UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______, 20___, to _____, 20___.
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(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each Exchange on which Registered | ||
| The
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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has been subject to such filing requirements for the past 90 days. Yes ☐
Indicate
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| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
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As of May 16, 2022, there were shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding.
HeartCore Enterprises, Inc.
Contents
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 2 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 29 |
| Item 4. | Controls and Procedures | 29 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 29 |
| Item 1A. | Risk Factors | 30 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30 |
| Item 3. | Defaults Upon Senior Securities | 30 |
| Item 4. | Mine Safety Disclosures | 30 |
| Item 5. | Other Information | 30 |
| Item 6. | Exhibits | 30 |
| Signatures | 32 | |
| 1 |
Item 1. Financial Statements.
HEARTCORE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Due from related party | ||||||||
| Loan receivable from employee | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Deferred tax assets | ||||||||
| Security deposits | ||||||||
| Long-term loan receivable from related party | ||||||||
| Loan receivable from employee, non-current | ||||||||
| Other non-current assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued payroll and other employee costs | ||||||||
| Due to related party | ||||||||
| Current portion of long-term debts | ||||||||
| Insurance premium financing | ||||||||
| Operating lease liabilities, current | ||||||||
| Finance lease liabilities, current | ||||||||
| Income tax payables | ||||||||
| Deferred revenue | ||||||||
| Mandatorily redeemable financial interest | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Long-term debts | ||||||||
| Operating lease liabilities, non-current | ||||||||
| Finance lease liabilities, non-current | ||||||||
| Other non-current liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities: | ||||||||
| Shareholders’ equity (deficit): | ||||||||
| Preferred shares ($ par value, shares authorized, shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively) | ||||||||
| Common shares ($ par value, shares authorized; and shares issued; and shares outstanding as of March 31, 2022 and December 31, 2021, respectively) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Total shareholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and shareholders’ equity (deficit) | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
| 2 |
HEARTCORE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expenses): | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Other expenses | ( | ) | ( | ) | ||||
| Total other expenses | ( | ) | ( | ) | ||||
| Loss before income tax provision | ( | ) | ( | ) | ||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net loss | ( | ) | ( | ) | ||||
| Less: net loss attributable to non-controlling interest | ( | ) | ||||||
| Net loss attributable to HeartCore Enterprises, Inc. | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive income: | ||||||||
| Foreign currency translation adjustment | ||||||||
| Total comprehensive loss | ( | ) | ( | ) | ||||
| Less: comprehensive loss attributable to non-controlling interest | ( | ) | ||||||
| Comprehensive loss attributable to HeartCore Enterprises, Inc. | $ | ( | ) | $ | ( | ) | ||
| Net loss per common share attributable to HeartCore Enterprises, Inc.* | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding* | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| * |
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
| 3 |
HEARTCORE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2022 and 2021
| Common shares* | Additional | Accumulated other | Total HeartCore Enterprises, Inc. | Non- | Total | |||||||||||||||||||||||||||
Number of shares | Amount | paid-in capital* | Accumulated deficit | comprehensive loss | shareholders’ deficit | controlling interest | shareholders’ deficit | |||||||||||||||||||||||||
| Balance, December 31, 2020* | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||||||||||
| Balance, March 31, 2021* | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||
| * |
| Accumulated | ||||||||||||||||||||||||
| Common shares | Additional | other comprehensive | Total shareholders’ | |||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Accumulated deficit | income (loss) | equity (deficit) | |||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| Issuance of common shares for cash | ||||||||||||||||||||||||
| Issuance of common shares from exercise of share options | ( | ) | ||||||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
| 4 |
HEARTCORE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expenses | ||||||||
| Amortization of debt issuance costs | ||||||||
| Non-cash lease expense | ||||||||
| Deferred income taxes | ||||||||
| Share-based compensation | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accrued payroll and other employee costs | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Finance lease liabilities | ( | ) | ( | ) | ||||
| Income tax payables | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Other liabilities | ( | ) | ||||||
| Net cash flows used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Advance and loan provided to related parties | ( | ) | ( | ) | ||||
| Repayment of loan provided to related party | ||||||||
| Net cash flows used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from initial public offering, net of issuance cost | ||||||||
| Proceeds from issuance of common shares prior to initial public offering | ||||||||
| Payments for finance leases | ( | ) | ( | ) | ||||
| Proceeds from long-term debt | ||||||||
| Repayment of long-term debts | ( | ) | ( | ) | ||||
| Repayment of insurance premium financing | ( | ) | ||||||
| Repayment to related party | ( | ) | ||||||
| Payment of debt issuance costs | ( | ) | ( | ) | ||||
| Payment for mandatorily redeemable financial interest | ( | ) | ||||||
| Net cash flows provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate changes | ( | ) | ( | ) | ||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents - beginning of the period | ||||||||
| Cash and cash equivalents - end of the period | $ | $ | ||||||
| Supplemental cash flow disclosure: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Non-cash investing and financing transactions | ||||||||
| Payroll withheld as repayment of loan receivable from employees | $ | $ | ||||||
| Expense paid by related parties on behalf of the Company | $ | $ | ||||||
| Share repurchase liability settled by issuance of common shares | $ | $ | ||||||
| Deferred offering costs recognized against the proceeds from the offering | $ | $ | ||||||
| Insurance premium financing | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
| 5 |
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 shares of its common shares to the shareholders of HeartCore Japan in exchange for shares out of shares of common shares issued by HeartCore Japan, representing approximately % of HeartCore Japan’s outstanding common shares. On February 24, 2022, the Company purchased the remaining 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.
| 6 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
COVID-19
While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent to which COVID-19 may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, which will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s financial statements.
