | |
Remaining of 2022 | |
$ | 11,140 | | |
$ | 152,511 | |
2023 | |
| 18,750 | | |
| 305,021 | |
2024 | |
| 276 | | |
| 305,021 | |
2025 | |
| - | | |
| 305,021 | |
2026 | |
| - | | |
| 305,021 | |
Thereafter | |
| - | | |
| 1,560,912 | |
Total lease payments | |
| 30,166 | | |
| 2,933,507 | |
Less: imputed interest | |
| (170 | ) | |
| (185,172 | ) |
Total lease liabilities | |
| 29,996 | | |
| 2,748,335 | |
Less: current portion | |
| 20,717 | | |
| 280,789 | |
Non-current lease liabilities | |
$ | 9,279 | | |
$ | 2,467,546 | |
Long
Term Debt
The
Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions.
As
of June 30, 2022, future minimum loan payments are as follows:
| |
Loan | |
Year ending December 31, | |
Payment | |
Remaining of 2022 | |
$ | 348,542 | |
2023 | |
| 687,055 | |
2024 | |
| 425,972 | |
2025 | |
| 244,391 | |
2026 | |
| 222,372 | |
Thereafter | |
| 182,468 | |
Total | |
$ | 2,110,800 | |
Off-Balance
Sheet Arrangements
We
did not have any off-balance sheet arrangements as of June 30, 2022.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements.
These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S.
GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and
revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose
the reported amounts of revenue and expenses incurred during the financial reporting period. We continue to evaluate the estimates and
assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an
integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies
require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed herein reflect
the more significant judgments and estimates used in preparation of our unaudited consolidated financial statements.
Revenue
Recognition
The
Company recognizes revenue under the ASC Topic 606, “Revenue from Contracts with customers”.
To
determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s)
with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable
consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price
to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance
obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local
government levies. The Consumption Tax on sales is calculated at 10% of gross sales.
The
Company currently generates its revenue from the following main sources:
Revenue
from On-Premise Software
Licenses
for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company
provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right
for a specified term. Revenue from on-premise licenses is recognized upfront at the point in time when the software is made available
to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle.
Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise
software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions
when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach
as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for
a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions
or other observable evidence.
Revenue
from Maintenance and Support service
Maintenance
and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified
software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time
as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted
by the customers.
Revenue
from Software as a Service (“SaaS”)
The
Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing
the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over
the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts
are generally one year or less in length.
Revenue
from Software Development and other Miscellaneous Services
The
Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose
of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services,
such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers
and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.
Revenue
from Consulting Service
The
Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts,
which primarily include communicating with intermediary parties, preparing required documents and supporting the listing process. Revenues
from consulting services are recognized over time as such services are performed. The consulting service contracts are generally less
than one year in length.
The
timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is
included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records
deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred
revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized
during the six months ended June 30, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $1.1
million and $1.2 million, respectively.