HeartCore Enterprises, Inc 10-Q for FY2023 Q1
HeartCore Enterprises, Inc. (HTCR)
About this 10-Q
HeartCore Enterprises, Inc filed this 10-Q on May 22, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.73M
- up 283.7% from $2.28M a year earlier
- Net income
- $1.88M
- compared with a net loss of $1.58M a year earlier
- Diluted EPS
- $0.10
- compared with -$0.09 a year earlier
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___.
Commission
File Number
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each Exchange on which Registered | ||
| The
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of May 22, 2023, there were shares of outstanding common stock, par value $0.0001 per share, of the registrant.
HeartCore Enterprises, Inc.
Contents
| Page | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | F-1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 |
| Item 4. | Controls and Procedures | 18 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 19 |
| Item 1A. | Risk Factors | 19 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
| Item 3. | Defaults Upon Senior Securities | 19 |
| Item 4. | Mine Safety Disclosures | 19 |
| Item 5. | Other Information | 19 |
| Item 6. | Exhibits | 20 |
| Signatures | 21 | |
| 2 |
Item 1. Financial Statements.
HEARTCORE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Short-term investment in warrants | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible asset, net | ||||||||
| Goodwill | ||||||||
| Long-term investment in warrants | ||||||||
| Deferred tax assets | ||||||||
| Security deposits | ||||||||
| Other non-current assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| 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 | ||||||||
| Factoring liability | ||||||||
| Operating lease liabilities, current | ||||||||
| Finance lease liabilities, current | ||||||||
| Income tax payables | ||||||||
| Deferred revenue | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Long-term debts | ||||||||
| Operating lease liabilities, non-current | ||||||||
| Finance lease liabilities, non-current | ||||||||
| Deferred tax liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred shares ($ par value, shares authorized, shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively) | ||||||||
| Common shares ($ par value, shares authorized; and shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total HeartCore Enterprises, Inc. shareholders’ equity | ||||||||
| Non-controlling interest | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-1 |
HEARTCORE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| 2023 | 2022 | |||||||
For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Total operating expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Other income (expenses): | ||||||||
| Changes in fair value of investments in warrants | ||||||||
| Interest income | ||||||||
| Interest expenses | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Other expenses | ( | ) | ( | ) | ||||
| Total other income (expenses) | ( | ) | ||||||
| Income (loss) before income tax provision | ( | ) | ||||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net income (loss) | ( | ) | ||||||
| Less: net loss attributable to non-controlling interest | ( | ) | ||||||
| Net income (loss) attributable to HeartCore Enterprises, Inc. | $ | $ | ( | ) | ||||
| Other comprehensive income (loss): | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||
| Total comprehensive income (loss) | ( | ) | ||||||
| Less: comprehensive loss attributable to non-controlling interest | ( | ) | ||||||
| Comprehensive income (loss) attributable to HeartCore Enterprises, Inc. | $ | $ | ( | ) | ||||
| Net income (loss) per common share attributable to HeartCore Enterprises, Inc. | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| Weighted average common shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-2 |
HEARTCORE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
| Number of shares* | Amount | paid-in capital | Accumulated deficit | comprehensive loss | shareholders’ deficit | controlling interest | shareholders’ deficit | |||||||||||||||||||||||||
| Common shares | Additional | Accumulated other | Total HeartCore Enterprises, Inc. | Non- | Total | |||||||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Accumulated deficit | comprehensive income (loss) | shareholders’ equity (deficit) | controlling interest | shareholders’ 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 | ( | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Common shares | Additional | Accumulated other | Total HeartCore Enterprises, Inc. | Non- | Total | |||||||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Accumulated deficit | comprehensive income | shareholders’ equity | controlling interest | shareholders’ equity | |||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Beginning balance | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income (loss) | - | ( | ) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of common shares for acquisition of subsidiary | ||||||||||||||||||||||||||||||||
| Non-controlling interests arising from acquisition of subsidiary | - | |||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Ending balance | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-3 |
HEARTCORE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2023 | 2022 | |||||||
For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization expenses | ||||||||
| Amortization of debt issuance costs | ||||||||
| Non-cash lease expense | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Warrants received as noncash consideration | ( | ) | ||||||
| Changes in fair value of investments in warrants | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Accrued payroll and other employee costs | ( | ) | ( | ) | ||||
| Due to related party | ||||||||
| 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 party | ( | ) | ||||||
| Repayment of loan provided to related party | ||||||||
| Payment for acquisition of subsidiary, net of cash acquired | ( | ) | ||||||
| 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 | ( | ) | ||||||
| Net proceeds from factoring arrangement | ||||||||
| Payments for 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 party 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 | $ | $ | ||||||
| Liabilities assumed in connection with purchase of property and equipment | $ | $ | ||||||
| Common shares issued for acquisition of subsidiary | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| F-4 |
HEARTCORE ENTERPRISES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
HeartCore Enterprises, Inc. (“HeartCore USA” or the “Company”), a holding company, was incorporated under the laws of the State of Delaware on May 18, 2021.
On July 16, 2021, the Company executed a Share Exchange Agreement with certain shareholders of HeartCore Co., Ltd. (“HeartCore Japan”), a company that was incorporated in Japan on June 12, 2009. Pursuant to the terms of the Share Exchange Agreement, the Company issued 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 consolidated financial statements.
The Company, via its wholly-owned operating subsidiary, HeartCore Japan, is mainly engaged in the business of developing and sales of comprehensive software. Beginning from early 2022, HeartCore USA is engaged in business of providing consulting services to Japanese companies with intention to go public in the United States capital market.
On September 6, 2022, HeartCore USA entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire of the outstanding shares of Sigmaways, Inc. (“Sigmaways”), a company incorporated under the laws of the State of California in April 2006, and its wholly-owned subsidiaries, Sigmaways B.V. and Sigmaways Technologies Ltd. (“Sigmaways Technologies”). Sigmaways B.V. was incorporated in Netherlands in November 2019. Sigmaways Technologies was incorporated in Canada in August 2020. Sigmaways and its wholly-owned subsidiaries are primarily engaged in the business of developing and sales of software in the United States. The acquisition was closed on February 1, 2023.
In January 2023, HeartCore USA incorporated a wholly-owned subsidiary, HeartCore Financial, Inc. (“HeartCore Financial”), under the laws of the State of Delaware. HeartCore Financial is engaged in the business of providing financial consulting services.
In February 2023, HeartCore USA incorporated a wholly-owned subsidiary, HeartCore Capital Advisors, Inc. (“HeartCore Capital Advisors”), in Japan. HeartCore Capital Advisors is engaged in the business of providing financial consulting services to Japanese companies.
HeartCore USA, HeartCore Japan, Sigmaways, Sigmaways B.V., Sigmaways Technologies, HeartCore Financial and HeartCore Capital Advisors are hereafter referred to as the Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
These unaudited interim consolidated financial statements do not include all of the information and disclosure required by the U.S. GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments consisting of normal recurring nature considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2022.
| F-5 |
Use of Estimates
In preparing the unaudited consolidated financial statements in conformity U.S. GAAP, the management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the unaudited consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for credit losses, useful lives of property and equipment, the impairment of long-lived assets and goodwill, valuation of stock-based compensation, valuation allowance of deferred tax assets, implicit interest rate of operating and financing leases, valuation of asset retirement obligations, valuation of investments in warrants, revenue recognition and purchase price allocation with respect to business combination. Actual results could differ from those estimates.
COVID-19
While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent to which COVID-19 may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, which will be recognized in the unaudited consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s unaudited consolidated financial statements.
| F-6 |
Asset Retirement Obligations
Pursuant to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other non-current liabilities in the consolidated balance sheets, in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations:
SCHEDULE OF CHANGES IN ASSET RETIREMENT OBLIGATIONS
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| 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, 2023 and 2022, software development costs expensed as incurred amounted to $
Investments in Warrants
Investments in warrants represent stock warrants of its consulting service customers and are not registered for public sale. The warrants are measured at fair value and any changes in fair value are recognized in other income (expenses). Investment in warrants is classified as short-term if the maturity is within one year, and as long-term if the maturity is over one year.
Intangible Asset, Net
Intangible asset represents the customer relationship acquired from business acquisition of Sigmaways and its subsidiaries. The acquired intangible asset is recognized and measured at fair value at the time of acquisition and is amortized on a straight-line basis over the estimated economic useful life of the respective assets. The estimated useful life of the customer relationship is 8 years.
Impairment of Long-Lived Assets Other Than Goodwill
Long-lived
assets with finite lives, primarily property and equipment, operating lease right-of-use assets and intangible asset, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated
cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed
to be impaired and written down to its fair value. There were
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. In accordance with ASC Topic 350, “Intangibles – Goodwill and Others”, goodwill is subject to at least an annual assessment for impairment or more frequently if events or changes in circumstances indicate that an impairment may exist, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis.
Foreign Currency Translation
The functional currency of HeartCore Japan and HeartCore Capital Advisors is the Japanese Yen (“JPY”). The functional currency of HeartCore USA, HeartCore Financial and Sigmaways is the United States Dollar (“US$”). The functional currency of Sigmaways B.V. is the Euro (“EUR”). The functional currency of Sigmaways Technologies is the Canada Dollar (“CAD”). Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the unaudited consolidated statements of operations.
| F-7 |
The reporting currency of the Company is the US$, and the accompanying unaudited consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of changes in shareholders’ equity.
Revenue Recognition
The Company recognizes revenues under ASC Topic 606, “Revenue from Contracts with customers”.
To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of value-added taxes and applicable local government levies.
The Company currently generates its revenues from the following main sources:
Revenues from On-Premise Software
Licenses for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenues from on-premise licenses are recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence.
Revenues from Maintenance and Support Services
Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers.
| F-8 |
Revenues from Software as a Service (“SaaS”)
The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length.
