UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______, 20___, to _____, 20___.

Commission File Number 001-41272

HeartCore Enterprises, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

87-0913420

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer

Identification Number)

1-2-33, Higashigotanda, Shinagawa-ku

Tokyo, Japan

(Address of Principal Executive Offices) (Zip Code)

(206) 385-0488, ext. 100

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each Exchange on which Registered
Common Stock		HTCR		The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 16, 2022, there were 18,999,276 shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding.

HeartCore Enterprises, Inc.

Contents

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	2

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Mine Safety Disclosures	30

Item 5.	Other Information	30

Item 6.	Exhibits	30

Signatures		32

Item 1. Financial Statements.

HEARTCORE ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2022			2021
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,913,886		$	3,136,839
Accounts receivable, net		1,116,254			960,964
Prepaid expenses		1,123,050			444,405
Due from related party		52,105			50,559
Loan receivable from employee		7,880			8,341
Other current assets		50,135			15,654
Total current assets		16,263,310			4,616,762

Non-current assets:
Property and equipment, net		238,787			261,414
Operating lease right-of-use assets		3,063,672			3,319,749
Deferred tax assets		275,490			297,990
Security deposits		262,851			278,237
Long-term loan receivable from related party		304,163			335,756
Loan receivable from employee, non-current		2,298			4,518
Other non-current assets		6,368			8,737
Total non-current assets		4,153,629			4,506,401

Total assets	$	20,416,939		$	9,123,163

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued expenses	$	485,138		$	646,425
Accrued payroll and other employee costs		239,710			255,082
Due to related party		185			1,110
Current portion of long-term debts		847,316			849,995
Insurance premium financing		347,258			-
Operating lease liabilities, current		313,737			332,277
Finance lease liabilities, current		29,272			37,459
Income tax payables		739			10,919
Deferred revenue		1,315,780			1,690,917
Mandatorily redeemable financial interest		-			447,986
Other current liabilities		157,725			281,673
Total current liabilities		3,736,860			4,553,843

Non-current liabilities:
Long-term debts		1,676,848			1,871,580
Operating lease liabilities, non-current		2,831,624			3,076,204
Finance lease liabilities, non-current		14,425			23,861
Other non-current liabilities		148,073			156,627
Total non-current liabilities		4,670,970			5,128,272

Total liabilities:		8,407,830			9,682,115

Shareholders’ equity (deficit):
Preferred shares ($0.0001 par value, 20,000,000 shares authorized, no shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively)		-			-
Common shares ($0.0001 par value, 200,000,000 shares authorized; 18,915,943 and 15,819,943 shares issued; 18,915,943 and 15,546,454 shares outstanding as of March 31, 2022 and December 31, 2021, respectively)		1,891			1,554
Additional paid-in capital		17,416,901			3,350,779
Accumulated deficit		(5,474,564	)		(3,896,113	)
Accumulated other comprehensive income (loss)		64,881			(15,172	)
Total shareholders’ equity (deficit)		12,009,109			(558,952	)

Total liabilities and shareholders’ equity (deficit)	$	20,416,939		$	9,123,163

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

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

		2022			2021
	For the Three Months Ended March 31,
	2022			2021

Revenues	$	2,276,001		$	2,110,309

Cost of revenues		1,055,356			1,407,632

Gross profit		1,220,645			702,677

Operating expenses:
Selling expenses		205,918			46,341
General and administrative expenses		2,468,933			762,748
Research and development expenses		108,259			52,146

Total operating expenses		2,783,110			861,235

Loss from operations		(1,562,465	)		(158,558	)

Other income (expenses):
Interest income		1,458			122
Interest expense		(11,271	)		(10,828	)
Other income		16,673			988
Other expenses		(23,662	)		(12,272	)
Total other expenses		(16,802	)		(21,990	)

Loss before income tax provision		(1,579,267	)		(180,548	)

Income tax expense (benefit)		(816	)		7,689

Net loss		(1,578,451	)		(188,237	)

Less: net loss attributable to non-controlling interest		-			(4,988	)