Asset Retirement Obligations
Pursuant to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other non-current liabilities in the consolidated balance sheets, in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Beginning balance | $ | $ | ||||||
| Accretion expense | ||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
Software Development Costs
Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Technological feasibility is established upon completion of a detailed program design or the completion of a working model. Costs incurred by the Company between establishment of technological feasibility and the point at which the product is ready for general release are capitalized and amortized over the economic life of the related products. The Company’s software development costs incurred subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.
In
the three months ended March 31, 2022 and 2021, software development costs expensed as incurred amounted to $
Impairment of Long-Lived Assets
Long-lived assets with finite lives, primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets during the three months ended March 31, 2022 and 2021.
Foreign Currency Translation
The Company maintains its books and record in its local currency, Japanese YEN (“JPY”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations.
| 7 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The reporting currency of the Company is the United States Dollars (“US$”), and the accompanying unaudited consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of changes in shareholders’ equity (deficit).
Translation of amounts from the local currency of the Company into US$1 has been made at the following exchange rates:
March 31, 2022 | March 31, 2021 | |||||||
| Current JPY: US$1 exchange rate | ||||||||
| Average JPY: US$1 exchange rate | ||||||||
Revenue Recognition
The Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with customers”.
To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales is calculated at 10% of gross sales.
The Company currently generates its revenue from the following main sources:
Revenue from On-Premises Software
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premises software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenue from on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premises software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premises software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premises software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premises licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence.
Revenue from Maintenance and Support Service
Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers.
| 8 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue from Software as a Service (“SaaS”)
The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length.
Revenue from Software Development and other Miscellaneous Services
The Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognized revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.
The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the three months ended March 31, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $0.8 million and $0.9 million, respectively.
Disaggregation of Revenue
The Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues by type for the three months ended March 31, 2022 and 2021 is as following:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue from On-Premise Software | $ | $ | ||||||
| Revenue from Maintenance and Support Service | ||||||||
| Revenue from Software as a Service (“SaaS”) | ||||||||
| Revenue from Software Development and other Miscellaneous Services | ||||||||
| Total Revenue | $ | $ | ||||||
The Company’s disaggregation of revenues by product is as following:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue from Customer Experience Management Platform | $ | $ | ||||||
| Revenue from Process Mining | ||||||||
| Revenue from Robotic Process Automation | ||||||||
| Revenue from Task Mining | ||||||||
| Revenue from Others | ||||||||
| Total Revenue | $ | $ | ||||||
As of March 31, 2022 and 2021, and for the periods then ended, all long-lived assets and almost all of the revenue generated are attributed to the Company’s operation in Japan.
| 9 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.
For
the three months ended March 31, 2022, customer A represents
For
the three months ended March 31, 2022, vendor A, B and C represents
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:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ||||||||
| Accounts receivable, net | $ | $ | ||||||
NOTE 4 — PREPAID EXPENSES
Prepaid expenses consist of the following:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Prepayments to software vendors | $ | $ | ||||||
| Prepaid selling expenses | ||||||||
| Prepaid subscription fees | ||||||||
| Deferred offering expenses | ||||||||
| Prepaid insurance premium | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
| 10 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Deferred offering expenses, consisting of legal fees and road show expenses relating to the Company’s planned initial public offering, are capitalized and recorded on the balance sheet. The deferred offering expenses were reclassified to shareholders’ equity and recorded against the proceeds received upon the closing of our initial public offering on February 14, 2022.