Revenues from Software Development and Other Miscellaneous Services
The Company provides customers with software development and support services pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognizes revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers.
Revenues from Customized Software Development and Services
The Company’s customized software development and services revenues primarily include revenues from providing software development solutions and other support services to its customers. The contract pricing is at stated billing rates per hour. These contracts are generally short-term in nature and not longer than one year in duration. For services provided under the contract that result in the transfer of control over time, the underlying deliverable in the contract is owned and controlled by the customer and does not create an asset with an alternative use to the Company. The Company recognizes revenue on rate per hour contracts based on the amount billable to the customer, as the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date.
Revenues from Consulting Services
The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents related to the initial public offering and supporting the listing process. The consulting service contracts are generally less than one year in length and normally include both cash and noncash consideration. Cash consideration is paid in installment payments and is recognized in revenue over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. Noncash consideration is in the form of warrants of the customers and is measured at fair value at contract inception. Noncash consideration that is variable for reasons other than only the form of the consideration is included in the transaction price, but is subject to the constraint on variable consideration. The Company assesses the estimated amount of the variable noncash consideration at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved. Only when the significant revenues reversal is concluded probable of not occurring can variable consideration be included in revenues. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the variable noncash consideration is recognized in revenues until the underlying uncertainties have been resolved.
The
timing of revenue recognition may differ from the timing of invoicing to the customers. The Company has determined that its contracts
do not include a significant financing component. The Company records a contract asset, which is included in accounts receivable on the
consolidated balance sheets, when revenue is recognized prior to invoicing. The Company factors certain accounts receivable upon or after
the performance obligation is being met. The Company records deferred revenue on the consolidated balance sheets when revenues are recognized
subsequent to cash collection for an invoice. Deferred revenue is reported net of related uncollected deferred revenue in the consolidated
balance sheets. The amount of revenues recognized during the three months ended March 31, 2023 and 2022 that were included in the opening
deferred revenues balance was approximately $
Disaggregation of Revenues
The Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenues and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the three months ended March 31, 2023 and 2022 is as following:
SCHEDULE OF DISAGGREGATION OF REVENUES
| 2023 | 2022 | |||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues from On-Premise Software | $ | $ | ||||||
| Revenues from Maintenance and Support Services | ||||||||
| Revenues from Software as a Service (“SaaS”) | ||||||||
| Revenues from Software Development and Other Miscellaneous Services | ||||||||
| Revenues from Customized Software Development and Services | ||||||||
| Revenues from Consulting Services | ||||||||
| Total Revenues | $ | $ | ||||||
| F-9 |
The Company’s disaggregation of revenues by product/service is as following:
| 2023 | 2022 | |||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues from Customer Experience Management Platform | $ | $ | ||||||
| Revenues from Process Mining | ||||||||
| Revenues from Robotic Process Automation | ||||||||
| Revenues from Task Mining | ||||||||
| Revenues from Customized Software Development and Services | ||||||||
| Revenues from Consulting Services | ||||||||
| Revenues from Others | ||||||||
| Total Revenues | $ | $ | ||||||
As of March 31, 2023 and 2022, and for the periods then ended, substantially all of the long-lived assets (excluding intangible asset) and the majority of revenues generated were attributed to the Company’s operation in Japan.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company usually does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.
For the three months ended March 31, 2023, customer B and C represent
For the three months ended March 31, 2023, vendor
A, B and D represent
Stock-based Compensation
The Company accounts for stock-based compensation awards in accordance with ASC Topic 718, “Compensation – Stock Compensation”. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the unaudited consolidated statements of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period or vesting period. The Company records forfeitures as they occur.
| F-10 |
Business Combinations
The Company accounts its business combinations using the acquisition method of accounting in accordance with ASC Topic 805. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible asset acquired and non-controlling interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses are expensed as incurred.
Consideration transferred in a business combination is measured at the fair value as of the date of acquisition. Where the consideration in an acquisition includes contingent consideration, and the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and is recorded as a liability. It is subsequently carried at fair value with changes in fair value reflected in earnings.
In a business combination achieved in stages, the Company remeasures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the remeasurement gain or loss, if any, is recognized in the unaudited consolidated statements of operations and comprehensive income (loss).
Fair value is determined based upon the guidance of ASC Topic 820, “Fair Value Measurements and Disclosures,” and generally are determined using Level 2 inputs and Level 3 inputs. The determination of fair value involves the use of significant judgments and estimates. The Company utilizes the assistance of a third-party valuation appraiser to determine the fair value as of the date of acquisition.
Fair Value Measurements
The Company performs fair value measurements in accordance with ASC Topic 820. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or a liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820 establishes three levels of inputs that may be used to measure fair value:
| ● | Level 1: quoted prices in active markets for identical assets or liabilities; | |
| ● | Level 2: inputs other than Level 1 that are observable, either directly or indirectly; or | |
| ● | Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. |
As of March 31, 2023 and December 31, 2022, the carrying values of current assets, except for short-term investment in warrants, and current liabilities approximated their fair values reported in the consolidated balance sheets due to the short-term maturities of these instruments.
The Company received warrants from its customers as noncash consideration from consulting services. The warrants are not registered for public sale and are measured at fair value at contract inception. The Company’s investments in warrants are measured on a recurring basis and are carried on the balance sheet at an estimated fair value at the end of the period. The valuation of investments in warrants was determined using a Black-Scholes model of value based upon the stock price, exercise price, expected volatility, time to maturity, and a risk-free interest rate for the term of the warrants exercise. Such valuations are classified within Level 3 of the fair value hierarchy.
The following table summarizes the Company’s investments in warrants activity for the three months ended March 31, 2023 and 2022:
SCHEDULE OF INVESTMENTS IN WARRANTS
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Fair value of investments in warrants at beginning of the period | $ | $ | ||||||
| Warrants received as noncash consideration | ||||||||
| Changes in fair value of investments in warrants | ||||||||
| Investments in warrants converted to securities | ||||||||
| Fair value of investments in warrants at end of the period | $ | $ | ||||||
| F-11 |
Recent Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 was further amended in November 2020 by ASU No. 2020-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). As a result, ASC Topic 326, “Financial Instruments – Credit Losses” is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2020. For all other entities, it is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As the Company is an “emerging growth company” and elects to apply for the new and revised accounting standards at the effective date for a private company, the Company adopted ASU No. 2016-13 on January 1, 2023 and the adoption did not have a material impact on the Company’s unaudited consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASC Topic 606, “Revenue from Contracts with Customers”. This ASU is expected to improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU No. 2021-08 on January 1, 2023 and the adoption did not have a material impact on the Company’s unaudited consolidated financial statements.
New Accounting Pronouncements Not Yet Effective
The Company has reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a material impact on the Company’s unaudited consolidated financial statements.
NOTE 3 — ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
SCHEDULE OF ACCOUNTS RECEIVABLE NET
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts receivable – non-factored | $ | $ | ||||||
| Accounts receivable – factored with recourse | ||||||||
| Accounts receivable, gross | ||||||||
| Less: allowance for credit losses | ||||||||
| Accounts receivable | $ | $ | ||||||
NOTE 4 — PREPAID EXPENSES
Prepaid expenses consist of the following:
SCHEDULE OF PREPAID EXPENSES
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Prepayments to software vendors | $ | $ | ||||||
| Prepaid marketing and consulting fees | ||||||||
| Prepaid subscription fees | ||||||||
| Prepaid insurance premium | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
| F-12 |
NOTE 5 — RELATED PARTY TRANSACTIONS
As of March 31, 2023 and December 31, 2022, the
Company has a due to related
party balance of $
As of March 31, 2023 and December 31, 2022, the Company has a loan receivable
balance of $
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, net consist of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT NET
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Leasehold improvements | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Vehicle | ||||||||
| Software | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expenses were $
NOTE 7 — INTANGIBLE ASSET, NET
Intangible asset, net is as follows:
SCHEDULE OF INTANGIBLE ASSETS
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Customer relationship | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ||||||
| Intangible asset, net | $ | $ | ||||||
As of March 31, 2023, the future estimated amortization cost for intangible asset is as follows:
SCHEDULE OF AMORTIZATION INTANGIBLE ASSET
| Year Ended December 31, | Estimated | |||
| Amortization | ||||
| Remaining of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
| F-13 |
NOTE 8 — LEASES
The
Company has entered into three 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 $
The components of lease costs are as follows:
SCHEDULE OF LEASE COSTS
| 2023 | 2022 | |||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Finance lease costs | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance lease costs | ||||||||
| Operating lease costs | ||||||||
| Total lease costs | $ | $ | ||||||
| F-14 |
The following table presents supplemental information related to the Company’s leases:
SCHEDULE OF SUPPLEMENTAL INFORMATION RELATED TO THE COMPANY’S LEASES
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| 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, 2023, the future maturity of lease liabilities is as follows:
SCHEDULE OF FINANCE LEASE AND OPERATING LEASE FUTURE MATURITY OF LEASE LIABILITIES
| Year Ended December 31, | Finance Lease | Operating Lease | ||||||
| Remaining of 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 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 $
| F-15 |
NOTE 9 — FACTORING LIABILITY
Sigmaways,
the newly acquired subsidiary of the Company, entered into a Factoring and Security Agreement (the
“Factoring Agreement”) with The Southern Bank Company, an unrelated factor (the “Factor”), in 2017, for
the purpose of factoring certain accounts receivable. Under the terms of the Factoring Agreement, the Company may offer for sale, and
the Factor may purchase in its sole discretion, certain accounts receivable of the Company (the “Purchased Receivable”).