Net loss attributable to HeartCore Enterprises, Inc.	$	(1,578,451	)	$	(183,249	)

Other comprehensive income:
Foreign currency translation adjustment		80,053			97,522

Total comprehensive loss		(1,498,398	)		(90,715	)
Less: comprehensive loss attributable to non-controlling interest		-			(2,404	)
Comprehensive loss attributable to HeartCore Enterprises, Inc.	$	(1,498,398	)	$	(88,311	)

Net loss per common share attributable to HeartCore Enterprises, Inc.^*
Basic	$	(0.09	)	$	(0.01	)
Diluted	$	(0.09	)	$	(0.01	)
Weighted average common shares outstanding^*
Basic		17,265,332			15,242,454
Diluted		17,265,332			15,242,454

*	Retrospectively restated for effect of share issuances on July 16, 2021.

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

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2022 and 2021

	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 loss			shareholders’ deficit			controlling interest			shareholders’ deficit
Balance, December 31, 2020^*		15,242,454	$	1,524	$	2,735,315	$	(3,557,957	)	$	(136,890	)	$	(958,008	)	$	353,825		$	(604,183	)
Net loss		-		-		-		(183,249	)		-			(183,249	)		(4,988	)		(188,237	)
Foreign currency translation adjustment		-		-		-		-			94,938			94,938			2,584			97,522
Balance, March 31, 2021^*		15,242,454	$	1,524	$	2,735,315	$	(3,741,206	)	$	(41,952	)	$	(1,046,319	)	$	351,421		$	(694,898	)

*	Retrospectively restated for effect of share issuances on July 16, 2021.



											Accumulated
	Common shares				Additional						other comprehensive			Total shareholders’
	Number of shares		Amount		paid-in capital			Accumulated deficit			income (loss)			equity (deficit)
Balance, December 31, 2021		15,546,454	$	1,554	$	3,350,779		$	(3,896,113	)	$	(15,172	)	$	(558,952	)
Net loss		-		-		-			(1,578,451	)		-			(1,578,451	)
Foreign currency translation adjustment		-		-		-			-			80,053			80,053
Issuance of common shares for cash		3,096,000		310		13,643,969			-			-			13,644,279
Issuance of common shares from exercise of share options		273,489		27		(11	)		-			-			16
Share-based compensation		-		-		422,164			-			-			422,164
Balance, March 31, 2022		18,915,943	$	1,891	$	17,416,901		$	(5,474,564	)	$	64,881		$	12,009,109

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

HEARTCORE ENTERPRISES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

		2022			2021
	For the Three Months Ended March 31,
	2022			2021
Cash flows from operating activities:
Net loss	$	(1,578,451	)	$	(188,237	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expenses		24,889			28,070
Amortization of debt issuance costs		866			949
Non-cash lease expense		75,986			87,247
Deferred income taxes		6,311			11,650
Share-based compensation		422,164			-

Changes in assets and liabilities:
Accounts receivable, net		(217,638	)		(458,314	)
Prepaid expenses		(488,970	)		(186,462	)
Other assets		(34,896	)		(29,300	)
Accounts payable and accrued expenses		(79,982	)		319,323
Accrued payroll and other employee costs		(27,492	)		(7,235	)
Operating lease liabilities		(78,226	)		(89,749	)
Finance lease liabilities		(174	)		(375	)
Income tax payables		(10,037	)		(159,991	)
Deferred revenue		(295,176	)		(233,170	)
Other liabilities		(113,027	)		54,782

Net cash flows used in operating activities		(2,393,853	)		(850,812	)

Cash flows from investing activities:
Purchases of property and equipment		(18,903	)		(4,239	)
Advance and loan provided to related parties		(25,480	)		(60,271	)
Repayment of loan provided to related party		9,102			-

Net cash flows used in investing activities		(35,281	)		(64,510	)