NOTE 5 — RELATED PARTY TRANSACTIONS
As
of March 31, 2022 and December 31, 2021, the Company has a due to related party balance of $
As
of March 31, 2022 and December 31, 2021, the Company has a loan receivable balance of $
In
June 2020, Suzuyo Shinwart Corporation became an over
During
the period from January 1, 2022 through January 13, 2022, the Company completed a private placement, in which, it issued shares
of common shares at a purchase price of $ per share to the officers of the Company for an aggregate amount of $
NOTE 6 — PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Leasehold improvement | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Vehicle | ||||||||
| Software | ||||||||
| Subtotal | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense was $
NOTE 7 — LEASES
The
Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases
for office equipment and a lease for a vehicle, and these leases were classified as finance leases. Right-of-use assets of these finance
leases in the amount of $
| 11 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The components of lease costs are as follows:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Finance lease costs | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance lease costs | ||||||||
| Operating lease costs | ||||||||
| Total lease costs | $ | $ | ||||||
The following table presents supplemental information related to the Company’s leases:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from finance leases | $ | $ | ||||||
| Operating cash flows from operating leases | ||||||||
| Financing cash flows from finance leases | ||||||||
| Weighted average remaining lease term (years) | ||||||||
| Finance leases | ||||||||
| Operating leases | ||||||||
| Weighted-average discount rate: (per annum) | ||||||||
| Finance leases | % | % | ||||||
| Operating leases | % | % | ||||||
As of March 31, 2022, the future maturity of lease liabilities is as follows:
| Year ending December 31, | Finance lease | Operating lease | ||||||
| Remaining of 2022 | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Total lease liabilities | ||||||||
| Less: current portion | ||||||||
| Non-current lease liabilities | $ | $ | ||||||
Pursuant
to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $
| 12 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — LONG-TERM DEBTS
The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions, which consist of the following:
| Name of Financial Institutions | Original Amount Borrowed (JPY) | Loan Duration | Annual Interest Rate | Balance as of March 31, 2022 | Balance as of December 31, 2021 | |||||||||||||
| Bond payable | ||||||||||||||||||
| Corporate bond issued through Resona Bank | (a)(b) | 1/10/2019— 1/10/2024 | % | $ | $ | |||||||||||||
| Loans with banks and other financial institutions | ||||||||||||||||||
| Resona Bank, Limited. | (a) | 12/29/2017— 12/30/2022 | % | |||||||||||||||
| Resona Bank, Limited. | (a)(b) | 12/29/2017— 12/29/2024 | % | |||||||||||||||
| Resona Bank, Limited. | (a)(b) | 9/30/2020— 9/30/2027 | % | |||||||||||||||
| Resona Bank, Limited. | (a)(b) | 9/30//2020— 9/30/2027 | % | |||||||||||||||
| Resona Bank, Limited. | (a)(b) | 11/13/2020— 10/31/2027 | % | |||||||||||||||
| Sumitomo Mitsui Banking Corporation | 12/28/2018— 12/28/2023 | % | ||||||||||||||||
| Sumitomo Mitsui Banking Corporation | (b) | 12/30/2019— 12/30/2026 | % | |||||||||||||||
| The Shoko Chukin Bank, Ltd. | 9/28/2018— 8/31/2023 | % | ||||||||||||||||
| The Shoko Chukin Bank, Ltd. | 7/27/2020— 6/30/2027 | % | ||||||||||||||||
| Japan Finance Corporation | 12/15/2017— 11/30/2022 | % | ||||||||||||||||
| Japan Finance Corporation | 11/17/2020— 11/30/2027 | % | ||||||||||||||||
| Higashi-Nippon Bank | (a) | % | - | |||||||||||||||
| Aggregate outstanding principal balances | ||||||||||||||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||||||||||||
| Less: current portion | ( | ) | ( | ) | ||||||||||||||
| Non-current portion | $ | $ | ||||||||||||||||
| (a) | ||
| (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 $
| 13 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2022, future minimum loan payments are as follows:
| Year ending December 31, | Loan | |||
| Payment | ||||
| Remaining of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
NOTE 9 — INSURANCE PREMIUM FINANCING
In
February 2022, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $
NOTE 10 — INCOME TAXES
United States
HeartCore
USA is a holding company registered in the State of Delaware incorporated in May 2021. The U.S. federal income tax rate is
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
For the three months ended March 31, 2022 and 2021, the Company’s income tax expenses (benefits) are as follows:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Current | $ | ( | ) | $ | ( | ) | ||
| Deferred | ( | ) | ||||||
Income tax expense (benefits) | $ | ( | ) | $ | ||||
The
effective tax rate was
Options
In May 2016, the Company granted units stock options to its employees each to acquire one share of common shares of HeartCore Japan (an equivalent of approximately shares of common shares of HeartCore USA) at JPY each (approximately $). All options are exercisable upon issuance with a repurchase provision before the completion of the Company’s initial public offering, which serves as a vesting condition. All employees that were granted these stock options had early exercised their stock options in 2016 prior to the vesting of the related stock options. As of March 31, 2021, 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 shares (equivalent to shares of common shares of HeartCore Japan) from the CEO of the Company.
| 14 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
consideration received for the remaining early exercised options were recorded by the Company as a share repurchase liability included
in other current liabilities in the consolidated balance sheet with JPY
| Number of stock options | ||||
| Issued and unvested as of January 1, 2021 | ||||
| Forfeited | ||||
| Issued and unvested as of March 31, 2021 | ||||
| Issued and unvested as of January 1, 2022 | ||||
| Vested and exercised | ||||
| Issued and unvested as of March 31, 2022 | ||||
| Number of Options/ Warrants | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | Intrinsic Value | |||||||||||||
| As of January 1, 2022 | $ | |||||||||||||||
| Granted | - | - | ||||||||||||||
| Forfeited | - | - | - | |||||||||||||
| Exercised | - | - | ||||||||||||||
| As of March 31, 2022 | $ | $ | ||||||||||||||
| Vested and exercisable as of March 31, 2022 | - | - | ||||||||||||||
Options granted historically were valued using the binomial model with the assistance of an independent valuation specialist. Significant assumptions used in the valuation include expected volatility, risk-free interest rate, dividend yield and expected exercise term.
For the three months ended March 31, 2022 and 2021, share-based compensation related to the options totaled $ and nil, respectively. The outstanding unamortized share-based compensation related to options was $ (which will be recognized through December 2025) as of March 31, 2022.
| 15 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Units (“RSUs”)
The following table summarizes the RSUs activity for the three months ended March 31, 2022:
Number of RSUs | ||||
| Issued as of January 1, 2022 | ||||
| Granted | ||||
| Forfeited | ||||
| Issued as of March 31, 2022 | ||||
| Vested as of March 31, 2022 |
On February 9, 2022, the Company entered into executive employment agreements with five executives and granted 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 % of the applicable shares of common shares. The fair value of the RSUs at grant date was $.