The Factoring Agreement provided for a maximum of $
Selected
accounts receivable is submitted to the Factor, and the Company receives
The Factoring Agreement specifies that eligible accounts receivable is factored with recourse. Under the terms of the recourse provision, the Company is required to reimburse the Factor, upon demand, for Purchased Receivable that is not paid on time by the customers. The performance of all obligations and payments to the Factor is personally guaranteed by Prakash Sadasivam, CEO of Sigmaways and Chief Strategy Officer (“CSO”) of the Company, and secured by all Sigmaways’ now owned and hereafter assets and any sums maintained by the Factor that are identified as payable to the Company.
The Factoring Agreement has an initial term of twelve months and automatically renews for successive twelve-month renewal periods unless terminated pursuant to the terms of the Factoring Agreement. The Company may terminate the Factoring Agreement with sixty days’ written notice to the Factor and is subject to certain early termination fee.
The Factoring Agreement contained covenants that are customary for accounts receivable-based factoring agreements and also contained provisions relating to events of default that are customary for agreements of this type.
As
of March 31, 2023, there was $
NOTE 10 — INSURANCE PREMIUM FINANCING
In
January 2023, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $
In
February 2022, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $
As of March 31, 2023 and December 31, 2022, the balance of the insurance
premium financing was $
| F-16 |
NOTE 11 — LONG-TERM DEBTS
The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions, which consist of the following:
SCHEDULE OF LONG-TERM DEBTS
| Name of Financial Institutions | Original Amount Borrowed | Loan Duration | Annual Interest Rate | Balance as of March 31, 2023 | Balance as of December 31, 2022 | |||||||||||||
| Bond payable | ||||||||||||||||||
| Corporate bond issued through Resona Bank, Limited | JPY | (a)(c) | % | $ | $ | |||||||||||||
| Loans with banks and other financial institutions | ||||||||||||||||||
| Resona Bank, Limited | JPY | (a)(b) | % | |||||||||||||||
| Resona Bank, Limited | JPY | (a)(b) | % | |||||||||||||||
| Resona Bank, Limited | JPY | (a)(b) | % | |||||||||||||||
| Resona Bank, Limited | JPY | (a)(b) | % | |||||||||||||||
| Sumitomo Mitsui Banking Corporation | JPY | (a) | % | |||||||||||||||
| Sumitomo Mitsui Banking Corporation | JPY | (a)(b) | % | |||||||||||||||
| The Shoko Chukin Bank, Ltd. | JPY | % | ||||||||||||||||
| The Shoko Chukin Bank, Ltd. | JPY | % | ||||||||||||||||
| Japan Finance Corporation | JPY | % | ||||||||||||||||
| Higashi-Nippon Bank | JPY | (a) | % | |||||||||||||||
| First Home Bank | $ | (d) | Wall Street Journal U.S. Prime Rate + | % | ||||||||||||||
| U.S. Small Business Administration | $ | (d) | % | |||||||||||||||
| Aggregate outstanding principal balances | ||||||||||||||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||||||||||||
| Less: current portion | ( | ) | ( | ) | ||||||||||||||
| Non-current portion | $ | $ | ||||||||||||||||
| (a) | |
| (b) | |
| (c) | |
| (d) |
Interest
expense for long-term debts was $
As of March 31, 2023, future minimum loan payments are as follows:
SCHEDULE OF FUTURE MINIMUM LOAN PAYMENTS
| Year Ended December 31, | Loan | |||
| Payment | ||||
| Remaining of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
| F-17 |
NOTE 12 — INCOME TAXES
United States
HeartCore USA, Sigmaways and HeartCore Financial, incorporated in the United
States, are subject to federal income tax at
Netherlands
Canada
Sigmaways
Technologies is a company incorporated in British Columbia in Canada in August 2020. It is subject to income tax on income arising in,
or derived from, the tax jurisdiction in British Columbia it operates. The basic federal rate of Part I tax is
Japan
The Company conducts its major businesses in Japan and is subject to tax
in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the local
tax authority. Income taxes in Japan applicable to the Company are imposed by the national, prefectural, and municipal governments, and
in the aggregate resulted in an effective statutory tax rate of approximately
For the three months ended March 31, 2023 and 2022, the Company’s income tax expense (benefit) are as follows:
SCHEDULE OF INCOME TAX EXPENSES
| 2023 | 2022 | |||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Current | $ | $ | ( | ) | ||||
| Deferred | ( | ) | ( | ) | ||||
| Income tax expense (benefit) | $ | $ | ( | ) | ||||
The
effective tax rate was
| F-18 |
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 (approximately $) each. All options are exercisable upon issuance with a repurchase provision before the completion of the Company’s initial public offering, which serves as a vesting condition. All employees that were granted these stock options had early exercised their stock options in 2016 prior to the vesting of the related stock options. As of November 3, 2021, 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.
The
consideration received for the remaining early exercised options was recorded by the Company as a share repurchase liability included
in other current liabilities in the consolidated balance sheet with JPY
SCHEDULE OF UNVESTED STOCK OPTION
Number of Stock Options | ||||
| Issued and unvested as of January 1, 2022 | ||||
| Vested and exercised | ||||
| Issued and unvested as of March 31, 2022 | ||||
On August 6, 2021, the Board of directors and stockholders of the Company approved a 2021 Equity Incentive Plan (the “2021 Plan”), under which shares of common shares are authorized for issuance. On December 25, 2021, the Company awarded options to purchase shares of common shares at an exercise price of $ 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 % of the applicable shares of common shares, with the expiration date on .
On August 2, 2022, the Company awarded options to purchase shares of common shares at an exercise price of $ per share to an employee of the Company. The options vest on each annual anniversary of the date of issuance, in an amount equal to % of the applicable shares of common shares, with the expiration date on .
On August 9, 2022, the Company awarded options to purchase shares of common shares at an exercise price of $per share to three prior employees of the Company. The options are fully vested and exercisable on the grant date, with the expiration date on .
On February 3, 2023, the Company awarded options to purchase shares of common shares at an exercise price of $ per share to an employee of the Company. The options vest % on the grant date and February 1, 2024, respectively, with the expiration date on February 3, 2033.
| F-19 |
SCHEDULE OF STOCK OPTION ACTIVITY
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Term (Years) | Intrinsic Value | |||||||||||||
| As of January 1, 2022 | $ | $ | ||||||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited | - | - | - | - | ||||||||||||
| As of March 31, 2022 | $ | $ | ||||||||||||||
| As of January 1, 2023 | $ | $ | ||||||||||||||
| Granted | 100,000 | 1.17 | 9.85 | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited | ( | ) | 2.50 | - | - | |||||||||||
| As of March 31, 2023 | $ | $ | - | |||||||||||||
| Vested and exercisable as of March 31, 2023 | $ | $ | ||||||||||||||
The Company calculated the fair value of options granted in the three months ended March 31, 2023 using the Black-Scholes model. 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, 2023 and 2022, the Company recognized stock-based compensation related to options of $ and $, respectively. The outstanding unamortized stock-based compensation related to options was $ (which will be recognized through August 2026) as of March 31, 2023.
Restricted Stock Units (“RSUs”)
On February 9, 2022, the Company entered into executive employment agreements with five executives and granted RSUs pursuant to the 2021 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 $.
On March 22, 2023, the Company entered into agreements with employees and service providers of Sigmaways and granted RSUs pursuant to the 2021 Plan. The RSUs were fully vested upon issuance. The fair value of the RSUs at grant date was $.
The following table summarizes the RSUs activity for the three months ended March 31, 2023 and 2022:
SCHEDULE OF RESTRICTED STOCK UNITS
| Number of RSUs | Weighted Average Grant Date Fair Value per Share | |||||||
| Unvested as of January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Forfeited | ||||||||
| Unvested as of March 31, 2022 | $ | |||||||
| Unvested as of January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Forfeited | ||||||||
| Unvested as of March 31, 2023 | $ | |||||||
For the three months ended March 31, 2023 and 2022, the Company recognized stock-based compensation related to RSUs of $ and $, respectively. The outstanding unamortized stock-based compensation related to RSUs was $ (which will be recognized through February 2026) as of March 31, 2023.
| F-20 |
NOTE 14 – SHAREHOLDERS’ EQUITY
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 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 $
On February 1, 2023,
shares of common shares were issued for the acquisition of
As of March 31, 2023 and December 31, 2022, there were and shares of common shares issued and outstanding, respectively.
preferred shares were issued and outstanding as of March 31, 2023 and December 31, 2022.
Basic net income (loss) per share is calculated on the basis of weighted average outstanding common shares. Diluted net income (loss) per share is computed on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, RSUs and other dilutive securities. Common shares equivalents are determined by applying the treasury stock method to the assumed conversion of share repurchase liability to common shares related to the early exercised stock options and unvested RSUs, and are not included in the calculation of diluted income (loss) per share if their effect would be anti-dilutive.
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
| 2023 | 2022 | |||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income (loss) per share - basic and diluted: | ||||||||
| Numerator: | ||||||||
| Allocation of net income (loss) attributable to HeartCore Enterprises, Inc. common shareholders used in calculating net income (loss) per common share | $ | $ | ( | ) | ||||
| Net income (loss) attributable to common shareholders | ( | ) | ||||||
| Denominator: | ||||||||
| Weighted average number of common shares outstanding used in calculating net income (loss) per share | ||||||||
| Denominator used for net income (loss) per share | ||||||||
| Net income (loss) per share - basic and diluted | $ | $ | ( | ) | ||||
For the three months ended March 31, 2023 and 2022, the weighted average common shares outstanding are the same for basic and diluted net income (loss) per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.
| F-21 |
NOTE 16 – BUSINESS COMBINATION
On
September 6, 2022, HeartCore USA entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire
The total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities and non-controlling interest based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Amounts recorded in the business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
The purchase price was allocated on the acquisition date as follows:
SCHEDULE OF BUSINESS PURCHASE PRICE ALLOCATION
| Amount | ||||
| Current assets | $ | |||
| Acquired intangible asset | 5,100,000 | |||
| Non-current assets | 47,979 | |||
| Current liabilities | (1,146,900 | ) | ||
| Deferred tax liabilities | ( | ) | ||
| Non-current liabilities | ( | ) | ||
| Goodwill | ||||
| Non-controlling interest | ( | ) | ||
| Total purchase consideration | $ | |||
The results of operations, financial position and
cash flows of Sigmaways and its subsidiaries have been included in the Company’s unaudited consolidated financial statements since
the date of acquisition. Sigmaways and its subsidiaries contributed revenues and net loss of $
Pro forma results of operations for the business combination have not been presented because they are not material to the unaudited consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2023 and 2022.