Cash flows from financing activities:
Proceeds from initial public offering, net of issuance cost		13,602,554			-
Proceeds from issuance of common shares prior to initial public offering		220,572			-
Payments for finance leases		(14,916	)		(16,172	)
Proceeds from long-term debt		258,087			-
Repayment of long-term debts		(308,121	)		(328,799	)
Repayment of insurance premium financing		(41,280	)		-
Repayment to related party		(903	)		-
Payment of debt issuance costs		(1,030	)		(1,420	)
Payment for mandatorily redeemable financial interest		(430,489	)		-

Net cash flows provided by (used in) financing activities		13,284,474			(346,391	)

Effect of exchange rate changes		(78,293	)		(103,801	)

Net change in cash and cash equivalents		10,777,047			(1,365,514	)

Cash and cash equivalents - beginning of the period		3,136,839			3,058,175

Cash and cash equivalents - end of the period	$	13,913,886		$	1,692,661

Supplemental cash flow disclosure:
Interest paid	$	13,262		$	13,555
Income taxes paid	$	1,489		$	6,605

Non-cash investing and financing transactions

Payroll withheld as repayment of loan receivable from employees	$	2,065		$	3,679
Expense paid by related parties on behalf of the Company	$	25,480		$	24,891
Share repurchase liability settled by issuance of common shares	$	16		$	-
Deferred offering costs recognized against the proceeds from the offering	$	178,847		$	-
Insurance premium financing	$	388,538		$	-

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

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

HeartCore Enterprises, Inc. (“HeartCore USA” or the “Company”), a holding company, was incorporated under the laws of the State of Delaware on May 18, 2021.

On July 16, 2021, the Company executed a Share Exchange Agreement with certain shareholders of HeartCore Co. Ltd. (“HeartCore Japan”), a company that was incorporated in Japan on June 12, 2009. Pursuant to the terms of the Share Exchange Agreement, the Company issued 15,999,994 shares of its common shares to the shareholders of HeartCore Japan in exchange for 10,706 shares out of 10,984 shares of common shares issued by HeartCore Japan, representing approximately 97.5% of HeartCore Japan’s outstanding common shares. On February 24, 2022, the Company purchased the remaining 278 shares of common shares of HeartCore Japan. As a result, HeartCore Japan became a wholly owned operating subsidiary of the Company.

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

The Company, via its wholly-owned operating subsidiary, HeartCore Japan, is mainly engaged in the business of developing and sales of comprehensive software. HeartCore USA and HeartCore Japan are hereafter referred to as the Company.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements include the accounts of the Company and its subsidiary. Prior to February 24, 2022, ownership interest of non-controlling party is presented as mandatorily redeemable financial interest or non-controlling interest as applicable. All significant intercompany accounts and transactions have been eliminated.

These unaudited interim consolidated financial statements do not include all of the information and disclosure required by the U.S. GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments consisting of normal recurring nature considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021.

Use of Estimates

In preparing the consolidated financial statements in conformity U.S. GAAP, the management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for doubtful accounts, useful lives of property and equipment, the impairment of long-lived assets, valuation of share-based compensation, valuation allowance of deferred tax assets, implicit interest rate of operating and financing leases, valuation of asset retirement obligations and revenue recognition. Actual results could differ from those estimates.

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

COVID-19

While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent to which COVID-19 may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, which will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s financial statements.

Asset Retirement Obligations

Pursuant to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other non-current liabilities in the consolidated balance sheets, in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations:

	March 31,			December 31,
	2022			2021
Beginning balance	$	155,666		$	173,043
Accretion expense		128			730
Foreign currency translation adjustment		(7,721	)		(18,107	)
Ending balance	$	148,073		$	155,666

Software Development Costs

Software development costs are expensed as incurred until the point the Company establishes technological feasibility. Technological feasibility is established upon completion of a detailed program design or the completion of a working model. Costs incurred by the Company between establishment of technological feasibility and the point at which the product is ready for general release are capitalized and amortized over the economic life of the related products. The Company’s software development costs incurred subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.

In the three months ended March 31, 2022 and 2021, software development costs expensed as incurred amounted to $108,259 and $52,146, respectively. These software development costs were included in the research and development expenses.