On February 25, 2022, the Company entered into a service agreement with a marketing company to purchase 6-month marketing services and granted RSUs. The RSUs were issued and vested on May 15, 2022. The fair value of the RSUs at grant date was $.
For the three months ended March 31, 2022, the Company recognized RSU-related share-based compensation of $. The outstanding unamortized share-based compensation related to RSUs was $(which will through February 2026) as of March 31, 2022.
NOTE 12 – SHAREHOLDERS’ EQUITY (DEFICIT)
The Company was authorized to issue shares of common shares, par value of $ per share, and shares of preferred shares, par value of $ per share.
During
the period from January 1, 2022 through January 13, 2022, the Company issued shares of common shares at a purchase price of
$ per
share for an aggregate net proceeds of $
On
February 14, 2022, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “HTCR”.
The Company offered common shares at $per share. Net proceeds raised by the Company
from the initial public offering amounted to $
On February 14, 2022, shares of common shares were issued from exercise of stock options by settling share repurchase liability of $ (also see NOTE 11).
As of March 31, 2022 and December 31, 2021, there were and shares, respectively, of common shares issued; and and shares, respectively, of common shares outstanding.
preferred shares were issued and outstanding as of March 31, 2022 and December 31, 2021.
NOTE 13 – MANDATORILY REDEEMABLE FINANCIAL INTEREST
On
August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore
Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the shares of HeartCore Japan held by Dentsu Digital
in accordance with certain terms and conditions in the stock purchase agreement for JPY
| 16 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Basic loss per share is calculated on the basis of weighted-average outstanding common shares. Diluted loss per share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock unit awards and other dilutive securities.
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
Loss per share – basic | ||||||||
| Numerator: | ||||||||
| Allocation of net loss attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating loss per common share — basic | $ | ( | ) | $ | ( | ) | ||
| Net loss attributable to common shareholders | ( | ) | ( | ) | ||||
| Denominator: | ||||||||
| Weighted average number of common shares outstanding used in calculating basic loss per share | ||||||||
| Denominator used for loss per share | ||||||||
| Loss per share — basic | $ | ( | ) | $ | ( | ) | ||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
Loss per share – diluted | ||||||||
| Numerator: | ||||||||
| Allocation of net loss attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating loss per common share — diluted | $ | ( | ) | $ | ( | ) | ||
| Net loss attributable to common shareholders | ( | ) | ( | ) | ||||
| Denominator: | ||||||||
| Weighted average number of common shares outstanding used in calculating diluted loss per share | ||||||||
| Denominator used for loss per share | ||||||||
| Loss per share — diluted | $ | ( | ) | $ | ( | ) | ||
For the three months ended March 31, 2022 and 2021, the weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common shares equivalents of and , respectively, would have an anti-dilutive effect.
NOTE 15 - SUBSEQUENT EVENTS
On February 25, 2022, the Company entered into a service agreement with a marketing company pursuant to which the Company agreed to issue RSUs for 6-month marketing services to be provided from February 25, 2022 to August 26, 2022. The RSUs were issued on May 15, 2022.
| 17 |
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 March 31, 2022, our sales and marketing organization was comprised of 15 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 March 31, 2022, our combined business units (customer experience management business unit and digital transformation business unit) had a total of 858 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.
| 18 |
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 subsidiaries 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
Moveaction Consulting Agreement
On March 31, 2022, we entered into a Consulting and Services Agreement (the “Moveaction Consulting Agreement”) by and between the Company and Moveaction Co., Ltd. (“Moveaction”). Pursuant to the terms of the Moveaction Consulting Agreement, the Company agreed to provide Moveaction certain services, including the following (collectively, the “Services”):
| ● | Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm; | |
| ● | Provision of process mining and task mining licenses for internal audit and internal control; | |
| ● | Assisting in the preparation of documentation for internal controls required for an initial public offering by Moveaction on the NASDAQ Stock Market, the New York Stock Exchange or the NYSE American; | |
| ● | Providing support services to remove problematic accounting accounts upon listing support; | |
| ● | Translation of requested documents into English; | |
| ● | Attend and, if requested by the other party, lead, meetings of management and employees; | |
| ● | Provide support services related to the NASDAQ listing; | |
| ● | Conversion of accounting data from Japanese standards to U.S. GAAP; | |
| ● | Assist in the preparation of S-1 or F-1 filings; | |
| ● | Creation of English web page; and | |
| ● | Preparing an investor presentation/deck and executive summary of the 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 Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of Moveaction’s securities; participation in discussions between Moveaction and potential investors; assisting in structuring any transactions involving the sale of Moveaction’s securities; pre-screening of potential investors; due diligence activities; and providing advice relating to valuation of or financial advisability of any investments in Moveaction.
Pursuant to the terms of the Consulting Agreement, Moveaction agreed to compensate the Company as follows in return for the provision of Services during the initial term of nine months:
| (a) | $460,000, to be paid as follows: (i) $180,000 on March 31, 2022; (ii) $140,000 on the three-month anniversary of March 31, 2022; and (iii) $140,000 on the six-month anniversary of March 31, 2022; and | |
| (b) | Issuance by Moveaction to the Company of a warrant (the “Moveaction Warrant”) to acquire shares of Moveaction capital stock. |
| 19 |
During any Renewal Term (as defined below), Moveaction will compensate the Company for Services at the rate of $150 per hour.