The Company’s policy is to perform its annual impairment testing on goodwill for its reporting unit on December 31 of each fiscal year or more frequently if events or changes in circumstances indicate that an impairment may exist. The Company did not recognize any impairment loss on goodwill during the three months ended March 31, 2023.
NOTE 17 - SUBSEQUENT EVENTS
On May 2, 2023, the Company entered into a
promissory note with a third party in the amount of $
| F-22 |
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, 2022, 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 Quarterly Report on Form 10-Q 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.
On September 6, 2022, HeartCore Enterprises, Inc. (the “Company”) entered into a share exchange and purchase agreement (“Sigmaways Agreement”) to acquire 51% of the outstanding shares of Sigmaways, a company incorporated under the laws of the State of California and is engaged in the business of developing and sales of software in the United States. The acquisition closed on February 1, 2023.
During 2022, we started the GO IPO consulting business, which supports Japanese companies seeking to list on Nasdaq and NYSE in the United States. As of May 22, 2023, we have entered into consulting agreements with ten companies to assist them in their IPO process, whereby we are entitled to receive from each company a consulting fee ranging from $350,000 to $900,000 and warrants or Japanese acquisition rights to purchase 1% to 4% of the fully-diluted share capital of such companies that is exercisable on certain dates at an exercise price of $0.01 per share. The revenue from the GO IPO business helped to offset the decline in sales in the CX and DX divisions. In the first quarter of 2023, we formed HeartCore Financial, Inc. and HeartCore Capital Advisors, Inc. as a part of our Go IPO consulting business.
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We have made significant investments in our sales and marketing efforts globally. As of March 31, 2023, our sales and marketing organization was comprised of 14 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, 2023, our combined business units (customer experience management business unit and digital transformation business unit) had 916 total customers in Japan.
We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our majority-owned subsidiary, HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co.”), which was established in Japan by Mr. Sumitaka Yamamoto, our Chairman of the Board, CEO, President and major shareholder, in 2009 and acquired by us in July 2021. HeartCore Co. started out 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. 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
BloomZ Consulting Agreement
On January 11, 2023 (the “BloomZ Effective Date”), the Company entered into a Consulting and Services Agreement (the “BloomZ Consulting Agreement”) by and between the Company and kk.BloomZ, a Japanese corporation (“BloomZ”). Pursuant to the terms of the BloomZ Consulting Agreement, the Company agreed to provide BloomZ certain services, including the following (collectively, the “BloomZ Services”):
(i) Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm for BloomZ;
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(ii) Assisting in the preparation of documentation for internal controls required for an initial public offering of de-SPAC or other Fundamental Transaction (as defined in the BloomZ Consulting Agreement) by BloomZ;
(iii) Providing support services to remove problematic accounting accounts upon listing;
(iv) Translation of requested documents into English;
(v) Attend and, if requested by BloomZ, lead meetings with BloomZ’s management and employees;
(vi) Provide BloomZ with support services related to BloomZ’s NASDAQ listing;
(vii) Conversion of accounting data from Japanese standards to U.S. GAAP;
(viii) Services to remove problematic accounting accounts upon listing;
(ix) Support for the BloomZ’s negotiations with the audit firm;
(x) Assist in the preparation of S-1 or F-1 filings;
(xi) Creation of English web page; and
(xii) Preparing an investor presentation/deck and executive summary of BloomZ’s operations.
In providing the BloomZ Services, the Company will not render legal advice or perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the BloomZ Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of BloomZ’s securities; participation in discussions between BloomZ and potential investors; assisting in structuring any transactions involving the sale of BloomZ’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in BloomZ.
Pursuant to the terms of the BloomZ Consulting Agreement, BloomZ agreed to compensate the Company as follows in return for the provision of the BloomZ Services during the eight-month term:
(a) $500,000, to be paid as follows: (i) $200,000 on the BloomZ Effective Date; (ii) $150,000 on the three-month anniversary of the BloomZ Effective Date; and (iii) $150,000 on the six-month anniversary of the BloomZ Effective Date; and
(b) Issuance by BloomZ to the Company of a warrant (the “BloomZ Warrant”), deemed fully earned and vested as of the BloomZ Effective Date, to acquire a number of shares of capital stock of BloomZ, to initially be equal to 4% of the fully diluted share capital of BloomZ as of the BloomZ Effective Date, subject to adjustment as set forth in the BloomZ Consulting Agreement.
For any services performed by the Company beyond the BloomZ Term (as hereinafter defined), BloomZ will compensate the Company for BloomZ Services at the rate of $150 per hour, based on the hours spent by personnel of the Company.
The term of the BloomZ Consulting Agreement will continue until eight months after the Effective Date, unless sooner terminated in accordance with the terms of the BloomZ Consulting Agreement (the “BloomZ Term”). The BloomZ Consulting Agreement may be terminated at any time by either party upon notice to the other party.
BloomZ Warrant
As provided in the BloomZ Consulting Agreement, on the BloomZ Effective Date, BloomZ issued the BloomZ Warrant to the Company. Pursuant to the terms of the BloomZ Warrant, the Company may, at any time on or after the date (the “BloomZ IPO Date”) that BloomZ completes its first initial public offering of stock in the U.S. resulting in any class of BloomZ’s stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American, or BloomZ consummates a merger or other transaction with a special purpose acquisition company (“SPAC”) wherein BloomZ becomes a subsidiary of the SPAC, or BloomZ undertakes any other Fundamental Transaction (the “IPO”) and on or prior to the close of business on the tenth anniversary of the BloomZ IPO Date, exercise the BloomZ Warrant to purchase 4% of the fully diluted share capital of BloomZ as of the BloomZ IPO Date for an exercise price per share of $0.01, subject to adjustment as provided in the BloomZ Warrant. The number of shares for which the BloomZ Warrant will be exercisable will be automatically adjusted on the IPO Date to be 4% of the fully diluted number and class of shares of capital stock of BloomZ as of the BloomZ IPO Date that are listed for trading. The BloomZ Warrant contains a 9.99% equity blocker.
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Executive Employment Agreements
As previously disclosed, the Company entered into an Executive Employment Agreement (each, an “Employment Agreement” and collectively, the “Employment Agreements”), dated as of February 9, 2022, by and between the Company and each of Qizhi Gao, the Company’s Chief Financial Officer; Kimio Hosaka, the Company’s Chief Operating Officer and a member of the Company’s Board of Directors; Keisuke Kuno, the Company’s CX Division Vice President; and Hidekazu Miyata, the Company’s Chief Technical Officer. On January 10, 2023, the Company entered into Amendment No. 1 to each of the Employment Agreements (each, an “Amendment” and collectively, the “Amendments”). Pursuant to the terms of each of the Amendments, the executives’ annual base salaries were increased as follows, effective January 1, 2023:
| Executive | Prior Base Salary | New Base Salary | ||||||
| Qizhi Gao | $ | 54,012 | $ | 120,222 | ||||
| Kimio Hosaka | $ | 95,459 | $ | 164,770 | ||||
| Keisuke Kuno | $ | 109,100 | $ | 152,308 | ||||
| Hidekazu Miyata | $ | 75,600 | $ | 112,616 | ||||
Except as set forth in each Amendment, each of the Employment Agreements remained in full force and effect.
Amendment No. 2 to Sigmaways Agreement
As previously disclosed, on September 6, 2022, the Company entered into that certain Share Exchange and Purchase Agreement (the “Sigmaways Agreement”), dated as of September 6, 2022, as thereafter amended, by and among the Company, Sigmaways, Inc. (“Sigmaways”) and Prakash Sadasivam. On February 1, 2023, the Company, Sigmaways and Mr. Sadasivam entered into Amendment No. 2 (“Amendment No. 2”) to the Sigmaways Agreement. Pursuant to the terms of Amendment No. 2, among other things, the Company agreed, in exchange for the Sigmaways shares, to (i) issue to Mr. Sadasivam 2,000,000 shares of the Company’s common stock, (ii) pay to Mr. Sadasivam $1,000,000 (the “Cash Purchase Price”); and (iii) issue to Mr. Sadasivam a common stock purchase warrant to acquire 1,900,000 shares of the Company’s common stock (the “Sigmaways Warrant”). In addition, the Company agreed that following closing, it would deposit $2,000,000 into a dedicated account, which amount will be used to expand Sigmaways’ business.
The Sigmaways Warrant issued pursuant to the Sigmaways Agreement was exercisable until February 12, 2025, at an exercise price of $1.17 per share, subject to adjustment as set forth in the Sigmaways Warrant. The Sigmaways Warrant contained a 9.99% equity blocker.
Amended and Restated Warrant
On February 6, 2023, subsequent to the closing of the Acquisition, the parties to the Sigmaways Agreement determined that there was an error in the Sigmaways Agreement and in the Sigmaways Warrant issued pursuant to the terms of the Sigmaways Agreement. As executed, among other things, the Sigmaways Agreement incorrectly provided that the Company would issue to Mr. Sadasivam a warrant to acquire 1,900,000 shares of the Company’s common stock. The parties had agreed, however, that the Company would issue to Mr. Sadasivam a warrant to acquire 737,500 shares of the Company’s common stock.