Impairment of Long-Lived Assets

Long-lived assets with finite lives, primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets during the three months ended March 31, 2022 and 2021.

Foreign Currency Translation

The Company maintains its books and record in its local currency, Japanese YEN (“JPY”), which is a functional currency as being the primary currency of the economic environment in which its operation is conducted. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statements of operations.

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The reporting currency of the Company is the United States Dollars (“US$”), and the accompanying unaudited consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of changes in shareholders’ equity (deficit).

Translation of amounts from the local currency of the Company into US$1 has been made at the following exchange rates:

March 31,

2022

March 31,

2021

Current JPY: US$1 exchange rate

121.83

110.70

Average JPY: US$1 exchange rate

116.24

106.01

Revenue Recognition

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

To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales is calculated at 10% of gross sales.

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

Revenue from On-Premises Software

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

Revenue from Maintenance and Support Service

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

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Revenue from Software as a Service (“SaaS”)

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

Revenue from Software Development and other Miscellaneous Services

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

The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the three months ended March 31, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $0.8 million and $0.9 million, respectively.

Disaggregation of Revenue

The Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues by type for the three months ended March 31, 2022 and 2021 is as following:

Schedule of Disaggregation of Revenues

		2022		2021
	For the Three Months Ended
	March 31,
	2022		2021

Revenue from On-Premise Software	$	801,601	$	249,608
Revenue from Maintenance and Support Service		845,339		942,215
Revenue from Software as a Service (“SaaS”)		126,654		151,808
Revenue from Software Development and other Miscellaneous Services		502,407		766,678
Total Revenue	$	2,276,001	$	2,110,309

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

	For the Three Months Ended
	March 31,
	2022		2021

Revenue from Customer Experience Management Platform	$	1,755,053	$	1,614,356
Revenue from Process Mining		266,488		256,784
Revenue from Robotic Process Automation		98,386		106,679
Revenue from Task Mining		86,877		55,799
Revenue from Others		69,197		76,691
Total Revenue	$	2,276,001	$	2,110,309

As of March 31, 2022 and 2021, and for the periods then ended, all long-lived assets and almost all of the revenue generated are attributed to the Company’s operation in Japan.

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.

For the three months ended March 31, 2022, customer A represents 13.3% of the Company’s total revenues. For the three months ended March 31, 2021, customer B and C represents 11.9% and 10.9%, respectively, of the Company’s total revenues.

For the three months ended March 31, 2022, vendor A, B and C represents 36.1%, 29.4% and 10.8%, respectively, of the Company’s total purchases. For the three months ended March 31, 2021, vendor A and B represents 59.4% and 23.1%, respectively, of the Company’s total purchases.

Share-based Compensation

The Company accounts for share-based compensation awards in accordance with ASC 718, “Compensation – Stock Compensation”. The cost of services received from employees and non-employees in exchange for awards of equity instruments is recognized in the consolidated statements of operations based on the estimated fair value of those awards on the grant date and amortized on a straight-line basis over the requisite service period or vesting period. The Company records forfeitures as they occur.

NOTE 3 — ACCOUNTS RECEIVABLE, NET

Accounts receivable consists of the following:

Schedule of Accounts Receivable Net

		March 31,		December 31,
	March 31,		December 31,
	2022		2021
Accounts receivable	$	1,116,254	$	960,964
Less: allowance for doubtful accounts		-		-
Accounts receivable, net	$	1,116,254	$	960,964

NOTE 4 — PREPAID EXPENSES

Prepaid expenses consist of the following:

Schedule of Prepaid Expenses

		March 31,		December 31,
	March 31,		December 31,
	2022		2021
Prepayments to software vendors	$	128,418	$	157,060
Prepaid selling expenses		426,972		-
Prepaid subscription fees		50,852		53,413
Deferred offering expenses		-		180,630
Prepaid insurance premium		465,019		18,252
Others		51,789		35,050
Total	$	1,123,050	$	444,405

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Deferred offering expenses, consisting of legal fees and road show expenses relating to the Company’s planned initial public offering, are capitalized and recorded on the balance sheet. The deferred offering expenses were reclassified to shareholders’ equity and recorded against the proceeds received upon the closing of our initial public offering on February 14, 2022.