The Moveaction Consulting Agreement has an initial term of nine months, which will automatically renew for additional nine month period (each, a “Renewal Term”) unless either party provides at least 30 days’ prior notice.
As provided in the Moveaction Consulting Agreement, on the Effective Date, Moveaction issued to the Company the Moveaction Warrant. Pursuant to the terms of the Moveaction Warrant, the Company may, at any time on or after the date that Moveaction completes its first initial public offering of stock in the United States resulting in any class of Moveaction’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 Moveaction Warrant to purchase eight shares of Moveaction common stock for an exercise price per share of $0.01, subject to adjustment as provided in the Moveaction Warrant. The Warrant contains a 9.99% equity blocker.
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 consultant services to assist ALI to exposure to the US stock market.
Pursuant to the terms of the ALI Consulting Agreement, the parties agreed that the Company will 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; 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 during the six-month term (the “Term”):
| (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 (the “ALI 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 ALI Warrant. |
For any services performed by the Company beyond the Term, ALI will compensate the Company for Services at the rate of $150 per hour.
The ALI Consulting Agreement has a term of six months, which shall expire unless renewed upon mutual written agreement of the parties.
As provided in the ALI Consulting Agreement, on April 13, 2022, ALI issued to the Company the ALI Warrant. Pursuant to the terms of the ALI Warrant, the Company may, at any time on or after the IPO Date and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the ALI 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 ALI Warrant. The number of shares for which the ALI 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.
Going forward, we expect that we will offer services substantially similar to the Services to other third parties, as well.
Financial Overview
For the three months ended March 31, 2022 and 2021, we generated revenues of $2,276,001 and $2,110,309, respectively, and reported net losses of $1,578,451 and $188,237, respectively, and cash out flow used in operating activities of $2,393,853 and $850,812, respectively. As noted in our unaudited consolidated financial statements, as of March 31, 2022, we had an accumulated deficit of $5,474,564.
| 20 |
Results of Operations
Comparison of Results of Operations for the Three Months ended March 31, 2022 and 2021
The following table summarizes our operating results as reflected in our unaudited statements of operations during the three months ended March 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
| For the Three Months ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| % of | % of | |||||||||||||||||||||||
| Amount | revenue | Amount | revenue | Amount | % of | |||||||||||||||||||
| REVENUES | $ | 2,276,001 | 100.0 | % | $ | 2,110,309 | 100.0 | % | $ | 165,692 | 7.9 | % | ||||||||||||
| COST OF REVENUES | 1,055,356 | 46.4 | % | 1,407,632 | 66.7 | % | (352,276 | ) | -25.0 | % | ||||||||||||||
| GROSS PROFIT | 1,220,645 | 53.6 | % | 702,677 | 33.3 | % | 517,968 | 73.7 | % | |||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Selling expenses | 205,918 | 9.0 | % | 46,341 | 2.2 | % | 159,577 | 344.4 | % | |||||||||||||||
| General and administrative expenses | 2,468,933 | 108.5 | % | 762,748 | 36.1 | % | 1,706,185 | 233.7 | % | |||||||||||||||
| Research and development expenses | 108,259 | 4.8 | % | 52,146 | 2.5 | % | 56,113 | 107.6 | % | |||||||||||||||
| Total operating expenses | 2,783,110 | 122.3 | % | 861,235 | 40.8 | % | 1,921,875 | 223.2 | % | |||||||||||||||
| Loss from operations | (1,562,465 | ) | -68.7 | % | (158,558 | ) | -7.5 | % | (1,403,907 | ) | 885.4 | % | ||||||||||||
| Other expenses | (16,802 | ) | -0.7 | % | (21,990 | ) | -1.0 | % | 5,188 | -23.6 | % | |||||||||||||
| Loss before income tax provision | (1,579,267 | ) | -69.4 | % | (180,548 | ) | -8.5 | % | (1,398,719 | ) | 774.7 | % | ||||||||||||
| Income tax expense (benefit) | (816 | ) | 0.0 | % | 7,689 | 0.4 | % | (8,505 | ) | -110.6 | % | |||||||||||||
| Net loss | (1,578,451 | ) | -69.4 | % | (188,237 | ) | -8.9 | % | (1,390,214 | ) | 738.5 | % | ||||||||||||
| Less: net loss attributable to non-controlling interest | - | - | % | (4,988 | ) | -0.2 | % | 4,988 | -100.0 | % | ||||||||||||||
| NET LOSS ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. | $ | (1,578,451 | ) | -69.4 | % | $ | (183,249 | ) | -8.7 | % | $ | (1,395,202 | ) | 761.4 | % | |||||||||
| 21 |
| For the Three Months ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| % of | % of | |||||||||||||||||||||||
| Amount | total revenue |
Amount | total revenue |
Amount | % of | |||||||||||||||||||
| Revenues | ||||||||||||||||||||||||
| Revenue from on-premise software | $ | 801,601 | 35.2 | % | $ | 249,608 | 11.8 | % | $ | 551,993 | 221.1 | % | ||||||||||||