Accordingly, in order to correct the error, on February 6, 2023, the Company issued to Mr. Sadasivam an amended and restated warrant (the “Amended and Restated Warrant”) that reflected the correct number of shares (737,500) underlying the warrant, and Mr. Sadasivam agreed and accepted the Amended and Restated Warrant. The Amended and Restated Warrant is exercisable until February 12, 2025, at an exercise price of $1.17 per share, subject to adjustment as set forth in the Amended and Restated Warrant. The Amended and Restated Warrant contains a 9.99% equity blocker.
Sigmaways Addendum
On February 8, 2023, the parties to the Sigmaways Agreement entered into an addendum to the Sigmaways Agreement pursuant to which the parties acknowledged and agreed that (i) the references in the Sigmaways Agreement to a warrant to acquire 1,900,000 shares of common stock was in error, and (ii) the warrant was intended to be for 737,500 shares of common stock. Except as set forth in the Addendum, the terms of the Sigmaways Agreement remain in full force and effect.
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Closing of Sigmaways Acquisition
On February 1, 2023, the acquisition of 51% of Sigmaways’ outstanding shares by the Company (the “Acquisition”) closed. In exchange for the 229,500 shares of Sigmaways stock acquired by the Company from Mr. Sadasivam, the Company (i) issued to Mr. Sadasivam 2,500,000 shares of the Company’s common stock; (ii) paid to Mr. Sadasivam cash consideration of $1,000,000. At the closing, two persons designated by the Company were named to Sigmaways’ Board of Directors, and the sole other member of the Sigmaways Board of Directors is Mr. Sadasivam.
Following the closing, there were 20,149,886 shares of the Company’s common stock outstanding.
On February 1, 2023, Mr. Sadasivam was appointed to serve as the Company’s Chief Strategy Officer. In addition, on February 1, 2023, the Board expanded the size of the Board from seven persons to eight persons, and named Mr. Sadasivam to serve as a member of the Board, to fill the vacancy created by the increase in the size of the Board.
On February 1, 2023, the Company and Mr. Sadasivam entered into an Employment Agreement (the “Sadasivam Employment Agreement”). The Sadasivam Employment Agreement provides that he will serve as the Company’s Chief Strategy Officer, and that he will be paid an annual salary of $96,000. In addition, on each annual anniversary of the effective date of the Sadasivam Employment Agreement during the term, the Company will issue to Mr. Sadasivam a number of shares of common stock equal to (i) 30% of the base salary as of such date, divided by (ii) the volume weighted average closing of the Company’s common stock for the five trading days immediately preceding such date. Mr. Sadasivam is also eligible to receive discretionary bonuses as determined by the Board.
The Sadasivam Employment Agreement has an initial term of one year, provided that the term of the agreement will automatically be extended for one or more additional terms of one year each unless either the Company or Mr. Sadasivam provides notice to the other of their desire to not so renew the initial term or renewal term (as applicable) at least 30 days prior to the expiration of then-current initial term or renewal term (as applicable). The Sadasivam Employment Agreement provides that the employment with the Company shall be “at will,” meaning that either Mr. Sadasivam or the Company may terminate employment at any time and for any reason, subject to the other provisions of the Sadasivam Employment Agreement.
The Sadasivam Employment Agreement may be terminated by the Company, either with or without “Cause” (as defined in the Sadasivam Employment Agreement), or by Mr. Sadasivam, either with or without “Good Reason” (as defined in the Sadasivam Employment Agreement).
In the event that the Company terminates the term of the Sadasivam Employment Agreement or employment with Cause, or if Mr. Sadasivam terminates his Sadasivam Employment Agreement without Good Reason, then, subject to any other relevant agreements:
○ the Company will pay to Mr. Sadasivam any unpaid base salary and benefits then owed or accrued, and any unreimbursed expenses;
○ any unvested portion of any equity granted to Mr. Sadasivam under the Sadasivam Employment Agreement or any other agreements with the Company will immediately be forfeited; and
○ all of the parties’ rights and obligations under the Sadasivam Employment Agreement will cease, other than those rights or obligations which arose prior to the termination date or in connection with such termination, and subject to the survival provisions of the Sadasivam Employment Agreement.
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In the event that the Company terminates the term of the Sadasivam Employment Agreement or employment without Cause, or if Mr. Sadasivam terminates the Sadasivam Employment Agreement with Good Reason, then, subject to any other relevant agreements:
○ the Company will pay to Mr. Sadasivam any base salary, bonuses, and benefits then owed or accrued, and any unreimbursed expenses;
○ the Company will pay to Mr. Sadasivam, in one lump sum, an amount equal to the base salary that would have been paid to Mr. Sadasivam for the remainder of the initial term of the Sadasivam Employment Agreement (if the termination occurs during the initial term of the Sadasivam Employment Agreement) or renewal term of the Sadasivam Employment Agreement (if the termination occurs during a renewal term of the Sadasivam Employment Agreement);
○ any unvested portion of any equity granted to Mr. Sadasivam under the Sadasivam Employment Agreement or any other agreements with the Company will, to the extent not already vested, be deemed automatically vested; and
○ all of the parties’ rights and obligations under the Sadasivam Employment Agreement will cease, other than those rights or obligations which arose prior to the termination date or in connection with such termination, and subject to the survival provisions of the Sadasivam Employment Agreement.
In the event of Mr. Sadasivam’s death or total disability during the term of the Sadasivam Employment Agreement, the term of the applicable agreement and the applicable executive’s employment shall terminate on the date of death or total disability. In the event of such termination, the Company’s sole obligations hereunder to Mr. Sadasivam shall be for unpaid base salary, accrued but unpaid bonus and benefits (then owed or accrued and owed in the future), a pro-rata bonus for the year of termination based on the target bonus for such year and the portion of such year in which Mr. Sadasivam was employed, and reimbursement of expenses pursuant to the terms hereon through the effective date of termination, and any unvested portion of any equity grant will immediately be forfeited as of the termination date.
In the event that the term of the Sadasivam Employment Agreement is not renewed by either party, any unvested portion of any equity granted will immediately be forfeited as of the expiration of the term of the Sadasivam Employment Agreement without any further action of the parties.
The Sadasivam Employment Agreement contains customary representations and warranties.
Libera Gaming Operations, Inc. Consulting Agreement
On March 13, 2023 (the “Libera Effective Date”), the Company entered into a Consulting and Services Agreement (the “Libera Consulting Agreement”) by and between the Company and Libera Gaming Operations, Inc., a Japanese corporation (“Libera”). Pursuant to the terms of the Libera Consulting Agreement, the Company agreed to provide Libera certain services, including the following (collectively, the “Libera Services”):
| (i) | Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm for Libera; | |
| (ii) | Assisting in the preparation of documentation for internal controls required for an initial public offering of de-SPAC or other Libera Fundamental Transaction (as defined in the Libera Consulting Agreement) by Libera; | |
| (iii) | Providing support services to remove problematic accounting accounts upon listing; | |
| (iv) | Translation of requested documents into English; | |
| (v) | Attend and, if requested by Libera, lead meetings with Libera’s management and employees; | |
| (vi) | Provide Libera with support services related to Libera’s NASDAQ listing; | |
| (vii) | Conversion of accounting data from Japanese standards to U.S. GAAP; | |
| (viii) | Services to remove problematic accounting accounts upon listing; | |
| (ix) | Support for Libera’s negotiations with the audit firm; | |
| (x) | Assist in the preparation of S-1 or F-1 filings; | |
| (xi) | Creation of English web page; and | |
| (xii) | Preparing an investor presentation/deck and executive summary of Libera’s operations. |
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In providing the Libera Services, the Company will not render legal advice or perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the Libera Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of Libera’s securities; participation in discussions between Libera and potential investors; assisting in structuring any transactions involving the sale of Libera’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in Libera.
Pursuant to the terms of the Libera Consulting Agreement, Libera agreed to compensate the Company as follows in return for the provision of the Libera Services during the eight-month term:
(a) $600,000, to be paid as follows: (i) $300,000 on the Libera Effective Date; (ii) $150,000 on the three-month anniversary of the Libera Effective Date; and (iii) $150,000 on the date that Libera first files a Form S-1, Form F-1, Form S-4, Form F-4 or any similar or replacement form with the SEC with respect to any transaction which is reasonably expected to result in the Libera Trigger Date (as defined in the Libera Warrant); and
(b) Issuance by Libera to the Company of a warrant (the “Libera Warrant”), deemed fully earned and vested as of the Libera Effective Date, to acquire a number of shares of capital stock of Libera, to initially be equal to 3% of the fully diluted share capital of Libera as of the Libera Effective Date, subject to adjustment as set forth in the Libera Consulting Agreement and the Libera Warrant.
For any services performed by the Company beyond the Libera Term (as hereinafter defined), Libera will compensate the Company for Libera Services at the rate of $150 per hour, based on the hours spent by personnel of the Company.
The term of the Libera Consulting Agreement will continue until eight months after the Libera Effective Date, unless sooner terminated in accordance with the terms of the Libera Consulting Agreement (the “Libera Term”). The Libera Consulting Agreement may be terminated at any time by either party upon notice to the other party.
Libera Warrant
As provided in the Libera Consulting Agreement, on the Libera Effective Date, Libera issued the Libera Warrant to the Company. Pursuant to the terms of the Libera Warrant, the Company may, at any time (i) on or after the earlier of the date that either (a) Libera completes its first initial public offering of stock in the U.S. resulting in any class of Libera’s stock being listed for trading on any tier of Nasdaq, NYSE or the NYSE American; (b) Libera consummates a merger or other transaction with a SPAC wherein Libera becomes a subsidiary of the SPAC; or (c) Libera undertakes any other Libera Fundamental Transaction (the “Libera Trigger Date”); and (ii) on or prior to the close of business on the tenth anniversary of the Libera Trigger Date, exercise the Libera Warrant to purchase 2,970 shares of Libera’s common stock, which represents 3% of Libera’s issued and outstanding common stock as of the Libera Trigger Date, for an exercise price per share of $0.01, subject to adjustment as provided in the Libera Warrant. The number of shares for which the Libera Warrant will be exercisable will be automatically adjusted on the Libera Trigger Date to be 3% of the fully diluted number and class of shares of capital stock of Libera as of the Libera Trigger Date, following completion of the transactions which caused the Libera Trigger Date to be achieved. The Libera Warrant contains a 9.99% equity blocker.