NOTE 5 — RELATED PARTY TRANSACTIONS

As of March 31, 2022 and December 31, 2021, the Company has a due to related party balance of $185 and $1,110, respectively, from Sumitaka Yamamoto, the CEO and major shareholder of the Company. The balance is unsecured, non-interest bearing and due on demand. During the three months ended March 31, 2022 and 2021, the Company advanced $25,480 and $3,075, respectively, to this related party, and the related party paid expenses of $25,480 and $10,695, respectively, on behalf of the Company. The Company also repaid $903 to the related party during the three months ended March 31, 2022.

As of March 31, 2022 and December 31, 2021, the Company has a loan receivable balance of $356,268 and $386,315, respectively, from Heartcore Technology Inc., a company controlled by the CEO of the Company. The loan was made to the related party to support its operation. The balance is unsecured, bears an annual interest of 1.475%, and requires repayments in installments starting from February 2022. During the three months ended March 31, 2022 and 2021, the Company loaned nil and $57,195, respectively, to this related party, and the related party paid expenses of nil and $14,197, respectively, on behalf of the Company. During the three months ended March 31, 2022 and 2021, the Company received repayments of $9,102 and nil, respectively, from this related party.

In June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. During the three months ended March 31, 2021, the Company has revenue from this related party of $73,569 from software sales and incurred cost with this related party of $185,875 for software development services provided. As of March 31, 2021, the Company has deferred revenue and other payable with this related party of $36,012 and $181,328, respectively. In July 2021, Suzuyo Shinwart Corporation sold all its shares of the Company to the Company’s CEO and ceased to be the Company’s related party.

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

NOTE 6 — PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

Schedule of Property and Equipment Net

	March 31,			December 31,
	2022			2021
Leasehold improvement	$	302,547		$	320,257
Machinery and equipment		314,220			316,126
Vehicle		114,531			121,235
Software		175,362			185,627
Subtotal		906,660			943,245
Accumulated depreciation		(667,873	)		(681,831	)
Property and equipment, net	$	238,787		$	261,414

Depreciation expense was $24,889 and $28,070 for the three months ended March 31, 2022 and 2021, respectively.

NOTE 7 — LEASES

The Company has entered into two leases for its office space, which were classified as operating leases. It has also entered into two leases for office equipment 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 $42,054 and $57,167 are included in property and equipment as of March 31, 2022 and December 31, 2021, respectively.

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The components of lease costs are as follows:

Schedule of Lease Costs

		2022		2021
	For the Three Months Ended
	March 31,
	2022		2021
Finance lease costs
Amortization of right-of-use assets	$	12,526	$	13,735
Interest on lease liabilities		174		375
Total finance lease costs		12,700		14,110
Operating lease costs		87,051		101,474
Total lease costs	$	99,751	$	115,584

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

		2022			2021
	For the Three Months Ended
	March 31,
	2022			2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	174		$	375
Operating cash flows from operating leases		89,290			103,815
Financing cash flows from finance leases		14,916			16,172

Weighted average remaining lease term (years)
Finance leases		1.4			2.1
Operating leases		9.9			10.9

Weighted-average discount rate: (per annum)
Finance leases		1.32	%		1.32	%
Operating leases		1.32	%		1.32	%

As of March 31, 2022, the future maturity of lease liabilities is as follows:

Year ending December 31,	Finance lease			Operating lease
Remaining of 2022	$	22,755		$	255,580
2023		20,947			340,773
2024		308			340,773
2025		-			340,773
2026		-			340,773
Thereafter		-			1,743,870
Total lease payments		44,010			3,362,542
Less: imputed interest		(313	)		(217,181	)
Total lease liabilities		43,697			3,145,361
Less: current portion		29,272			313,737
Non-current lease liabilities	$	14,425		$	2,831,624

Pursuant to the operating lease agreements, the Company made security deposits to the lessors. The security deposits amounted to $262,851 and $278,237 as of March 31, 2022 and December 31, 2021, respectively.