| Revenue from maintenance and support services | 845,339 | 37.1 | % | 942,215 | 44.7 | % | (96,876 | ) | -10.3 | % | ||||||||||||||
| Revenue from software as a service (“SaaS”) | 126,654 | 5.6 | % | 151,808 | 7.2 | % | (25,154 | ) | -16.6 | % | ||||||||||||||
| Revenue from software development and other miscellaneous services | 502,407 | 22.1 | % | 766,678 | 36.3 | % | (264,271 | ) | -34.5 | % | ||||||||||||||
| Total revenue | 2,276,001 | 100.0 | % | 2,110,309 | 100.0 | % | 165,692 | 7.9 | % | |||||||||||||||
| Cost of Revenue | ||||||||||||||||||||||||
| Costs of on-premise software | 220,432 | 9.7 | % | 282,252 | 13.4 | % | (61,820 | ) | -21.9 | % | ||||||||||||||
| Costs of maintenance and support services | 308,286 | 13.6 | % | 331,817 | 15.7 | % | (23,531 | ) | -7.1 | % | ||||||||||||||
| Costs of software as a service (“SaaS”) | 70,924 | 3.1 | % | 115,541 | 5.5 | % | (44,617 | ) | -38.6 | % | ||||||||||||||
| Costs of software development and other miscellaneous services | 455,714 | 20.0 | % | 678,022 | 32.1 | % | (222,308 | ) | -32.8 | % | ||||||||||||||
| Total cost of revenue | 1,055,356 | 46.4 | % | 1,407,632 | 66.7 | % | (352,276 | ) | -25.0 | % | ||||||||||||||
| Gross Profit | ||||||||||||||||||||||||
| On-premise software | 581,169 | 25.5 | % | (32,644 | ) | -1.5 | % | 613,813 | -1,880.3 | % | ||||||||||||||
| Maintenance and support services | 537,053 | 23.6 | % | 610,398 | 28.9 | % | (73,345 | ) | -12.0 | % | ||||||||||||||
| Software as a service (“SaaS”) | 55,730 | 2.4 | % | 36,267 | 1.7 | % | 19,463 | 53.7 | % | |||||||||||||||
| Software development and other miscellaneous services | 46,693 | 2.1 | % | 88,656 | 4.2 | % | (41,963 | ) | -47.3 | % | ||||||||||||||
| Total gross profit | $ | 1,220,645 | 53.6 | % | $ | 702,677 | 33.3 | % | $ | 517,968 | 73.7 | % | ||||||||||||
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Revenues
Our total revenues increased by $165,692, or 7.9%, to $2,276,001 for the three months ended March 31, 2022 from $2,110,309 for the three months ended March 31, 2021. The increase in our revenues was attributable to the following reasons:
| (i) | the revenues from sales of on-premise software increased by $551,993, or 221.1%, to $801,601 for the three months ended March 31, 2022 from $249,608 for the three months ended March 31, 2021, mainly attributable to the increased sales volume of 15 in CMS licenses; |
| (ii) | Offset by the revenues from maintenance and support services decreased by $96,876, or 10.3%, to $845,339 for the three months ended March 31, 2022 from $942,215 for the three months ended March 31, 2021, mainly attributable to the depreciation of Japanese Yen, without which, the sales would have slightly decreased by $15,301, or 1.5%. |
| (iii) | Offset by the decrease of $264,271, or 34.5% in our revenue from software development and other service, to $502,407 in the three months ended March 31, 2022 from $766,678 in the three months ended March 31, 2021. An important customer who contributed $229,035 to our revenue in the three months ended March 31, 2021, was finished in the prior year and accordingly generated no revenue in the current period |
Cost of Revenues
Our total costs of revenues decreased by $352,276, or 25.0%, to $1,055,356 for the three months ended March 31, 2022 from $1,407,632 for the three months ended March 31, 2021. The decrease in our costs was attributable to the following reasons:
| (i) | the costs of on-premises software decreased by $61,820, or 21.9%, to $220,432 for the three months ended March 31, 2022 from $282,252 for the three months ended March 31, 2021. In addition to the depreciation of the yen, CMS license costs were fixed monthly and not proportional to sales. On the other hand, the sales deceased in the three months ended March 31, 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 $44,617, or 38.6%, to $70,924 for the three months ended March 31, 2022 from $115,541 for the three months ended March 31, 2021. There were specialized supporting employees and subcontractors for CXM Cloud (SaaS) in the first quarter 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 $222,308, or 32.8%, to $455,714 for the three months ended March 31, 2022 from $678,022 for the three months ended March 31, 2021. As mentioned above, we incurred development costs for the product sold to the important customer in the first quarter 2021, and we incurred no such costs in 2022 because the project development completed in 2021. |
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Gross Profit
Our total gross profit increased by $517,968, or 73.7%, to $1,220,645 for the three months ended March 31, 2022 from $702,677 for the three months ended March 31, 2021. The increase in our gross profit was attributable to the gross profit from sales of on-premises software increased by $613,813, or -1,880.3% from -$32,644 for the three months ended March 31, 2021 to $581,169 for the three months ended March 31, 2022, primarily due to the increased sales in CMS licenses, the costs of which is not proportional to sales, but fixed monthly.
For the reasons discussed above, our overall gross profit margin increased by 20.3% to 53.6% in the three months ended March 31, 2022 from 33.3% in the three months ended March 31, 2021.