ICheck Co., Ltd. Consulting Agreement
On March 13, 2023 (the “ICheck Effective Date”), the Company entered into a Consulting and Services Agreement (the “ICheck Consulting Agreement”) by and between the Company and ICheck Co., Ltd., a Japanese corporation (“ICheck”). Pursuant to the terms of the ICheck Consulting Agreement, the Company agreed to provide ICheck certain services, including the following (collectively, the “ICheck Services”):
| (i) | Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm for ICheck; | |
| (ii) | Assisting in the preparation of documentation for internal controls required for an initial public offering of de-SPAC or other ICheck Fundamental Transaction (as defined in the ICheck Consulting Agreement) by ICheck; | |
| (iii) | Providing support services to remove problematic accounting accounts upon listing; | |
| (iv) | Translation of requested documents into English; | |
| (v) | Attend and, if requested by ICheck, lead meetings with ICheck’s management and employees; | |
| (vi) | Provide ICheck with support services related to ICheck’s NASDAQ listing; | |
| (vii) | Conversion of accounting data from Japanese standards to U.S. GAAP; | |
| (viii) | Services to remove problematic accounting accounts upon listing; | |
| (ix) | Support for ICheck’s negotiations with the audit firm; | |
| (x) | Assist in the preparation of S-1 or F-1 filings; | |
| (xi) | Creation of English web page; and | |
| (xii) | Preparing an investor presentation/deck and executive summary of ICheck’s operations. |
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In providing the ICheck Services, the Company will not render legal advice or perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the ICheck Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of ICheck’s securities; participation in discussions between ICheck and potential investors; assisting in structuring any transactions involving the sale of ICheck’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in ICheck.
Pursuant to the terms of the ICheck Consulting Agreement, ICheck agreed to compensate the Company as follows in return for the provision of the ICheck Services during the nine-month term:
(c) $600,000, to be paid as follows: (i) $300,000 on the ICheck Effective Date; (ii) $150,000 on the three-month anniversary of the ICheck Effective Date; and (iii) $150,000 on the date that ICheck first files a Form S-1, Form F-1, Form S-4, Form F-4 or any similar or replacement form with the SEC with respect to any transaction which is reasonably expected to result in the ICheck Trigger Date (as defined in the ICheck Warrant); and
(d) Issuance by ICheck to the Company of a warrant (the “ICheck Warrant”), deemed fully earned and vested as of the ICheck Effective Date, to acquire a number of shares of capital stock of ICheck, to initially be equal to 3% of the fully diluted share capital of ICheck as of the ICheck Effective Date, subject to adjustment as set forth in the ICheck Consulting Agreement and the ICheck Warrant.
For any services performed by the Company beyond the ICheck Term (as hereinafter defined), ICheck will compensate the Company for ICheck Services at the rate of $150 per hour, based on the hours spent by personnel of the Company.
The term of the ICheck Consulting Agreement will continue until nine months after the ICheck Effective Date, unless sooner terminated in accordance with the terms of the ICheck Consulting Agreement (the “ICheck Term”). The ICheck Consulting Agreement may be terminated at any time by either party upon notice to the other party.
ICheck Warrant
As provided in the ICheck Consulting Agreement, on the ICheck Effective Date, ICheck issued the ICheck Warrant to the Company. Pursuant to the terms of the ICheck Warrant, the Company may, at any time (i) on or after the earlier of the date that either (a) ICheck completes its first initial public offering of stock in the U.S. resulting in any class of ICheck’s stock being listed for trading on any tier of Nasdaq, NYSE or the NYSE American; (b) ICheck consummates a merger or other transaction with a SPAC wherein ICheck becomes a subsidiary of the SPAC; or (c) ICheck undertakes any other ICheck Fundamental Transaction (the “ICheck Trigger Date”); and (ii) on or prior to the close of business on the tenth anniversary of the ICheck Trigger Date, exercise the ICheck Warrant to purchase 39,446 shares of ICheck’s common stock, which represents 3% of ICheck’s issued and outstanding common stock as of the ICheck Trigger Date, for an exercise price per share of $0.01, subject to adjustment as provided in the ICheck Warrant. The number of shares for which the ICheck Warrant will be exercisable will be automatically adjusted on the ICheck Trigger Date to be 3% of the fully diluted number and class of shares of capital stock of ICheck as of the ICheck Trigger Date, following completion of the transactions which caused the ICheck Trigger Date to be achieved. The ICheck Warrant contains a 9.99% equity blocker.
Warrant Exchange and Termination Agreement
On March 22, 2023, the Company entered into a Warrant Exchange and Termination Agreement pursuant to which Mr. Sadasivam agreed to transfer the Amended and Restated Warrant to the Company in exchange for the issuance by the Company to Mr. Sadasivam of 500,000 shares of the Company’s common stock. On March 22, 2023, the Company issued 500,000 shares of the Company’s common stock to Mr. Sadasivam. As a result, the Amended and Restated Warrant is terminated, null and void, and of no further force or effect.
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rYojbaba Inc. Consulting Agreement
On April 4, 2023 (the “rYojbaba Effective Date”), the Company entered into a Consulting and Services Agreement (the “rYojbaba Consulting Agreement”) by and between the Company and rYojbaba Inc., a Japanese corporation (“rYojbaba”). Pursuant to the terms of the rYojbaba Consulting Agreement, the Company agreed to provide rYojbaba certain services, including the following (collectively, the “rYojbaba Services”):
| (i) | Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm for rYojbaba; | |
| (ii) | Assisting in the preparation of documentation for internal controls required for an initial public offering of de-SPAC or other rYojbaba Fundamental Transaction (as defined in the rYojbaba Consulting Agreement) by rYojbaba; | |
| (iii) | Providing support services to remove problematic accounting accounts upon listing; | |
| (iv) | Translation of requested documents into English; | |
| (v) | Attend and, if requested by rYojbaba, lead meetings with rYojbaba’s management and employees; | |
| (vi) | Provide rYojbaba with support services related to rYojbaba’s NASDAQ listing; | |
| (vii) | Conversion of accounting data from Japanese standards to U.S. GAAP; | |
| (viii) | Support for rYojbaba’s negotiations with the audit firm; | |
| (ix) | Assist in the preparation of S-1 or F-1 filings; | |
| (x) | Creation of English web page; and | |
| (xi) | Preparing an investor presentation/deck and executive summary of rYojbaba’s operations. |
In providing the rYojbaba Services, the Company will not render legal advice or perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the rYojbaba Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of rYojbaba’s securities; participation in discussions between rYojbaba and potential investors; assisting in structuring any transactions involving the sale of rYojbaba’s securities; pre-screening of potential investors; due diligence activities; nor providing advice relating to valuation of or financial advisability of any investments in rYojbaba.
Pursuant to the terms of the rYojbaba Consulting Agreement, rYojbaba agreed to compensate the Company as follows in return for the provision of the rYojbaba Services during the eight-month term:
(a) $500,000, to be paid as follows: (i) $200,000 on the rYojbaba Effective Date; (ii) $150,000 on the three-month anniversary of the rYojbaba Effective Date; and (iii) $150,000 on the date that rYojbaba first files a Form S-1, Form F-1, Form S-4, Form F-4 or any similar or replacement form with the SEC with respect to any transaction which is reasonably expected to result in the rYojbaba Trigger Date (as defined in the rYojbaba Warrant); and
(b) Issuance by rYojbaba to the Company of a warrant (the “rYojbaba Warrant”), deemed fully earned and vested as of the rYojbaba Effective Date, to acquire a number of shares of capital stock of rYojbaba, to initially be equal to 3% of the fully diluted share capital of rYojbaba as of the rYojbaba Effective Date, subject to adjustment as set forth in the rYojbaba Consulting Agreement and the rYojbaba Warrant.
For any services performed by the Company beyond the rYojbaba Term (as hereinafter defined), rYojbaba will compensate the Company for rYojbaba Services at the rate of $150 per hour, based on the hours spent by personnel of the Company.
The term of the rYojbaba Consulting Agreement will continue until eight months after the rYojbaba Effective Date, unless sooner terminated in accordance with the terms of the rYojbaba Consulting Agreement (the “rYojbaba Term”). The rYojbaba Consulting Agreement may be terminated at any time by either party upon notice to the other party.
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rYojbaba Warrant
As provided in the rYojbaba Consulting Agreement, on the rYojbaba Effective Date, rYojbaba issued the rYojbaba Warrant to the Company. Pursuant to the terms of the rYojbaba Warrant, the Company may, at any time (i) on or after the earlier of the date that either (a) rYojbaba completes its first initial public offering of stock in the U.S. resulting in any class of rYojbaba’s stock being listed for trading on any tier of Nasdaq, the NYSE or the NYSE American; (b) rYojbaba consummates a merger or other transaction with a SPAC wherein rYojbaba becomes a subsidiary of the SPAC; or (c) rYojbaba undertakes any other rYojbaba Fundamental Transaction (the “rYojbaba Trigger Date”); and (ii) on or prior to the close of business on the tenth anniversary of the rYojbaba Trigger Date, exercise the rYojbaba Warrant to purchase 3,000 shares of rYojbaba’s common stock, which represents 3% of rYojbaba’s issued and outstanding common stock as of the rYojbaba Trigger Date, for an exercise price per share of $0.01, subject to adjustment as provided in the rYojbaba Warrant. The number of shares for which the rYojbaba Warrant will be exercisable will be automatically adjusted on the rYojbaba Trigger Date to be 3% of the fully diluted number and class of shares of capital stock of rYojbaba as of the rYojbaba Trigger Date, following completion of the transactions which caused the rYojbaba Trigger Date to be achieved. The rYojbaba Warrant contains a 9.99% equity blocker.