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 — LONG-TERM DEBTS

The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions, which consist of the following:

Schedule of Long-Term Debts

Name of Financial Institutions	Original Amount Borrowed (JPY)			Loan Duration	Annual Interest Rate			Balance as of March 31, 2022			Balance as of December 31, 2021
Bond payable
Corporate bond issued through Resona Bank		100,000,000	(a)(b)	1/10/2019— 1/10/2024		0.430	%	$	328,326		$	434,431
Loans with banks and other financial institutions
Resona Bank, Limited.		30,000,000	(a)	12/29/2017— 12/30/2022		1.475	%		36,937			56,476
Resona Bank, Limited.		50,000,000	(a)(b)	12/29/2017— 12/29/2024		0.675	%		161,331			191,454
Resona Bank, Limited.		10,000,000	(a)(b)	9/30/2020— 9/30/2027		0.000	%		64,500			72,411
Resona Bank, Limited.		40,000,000	(a)(b)	9/30//2020— 9/30/2027		0.000	%		257,999			289,644
Resona Bank, Limited.		20,000,000	(a)(b)	11/13/2020— 10/31/2027		1.600	%		130,953			146,890
Sumitomo Mitsui Banking Corporation		100,000,000		12/28/2018— 12/28/2023		1.475	%		287,179			361,925
Sumitomo Mitsui Banking Corporation		10,000,000	(b)	12/30/2019— 12/30/2026		1.975	%		55,709			63,105
The Shoko Chukin Bank, Ltd.		30,000,000		9/28/2018— 8/31/2023		1.200	%		70,426			92,273
The Shoko Chukin Bank, Ltd.		50,000,000		7/27/2020— 6/30/2027		1.290	%		311,910			351,020
Japan Finance Corporation		40,000,000		12/15/2017— 11/30/2022		0.300	%		47,854			73,940
Japan Finance Corporation		80,000,000		11/17/2020— 11/30/2027		0.210	%		538,455			603,339
Higashi-Nippon Bank		30,000,000	(a)	3/31/2022 – 3/31/2025		1.400	%		246,245			-
Aggregate outstanding principal balances									2,537,824			2,736,908
Less: unamortized debt issuance costs									(13,660	)		(15,333	)
Less: current portion									(847,316	)		(849,995	)
Non-current portion								$	1,676,848		$	1,871,580

	(a)	These debts are guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder.
	(b)	These debts are guaranteed by Tokyo Credit Guarantee Association, and the Company has paid guarantee expenses for these debts.

In March 2022, the Company entered into a loan agreement with Higashi-Nippon Bank with a term of three years payable monthly. The loan is guaranteed by Sumitaka Yamamoto, the Company’s CEO and major shareholder.

Interest expense for long-term debts was $7,016 and $10,828 for the three months ended March 31, 2022 and 2021, respectively.

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2022, future minimum loan payments are as follows:

Year ending December 31,	Loan
	Payment
Remaining of 2022	$	569,006
2023		767,586
2024		475,901
2025		273,036
2026		248,436
Thereafter		203,859
Total	$	2,537,824

NOTE 9 — INSURANCE PREMIUM FINANCING

In February 2022, the Company entered into an insurance premium financing agreement with BankDirect Capital Finance for $388,538 at an annual interest rate of 12.80% for nine months from February 1, 2022, payable in nine monthly installments of principal and interest. As of March 31, 2022, the balance of the insurance premium financing was $347,258. During the three months ended March 31, 2022, the interest incurred was $4,255.

NOTE 10 — INCOME TAXES

United States

HeartCore USA is a holding company registered in the State of Delaware incorporated in May 2021. The U.S. federal income tax rate is 21%.

Japan

The Company conducts its major businesses in Japan and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the local tax authority. Income taxes in Japan applicable to the Company are imposed by the national, prefectural, and municipal governments, and in the aggregate resulted in an effective statutory rate of approximately 30.62% for the three months ended March 31, 2022 and 2021.