Operating Expenses
The following table sets forth the breakdown of our operating expenses for the three months ended March 31, 2022 and 2021:
| For the Three Months ended March 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| % of | % of | |||||||||||||||||||||||
| Amount | revenue | Amount | revenue | Amount | % of | |||||||||||||||||||
| Total revenues | $ | 2,276,001 | 100.0 | % | $ | 2,110,309 | 100.0 | % | $ | 165,692 | 7.9 | % | ||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Selling expenses | 205,918 | 9.0 | % | 46,341 | 2.2 | % | 159,577 | 344.4 | % | |||||||||||||||
| General and administrative expenses | 2,468,933 | 108.5 | % | 762,748 | 36.1 | % | 1,706,185 | 223.7 | % | |||||||||||||||
| Research and development expenses | 108,259 | 4.8 | % | 52,146 | 2.5 | % | 56,113 | 107.6 | % | |||||||||||||||
| Total operating expenses | $ | 2,783,110 | 122.3 | % | $ | 861,235 | 40.8 | % | $ | 1,921,875 | 223.2 | % | ||||||||||||
Selling Expenses
Our selling expenses primarily include advertising expenses, sales commissions, and sales promotion expenses.
Our selling expenses increased by $159,577, or 344.4%, to $205,918 in the three months ended March 31, 2022 from $46,341 in the three months ended March 31, 2021, primarily attributable to an increase in advertising expenses by $157,270, or 527.8%, to 187,070 in the three months ended March 31, 2022 from $29,800 in the three months ended March 31, 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.
As a percentage of revenues, our selling expenses accounted for 9.0% and 2.2% of our total revenue for the three months ended March 31, 2022 and 2021, respectively.
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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 $1,706,185 or 223.7%, to $2,468,933 in the three months ended March 31, 2022 from $762,748 in the three months ended March 31, 2021, primarily attributable to (i) our office, utility and other expenses increased by $121,627 or 149.0%, to $203,257 in the three months ended March 31, 2022 from $81,630 in the three months ended March 31, 2021, primarily due to the increase in the U.S. parent company’s office expenses, and DO indemnity insurance premiums of the parent company; (ii) our consulting and professional fees increased by $412,713 or 399.3%, to $516,072 in the three months ended March 31, 2022 from $103,359 in the three months ended March 31, 2021, primarily due to the increase in consulting and legal fees related to going public; (iii) an increase in listing-related expenses of $283,468, or 100%, as compared the prior period; (iv) an increase in salaries and welfare by $384,388, or 79.8%, to $866,207 in the three months ended March 31, 2022 from $481,819 in the three months ended March 31, 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; (v) an increase in share-based compensation of $422,164, or 100%, to $422,164 in the three months ended March 31, 2022 from nil in the three months ended March 31, 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 March 31, 2021 as compared to the three months ended March 31, 2020 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 108.5% and 36.1% of our revenue for the three months ended March 31, 2022 and 2021, respectively.
Research and development expenses
Our research and development expenses primarily consist of employee salaries and welfare, and outsourcing expenses.
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Our research and development expenses increased by $56,113 or 107.6%, to $108,259 in the three months ended March 31, 2022 from $52,146 in the three months ended March 31, 2021, primarily attributable to an increase in outsourcing expenses by $57,302, or 126.1%, to $102,750 in the three months ended March 31, 2022 from $45,448 in the three months ended March 31, 2021, as we outsourced certain development activities for more efficiency and experience, relating to CMS UI renewal and PIM/DAM large-scale development starting in September 2021.
The overall increase in our research and development expenses in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 4.8% and 2.5% of our revenue for the three months ended March 31, 2022 and 2021, respectively.
Other Expenses, net
Our other income (expenses) primarily includes interest income generated from bank deposits and loans to related-parties, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, decreased by $5,188 or 23.6%, from $21,990 in the three months ended March 31, 2021 to $16,802 in the three months ended March 31, 2022.
Provision for Income Taxes
Our income taxes benefit was $816 in the three months ended March 31, 2022, as compared to the income taxes provision of $7,689 in the three months ended March 31, 2021, mainly due to the increased loss.
Net Loss
As a result of the foregoing, we reported a net loss of $1,578,451 for the three months ended March 31, 2022, representing a $1,390,214 or 738.5% increase from a net loss of $188,237 for the three months ended March 31, 2021.
Net loss 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 March 31, 2021. Accordingly, we recorded net loss attributable to the non-controlling interest. The net loss attributable to non-controlling interest was $4,988 in the three months ended March 31, 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 March 31, 2022.
Net loss attributable to HeartCore Enterprises, Inc.
As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,578,451 for the three months ended March 31, 2022, representing a $1,395,202 or 761.4% increase from a net loss of $183,249 for the three months ended March 31, 2021.
Liquidity and Capital Resources
As of March 31, 2022, we had $13,913,886 in cash as compared to $3,136,839 as of December 31, 2021. As of March 31, 2022, our working capital was $12,526,450 as compared to $62,919 as of December 31, 2021. We also had $1,116,254 in accounts receivable as of March 31, 2022. Our accounts receivable primarily include balance due from customers for our on-premises software sold and services provided and accepted by customers.