ZEROSPO Note Purchase Agreement
On May 2, 2023, the Company entered into that certain Note Purchase Agreement by and between the Company and ZEROSPO. Pursuant to the terms of the Note Purchase Agreement, ZEROSPO agreed to issue and sell to the Company, and the Company agreed to purchase, a promissory note in the principal amount of $300,000 (the “ZEROSPO Note”).
Pursuant to the terms of the ZEROSPO Note, ZEROSPO agreed to pay to the Company $300,000 and to pay interest on the outstanding principal amount at the rate of 8% per annum. To the extent not earlier paid, the principal amount and all accrued interest will be due and payable on the ZEROSPO Maturity Date (as hereinafter defined) or earlier in the event of an event of default as provided in the ZEROSPO Note. The “ZEROSPO Maturity Date” means the earlier of:
(i) The date of the closing of capital-raising transactions consummated by ZEROSPO via the issuance of any debt securities or equity securities of ZEROSPO or any of its affiliates which results in gross proceeds to ZEROSPO or any of its affiliates of $300,000 or more;
(ii) The date on which ZEROSPO completes a transaction pursuant to which its ordinary shares are listed for trading on The Nasdaq Capital Market, or any related exchange, including the NASDAQ Global Market, or on the New York Stock Exchange or any related securities exchange, including the NYSE American; and
(iii) The date which is 180 days following May 2, 2023.
ZEROSPO may, at its sole option, prepay the ZEROSPO Note and any accrued interest thereunder in whole or in part at any time. In the event that any amount due under the ZEROSPO Note is not paid as and when due, such amounts will accrue interest at the rate of 12% per year, simple interest, non-compounding, until paid.
Financial Overview
For the three months ended March 31, 2023 and 2022, we generated revenues of $8,734,150 and $2,276,001, respectively, and reported net income of $1,808,037 and net loss of $1,578,451, respectively, and cash flows used in operating activities of $1,048,059 and $2,393,853, respectively. As noted in our unaudited consolidated financial statements, as of March 31, 2023, we had an accumulated deficit of $8,691,290.
Results of Operations
Comparison of Results of Operations for the Three Months ended March 31, 2023 and 2022
The following table summarizes our operating results as reflected in our statements of operations during the three months ended March 31, 2023 and 2022, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.
| For the Three Months Ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | Variance | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| Amount | Revenues | Amount | Revenues | Amount | Revenues | |||||||||||||||||||
| Revenues | $ | 8,734,150 | 100.0 | % | $ | 2,276,001 | 100.0 | % | $ | 6,458,149 | 283.7 | % | ||||||||||||
| Cost of Revenues | 3,101,066 | 35.5 | % | 1,055,356 | 46.4 | % | 2,045,710 | 193.8 | % | |||||||||||||||
| Gross Profit | 5,633,084 | 64.5 | % | 1,220,645 | 53.6 | % | 4,412,439 | 361.5 | % | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling expenses | 568,642 | 6.5 | % | 205,918 | 9.0 | % | 362,724 | 176.1 | % | |||||||||||||||
| General and administrative expenses | 2,685,207 | 30.8 | % | 2,468,933 | 108.5 | % | 216,274 | 8.8 | % | |||||||||||||||
| Research and development expenses | 79,624 | 0.9 | % | 108,259 | 4.8 | % | (28,635 | ) | -26.5 | % | ||||||||||||||
| Total operating expenses | 3,333,473 | 38.2 | % | 2,783,110 | 122.3 | % | 550,363 | 19.8 | % | |||||||||||||||
| Income (loss) from operations | 2,299,611 | 26.3 | % | (1,562,465 | ) | -68.7 | % | 3,862,076 | -247.2 | % | ||||||||||||||
| Other income (expenses) | 169,874 | 2.0 | % | (16,802 | ) | -0.7 | % | 186,676 | -1,111.0 | % | ||||||||||||||
| Income (loss) before income tax provision | 2,469,485 | 28.3 | % | (1,579,267 | ) | -69.4 | % | 4,048,752 | -256.4 | % | ||||||||||||||
| Income tax expense (benefit) | 661,448 | 7.6 | % | (816 | ) | 0.0 | % | 662,264 | -81,159.8 | % | ||||||||||||||
| Net income (loss) | 1,808,037 | 20.7 | % | (1,578,451 | ) | -69.4 | % | 3,386,488 | -214.5 | % | ||||||||||||||
| Less: net loss attributable to non-controlling interest | (74,252 | ) | -0.9 | % | - | - | (74,252 | ) | -100.0 | % | ||||||||||||||
| Net income (loss) attributable to HeartCore Enterprises, Inc. | $ | 1,882,289 | 21.6 | % | $ | (1,578,451 | ) | -69.4 | % | $ | 3,460,740 | -219.2 | % | |||||||||||
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Revenues
Our total revenues increased by $6,458,149, or 283.7%, to $8,734,150 for the three months ended March 31, 2023 from $2,276,001 for the three months ended March 31, 2022, mainly attributable to (i) the increased revenue of $5,192,751 from GO IPO consulting services; (ii) the increased revenue of $1,631,619 from customized software development and services as a result of acquisition of Sigmaways and its subsidiaries on February 1, 2023; offset by (iii) the decreased revenue of $444,680 in revenue from sales of on-premise software, primarily due to the loss of a significant CMS customer in the current period.
Cost of Revenues
Our total costs of revenues increased by $2,045,710, or 193.8%, to $3,101,066 for the three months ended March 31, 2023 from $1,055,356 for the three months ended March 31, 2022, in light of the increase in sales in GO IPO consulting services and customized software development and services, offset by the decrease in the costs related to maintenance and support services.
Gross Profit
Our total gross profit increased by $4,412,439, or 361.5%, to $5,633,084 for the three months ended March 31, 2023 from $1,220,645 for the three months ended March 31, 2022, mainly attributable to (i) the increased gross profit of $4,518,938 from GO IPO consulting services; (ii) the increased gross profit of $223,876 from customized software development and services; offset by (iii) the decreased gross profit of $526,939 from sales of on-premise software. Our overall gross profit margin increased by 10.9% to 64.5% for the three months ended March 31, 2023, from 53.6% for the three months ended March 31, 2022.
Selling Expenses
Our selling expenses increased by $362,724, or 176.1%, to $568,642 for the three months ended March 31, 2023 from $205,918 for the three months ended March 31, 2022, primarily attributable to an increase of $321,376 in stock-based compensation for sales staff.
As a percentage of revenues, our selling expenses accounted for 6.5% and 9.0% of our total revenues for the three months ended March 31, 2023 and 2022, respectively.
General and Administrative Expenses
Our general and administrative expenses increased by $216,274, or 8.8%, to $2,685,207 for the three months ended March 31, 2023 from $2,468,933 for the three months ended March 31, 2022, primarily attributable to (i) an increase of $102,357 in stock-based compensation as the Company awarded options and RSUs to employees and service providers in 2023; (ii) an increase of $196,667 in office, utility and other expenses, an increase of $96,104 in depreciation and amortization expenses, and an increase of $50,682 in rent expenses, mostly due to the acquisition of Sigmaways and its subsidiaries; offset by (iii) a decrease of $283,468 in listing-related expenses as we finished the process of going public in early 2022.
As a percentage of revenues, general and administrative expenses were 30.8% and 108.5% of our revenues for the three months ended March 31, 2023 and 2022, respectively.
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Research and Development Expenses
Our research and development expenses decreased by $28,635, or 26.5%, to $79,624 for the three months ended March 31, 2023 from $108,259 for the three months ended March 31, 2022, primarily attributable to the decrease in outsourcing expenses relating to the development of a high quality 12K VR camera and related data compression system, which was completed in June 2022.
As a percentage of revenues, research and development expenses were 0.9% and 4.8% of our revenues for the three months ended March 31, 2023 and 2022, respectively.
Other Income (Expenses), Net
Our other income (expenses) primarily includes changes in fair value of investments in warrants, interest income generated from bank deposits, interest expense for bank loans and bonds, other income, and other expenses. Our other income (expenses), net increased by $186,676, or -1,111.0%, to other income, net of $169,874 in the three months ended March 31, 2023 from other expenses, net of $16,802 in the three months ended March 31, 2022, primarily attributable to the increase of $193,365 in the changes in fair value of investments in warrants.
Income Tax Expense (Benefit)
Our income tax expense was $661,448 in the three months ended March 31, 2023, as compared to the income tax benefit of $816 in the three months ended March 31, 2022, mainly due to the net income before income tax of $2,469,485 in the current period, as compared to a net loss before income tax of $1,579,267 in the prior period.
Net Income (Loss)
As a result of the foregoing, we reported a net income of $1,808,037 for the three months ended March 31, 2023, representing a $3,386,488, or -214.5%, increase from a net loss of $1,578,451 for the three months ended March 31, 2022.
Net Loss Attributable to Non-controlling Interest
We owned 51% equity ownership interest of Sigmaways as of March 31, 2023. Accordingly, we recorded net loss attributable to the non-controlling interest of $74,252 in the three months ended March 31, 2023.
Net Income (Loss) Attributable to HeartCore Enterprises, Inc.
As a result of the foregoing, we reported a net income attributable to HeartCore Enterprises, Inc. of $1,882,289 for the three months ended March 31, 2023, representing a $3,460,740, or -219.2%, increase from a net loss attributable to HeartCore Enterprises, Inc. of $1,578,451 for the three months ended March 31, 2022.