For the three months ended March 31, 2022 and 2021, the Company’s income tax expenses (benefits) are as follows:

Schedule of Income Tax Expenses

		2021			2020
	For the Three Months Ended
	March 31,
	2022			2021
Current	$	(774	)	$	(1,368	)
Deferred		(42	)		9,057
Income tax expense (benefits)	$	(816	)	$	7,689

The effective tax rate was 0.05% and (4.26)% for the three months ended March 31, 2022 and 2021, respectively.

NOTE 11 – SHARE-BASED COMPENSATION

Options

In May 2016, the Company granted 507 units stock options to its employees each to acquire one share of common shares of HeartCore Japan (an equivalent of approximately 1,494 shares of common shares of HeartCore USA) at JPY10 each (approximately $0.09). All options are exercisable upon issuance with a repurchase provision before the completion of the Company’s initial public offering, which serves as a vesting condition. All employees that were granted these stock options had early exercised their stock options in 2016 prior to the vesting of the related stock options. As of March 31, 2021, 324 units of the options were forfeited, and the CEO of the Company has repurchased and held the shares issued related to the early exercise of such stock options on behalf of the Company. On November 3, 2021, the Company redeemed 484,056 shares (equivalent to 324 shares of common shares of HeartCore Japan) from the CEO of the Company.

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The consideration received for the remaining early exercised options were recorded by the Company as a share repurchase liability included in other current liabilities in the consolidated balance sheet with JPY1,830 (approximately $16) as of December 31, 2021. The shares issued related to the early exercise of the above-mentioned stock options were not considered outstanding as of December 31, 2021. On February 14, 2022, the 183 units of stock options were vested upon the completion of the Company’s initial public offering and the Company recognized share-based compensation of $11,005 during the three months ended March 31, 2022. In the same period, the share repurchase liability of $16 was settled by issuance of 273,489 shares of common shares (equivalent to 183 shares of common shares of HeartCore Japan) from exercise of stock options.

The following summarized the Company’s stock option activity for the stock options issued in 2016 for the three months ended March 31, 2022 and 2021:

Schedule of Unvested Stock Option

		Number of stock options
	Number of stock options
Issued and unvested as of January 1, 2021		194
Forfeited		11
Issued and unvested as of March 31, 2021		183

Issued and unvested as of January 1, 2022		183
Vested and exercised		183
Issued and unvested as of March 31, 2022		-

The following table summarizes the share options activity and related information for the three months ended March 31, 2022:

Schedule of Stock Option Activity

	Number of Options/ Warrants		Weighted Average Exercise Price		Weighted Average Remaining Term (Years)		Intrinsic Value
As of January 1, 2022		1,534,500	$	2.5		9.99		-
Granted		-		-		-		-
Forfeited		-		-		-		-
Exercised		-		-		-		-
As of March 31, 2022		1,534,500	$	2.5		9.74	$	583,110
Vested and exercisable as of March 31, 2022		-		-		-		-

Options granted historically were valued using the binomial model with the assistance of an independent valuation specialist. Significant assumptions used in the valuation include expected volatility, risk-free interest rate, dividend yield and expected exercise term.

For the three months ended March 31, 2022 and 2021, share-based compensation related to the options totaled $292,812 and nil, respectively. The outstanding unamortized share-based compensation related to options was $1,912,528 (which will be recognized through December 2025) as of March 31, 2022.

HEARTCORE ENTERPRISES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units (“RSUs”)

The following table summarizes the RSUs activity for the three months ended March 31, 2022:

Schedule Of Restricted Stock units

			Number of RSUs
Issued as of January 1, 2022			-
Granted			169,153
Forfeited			-
Issued as of March 31, 2022			169,153
Vested as of March 31, 2022			-

On February 9, 2022, the Company entered into executive employment agreements with five executives and granted 85,820 RSUs pursuant to the 2021 Equity Incentive Plan. The RSUs vest on each annual anniversary of the date of the employment agreement, in an amount equal to

SEC Form 10-Q filed by Heartcore Enterprises Inc.