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The following table sets forth summary of our cash flows for the periods indicated:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (2,393,853 | ) | $ | (850,812 | ) | ||
| Net cash used in investing activities | (35,281 | ) | (64,510 | ) | ||||
| Net cash provided by (used in) financing activities | 13,284,474 | (346,391 | ) | |||||
| Effect of exchange rate changes | (78,293 | ) | (103,801 | ) | ||||
| Net change in cash and cash equivalents | 10,777,047 | (1,365,514 | ) | |||||
| Cash and cash equivalents, beginning of the period | 3,136,839 | 3,058,175 | ||||||
| Cash and cash equivalents, end of the period | $ | 13,913,886 | $ | 1,692,661 | ||||
Operating Activities
Net cash used in operating activities was $2,393,853 for the three months ended March 31, 2022, primarily consisting of the following:
| ● | Net loss of $1,578,451 for the three months ended March 31, 2022. | |
| ● | An increase in accounts receivable of $217,638. 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 $488,970, primarily due to the increase in the prepayment to an IR provider of $400,000. | |
| ● | A decreased in account payable and accrued expenses of $79,982, primarily attributable to the payoff the accrued expenses related to the IPO. | |
| ● | A decrease of deferred revenue of $295,176, primarily due to the completion of software development project. | |
| ● | Offset by share-based compensation of $422,164. |
Net cash used in operating activities was $850,812 for the three months ended March 31, 2021, primarily consisting of the following:
| ● | Net loss of $188,237 for the three months ended March 31, 2021. | |
| ● | An increase in accounts receivable of $458,314. The increase was primarily due to our increased sales in the three months ended March 31, 2021. 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 $186,462, primarily due to the increase in the prepayments to software venders. | |
| ● | A decrease of deferred revenue of $233,170, primarily due to the completion of software development project. | |
| ● | A decrease of income tax payable of 159,991, primarily due to the decreased taxable income. | |
| ● | Offset by an increase in accounts payable and accrued expenses of $319,323, primarily due to the increase in the accrued expense related to the IPO. |
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Investing Activities
Net cash used in investing activities amounted to $35,281 for the three months ended March 31, 2022, and primarily included the purchase of fixed assets of $18,903, and the loans provided to related parties of $25,480.
Net cash used in investing activities amounted to $64,510 for the three months ended March 31, 2021, and primarily included the purchase of fixed assets of $4,239, and the loans provided to related parties of $60,271.
Financing Activities
Net cash provided by financing activities amounted to $13,284,474 for the three months ended March 31, 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.
Net cash used in financing activities amounted to $346,391 for the three months ended March 31, 2021, primarily consisting of repayment of long-term debts of $328,799 and payments for finance leases of $16,172.
Contractual Obligations
Lease commitment
The Company’s subsidiary, HeartCore Co., Ltd. entered into two leases for its office space and parking lot, which were classified as operating leases. HeartCore Co., Ltd. also entered into two leases for office equipment and a lease for a vehicle, and these leases were classified as finance leases.
As of March 31, 2022, future minimum lease payments under the non-cancellable lease agreements are as follows:
| Year ending December 31, | Finance lease | Operating lease | ||||||
| Remaining of 2022 | $ | 22,755 | $ | 255,580 | ||||
| 2023 | 20,947 | 340,773 | ||||||
| 2024 | 308 | 340,773 | ||||||
| 2025 | - | 340,773 | ||||||
| 2026 | - | 340,773 | ||||||
| Thereafter | - | 1,743,870 | ||||||
| Total lease payments | 44,010 | 3,362,542 | ||||||
| Less: imputed interest | (313 | ) | (217,181 | ) | ||||
| Total lease liabilities | 43,697 | 3,145,361 | ||||||
| Less: current portion | 29,272 | 313,737 | ||||||
| Non-current lease liabilities | $ | 14,425 | $ | 2,831,624 | ||||
Long Term Debt
The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions.
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As of March 31, 2022, future minimum loan payments are as follows:
| Year ending December 31, | Loan | |||
| Payment | ||||
| Remaining of 2022 | $ | 569,006 | ||
| 2023 | 767,586 | |||
| 2024 | 475,901 | |||
| 2025 | 273,036 | |||
| 2026 | 248,436 | |||
| Thereafter | 203,859 | |||
| Total | $ | 2,537,824 | ||
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 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 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 recognized revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.
The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the three months ended March 31, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $0.8 million and $0.9 million, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2022. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2022, the Company’s disclosure controls and procedures were not effective, for the same reason as previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2021.
Changes in Internal Controls Over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. To the knowledge of our management, there are no legal proceedings currently pending against us which we believe would have a material effect on our business, financial position or results of operations and, to the best of our knowledge, there are no such legal proceedings contemplated or threatened.
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ITEM 1A. RISK FACTORS
As a smaller reporting company, the Company is not required to disclose material changes to the risk factors that were contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as updated from time to time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no defaults in any material payments during the covered period.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a) None.
(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K.
ITEM 6. EXHIBITS
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| * | Filed herewith. |
| ** | Furnished herewith. |
| † | Management contracts and compensation plans and arrangements. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| HEARTCORE ENTERPRISES, INC. | ||
| Dated: May 16, 2022 | By: | /s/ Sumitaka Yamamoto |
| Sumitaka Yamamoto | ||
| Chief Executive Officer and President (principal executive officer) | ||
| Dated: May 16, 2022 | By: | /s/ Qizhi Gao |
| Qizhi Gao | ||
| Chief Financial Officer (principal financial officer and principal accounting officer) | ||
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