Liquidity and Capital Resources
As of March 31, 2023, we had $5,209,915 in cash, as compared to $7,177,326 as of December 31, 2022. As of March 31, 2023, our working capital was $3,540,983 as compared to $4,887,444 as of December 31, 2022. We also had $2,380,128 in accounts receivable as of March 31, 2023. Our accounts receivable primarily include balance due from customers for our on-premise 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 Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (1,048,059 | ) | $ | (2,393,853 | ) | ||
| Net cash used in investing activities | (722,364 | ) | (35,281 | ) | ||||
| Net cash provided by (used in) financing activities | (134,296 | ) | 13,284,474 | |||||
| Effect of exchange rate changes | (62,692 | ) | (78,293 | ) | ||||
| Net change in cash and cash equivalents | (1,967,411 | ) | 10,777,047 | |||||
| Cash and cash equivalents, beginning of the period | 7,177,326 | 3,136,839 | ||||||
| Cash and cash equivalents, end of the period | $ | 5,209,915 | $ | 13,913,886 | ||||
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Operating Activities
Net cash used in operating activities was $1,048,059 for the three months ended March 31, 2023, as compared to the amount of $2,393,853 net cash used in operating activities for the three months ended March 31, 2022, primarily consisting of the following:
| ● | Net income of $1,808,037 for the three months ended March 31, 2023. | |
| ● | Changes in fair value of investments in warrants of $193,365 and an increase of $4,009,335 in warrants received as noncash consideration as two of our IPO consulting customers completed the IPO during the current period and we recognized investments in warrants and remeasured the fair value at the period end. | |
| ● | A decrease of $178,733 in accrued payroll and other employee costs due to payment made for bonus during the three months ended March 31, 2023. | |
| ● | A decrease of $167,873 in deferred revenue, due to amortization of upfront payment received for long-term service contracts. | |
| ● | Offset by stock-based compensation of $915,228 for the three months ended March 31, 2023, as we granted equity rewards to our employees and service providers in 2023. | |
| ● | Offset by an increase of $678,725 in income tax payables as we generated more taxable income in the current period. |
Investing Activities
Net cash used in investing activities amounted to $722,364 for the three months ended March 31, 2023, as compared to net cash used in investing activities amounted to $35,281 for the three months ended March 31, 2023, primarily consisting of net payment of $724,910 for acquisition of subsidiary, net of cash acquired.
Financing Activities
Net cash used in financing activities amounted to $134,296 for the three months ended March 31, 2023, as compared to net cash provided by financing activities amounted to $13,284,474 for the three months ended March 31, 2022, primarily consisting of repayment of $265,255 for long-term debts, and repayment of $36,517 for insurance premium financing, offset by the net proceeds of $173,582 from factoring arrangement.
Contractual Obligations
Lease commitment
The Company has entered into three 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 March 31, 2023, future minimum lease payments under the non-cancelable lease agreements are as follows:
| Year Ended December 31, | Finance Leases | Operating Leases | ||||||
| Remaining of 2023 | $ | 13,433 | $ | 243,039 | ||||
| 2024 | 281 | 310,891 | ||||||
| 2025 | - | 310,891 | ||||||
| 2026 | - | 310,891 | ||||||
| 2027 | - | 310,891 | ||||||
| Thereafter | - | 1,280,060 | ||||||
| Total lease payments | 13,714 | 2,766,663 | ||||||
| Less: imputed interest | (51 | ) | (164,422 | ) | ||||
| Total lease liabilities | 13,663 | 2,602,241 | ||||||
| Less: current portion | 13,663 | 288,081 | ||||||
| Non-current lease liabilities | $ | - | $ | 2,314,160 | ||||
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Long-Term Debts
The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions.
As of March 31, 2023, future minimum loan payments are as follows:
| Loan | ||||
| Year Ended December 31, | Payment | |||
| Remaining of 2023 | $ | 464,705 | ||
| 2024 | 467,708 | |||
| 2025 | 291,088 | |||
| 2026 | 276,692 | |||
| 2027 | 241,046 | |||
| Thereafter | 398,006 | |||
| Total | $ | 2,139,245 | ||
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2023.
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 revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues 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.
Business Combinations
We account for business combinations using the acquisition method, which requires management to estimate the fair value of the tangible assets, liabilities, identifiable intangible asset and non-controlling interest, and to properly allocate purchase price consideration to the individual assets acquired, liabilities assumed and non-controlling interest. Goodwill is measured as the excess amount of consideration transferred. The allocation of the purchase price utilizes significant estimates and assumptions in determining the fair values of identifiable assets acquired, liabilities assumed and non-controlling interest, especially with respect to intangible asset. These estimates are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset and are reviewed by consulting with third-party valuation appraisers. The purchase price allocation for business acquisitions contains uncertainties because it requires management’s judgment.
The fair value of the intangible asset is estimated using the income approach using the multi-period excess earnings method. Management applies significant judgement related to this fair value method, which included the selection of an expected EBITDA margin assumption for the forecast period, and discount rate assumptions. These significant assumptions are based on company specific information and projections, which are not observable in the market (except for the discount rate assumption) and, therefore, are considered Level 2 and Level 3 measurements. These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions.
The accounting for business combinations is a critical accounting estimate because it requires estimates and judgement in assessing the future cash flows of the acquired business, the fair value of non-controlling interest, and the allocation of the future cash flows to identifiable intangible assets, in determining the fair value for assets and liabilities.
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Revenue Recognition
The Company recognizes revenues under ASC Topic 606, “Revenue from Contracts with customers”.
To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of value-added taxes and applicable local government levies.
The Company currently generates its revenues from the following main sources:
Revenues from On-Premise Software
Licenses for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenues from on-premise licenses are recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence.
Revenues from Maintenance and Support Services
Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers.
Revenues from Software as a Service (“SaaS”)
The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length.
Revenues 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.
Revenues from Customized Software Development and Services
The Company’s customized software development and services revenues primarily include revenues from providing software development solutions and other support services to its customers. The contract pricing is at stated billing rates per hour. These contracts are generally short-term in nature and not longer than one year in duration. For services provided under the contract that result in the transfer of control over time, the underlying deliverable in the contracts is owned and controlled by the customer and does not create an asset with an alternative use to the Company. The Company recognizes revenue on rate per hour contracts based on the amount billable to the customer, as the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date.
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Revenues from Consulting Services
The Company provides public listing related consulting services to customers pursuant to the specific requirements prescribed in the contracts, which primarily include communicating with intermediary parties, preparing required documents related to the initial public offering and supporting the listing process. The consulting service contracts are generally less than one year in length and normally include both cash and noncash consideration. Cash consideration is paid in installment payments and is recognized in revenue over the period of the contract by reference to progress toward complete satisfaction of that performance obligation. Noncash consideration is in the form of warrants of the customers and is measured at fair value at contract inception. Noncash consideration that is variable for reasons other than only the form of the consideration is included in the transaction price, but is subject to the constraint on variable consideration. The Company assesses the estimated amount of the variable noncash consideration at contract inception and subsequently, to determine when and to what extent it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur once the uncertainty associated with the variable consideration is subsequently resolved. Only when the significant revenues reversal is concluded probable of not occurring can variable consideration be included in revenues. Based on evaluation of likelihood and magnitude of a reversal in applying the constraint, the variable noncash consideration is recognized in revenues until the underlying uncertainties have been resolved.
The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company has determined that its contracts do not include a significant financing component. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company factors certain accounts receivable upon or after the performance obligation is being met. The Company records deferred revenue on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenue is reported net of related uncollected deferred revenue in the consolidated balance sheets. The amount of revenues recognized during the three months ended March 31, 2023 and 2022 that were included in the opening deferred revenues balance was approximately $0.9 million and $0.8 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, 2023. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2023, 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, 2022, as filed with the Securities and Exchange Commission on March 31, 2023.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control 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, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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.
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, 2022, as updated from time to time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 1, 2023 and March 22, 2023, the Company issued 2,000,000 and 500,000 shares of the Company’s common stock, respectively, in connection with the Sigmaways acquisition. On March 22, 2023, the Company granted 671,350 shares of common stock to employees and service providers of Sigmaways.
The above issuances and sales were made pursuant to an exemption from registration as set forth in Section 4(a)(2) of the Securities Act and/or Regulation D and/or Regulation S under the Securities Act.
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.
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ITEM 6. EXHIBITS
| * | Filed herewith. |
| ** | Furnished herewith. |
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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 22, 2023 | By: | /s/ Sumitaka Yamamoto |
| Sumitaka Yamamoto | ||
| Chief Executive Officer and President (principal executive officer) | ||
| Dated: May 22, 2023 | By: | /s/ Qizhi Gao |
| Qizhi Gao | ||
| Chief Financial Officer (principal financial officer and principal accounting officer) | ||
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Exhibit 31.1
CERTIFICATIONS
I, Sumitaka Yamamoto, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2023 of HeartCore Enterprises, Inc.; and |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 22, 2023 | By: | /s/ Sumitaka Yamamoto |
| Sumitaka Yamamoto | ||
| Chief Executive Officer and President (principal executive officer) |
Exhibit 31.2
CERTIFICATIONS
I, Qizhi Gao, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2023 of HeartCore Enterprises, Inc.; and |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; and |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 22, 2023 | By: | /s/ Qizhi Gao |
| Qizhi Gao | ||
| Chief Financial Officer (principal financial officer) |
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HeartCore Enterprises, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sumitaka Yamamoto, Chief Executive Officer and President of the Company, and I, Qizhi Gao, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
| Date: May 22, 2023 | /s/ Sumitaka Yamamoto |
Sumitaka Yamamoto | |
| Chief Executive Officer and President (principal executive officer) | |
| Date: May 22, 2023 | /s/ Qizhi Gao |
Qizhi Gao Chief Financial Officer (principal financial officer) |
This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.