HeartCore Enterprises, Inc. 10-Q

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 I nsurance 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. 2 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. 3 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. 4 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. 5 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS HeartCore Enterprises, Inc. (“HeartCore USA” or the “Company”), a holding company, was incorporated under the laws of the State of Delaware on May 18, 2021. On July 16, 2021, the Company executed a Share Exchange Agreement with certain shareholders of HeartCore Co. Ltd. (“HeartCore Japan”), a company that was incorporated in Japan on June 12, 2009. Pursuant to the terms of the Share Exchange Agreement, the Company issued 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. 6 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS COVID-19 While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the lasting effects of the pandemic continue to be unknown. The Company may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in delays in collections or an inability to collect accounts receivable from these customers. The extent to which COVID-19 may continue to impact the Company’s financial condition, results of operations, or liquidity continues to remain uncertain, and as of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or an adjustment to the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, which will be recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates, and any such differences may be material to the Company’s financial statements. Asset Retirement Obligations Pursuant to the lease agreements for the office space, the Company is responsible to restore these spaces back to its original statute at the time of leaving. The Company recognizes an obligation related to these restorations as asset retirement obligation included in other non-current liabilities in the consolidated balance sheets, in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 410, “Asset Retirement Obligation Accounting”. The Company capitalizes the associated asset retirement cost by increasing the carrying amount of the related property and equipment. The following table presents changes in asset retirement obligations: Schedule of 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. 7 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The reporting currency of the Company is the United States Dollars (“US$”), and the accompanying unaudited consolidated financial statements have been expressed in US$. In accordance with ASC Topic 830-30, “Translation of Financial Statements”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from the translation of financial statements are recorded as a separate component of accumulated other comprehensive income (loss) within the statements of changes in shareholders’ equity (deficit). Translation of amounts from the local currency of the Company into US$1 has been made at the following exchange rates: Schedule of Foreign Currency Translation 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. 8 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Revenue from Software as a Service (“SaaS”) The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length. Revenue from Software Development and other Miscellaneous Services The Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognized revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers. The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the three months ended March 31, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $0.8 million and $0.9 million, respectively. Disaggregation of Revenue The Company disaggregates its revenues from contracts by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. The Company’s disaggregation of revenues by type for the three months ended March 31, 2022 and 2021 is as following: 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. 9 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable. For the three months ended March 31, 2022, customer A represents 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 10 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Deferred offering expenses, consisting of legal fees and road show expenses relating to the Company’s planned initial public offering, are capitalized and recorded on the balance sheet. The deferred offering expenses were reclassified to shareholders’ equity and recorded against the proceeds received upon the closing of our initial public offering on February 14, 2022. NOTE 5 — RELATED PARTY TRANSACTIONS As of March 31, 2022 and December 31, 2021, the Company has a due to related party balance of $ 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. 11 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: Schedule of 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: Schedule of Finance Lease and Operating Lease Future Maturity of Lease Liabilities 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. 12 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 — LONG-TERM DEBTS The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions, which consist of the following: 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. 13 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS As of March 31, 2022, future minimum loan payments are as follows: Schedule of Future Minimum Loan Payments 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 JPY 10 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. 14 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The consideration received for the remaining early exercised options were recorded by the Company as a share repurchase liability included in other current liabilities in the consolidated balance sheet with JPY 1,830 (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. 15 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Restricted Stock Units (“RSUs”) The following table summarizes the RSUs activity for the three months ended March 31, 2022: 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 25 % of the applicable shares of common shares. The fair value of the RSUs at grant date was $ 424,809 . On February 25, 2022, the Company entered into a service agreement with a marketing company to purchase 6-month marketing services and granted 83,333 RSUs. The RSUs were issued and vested on May 15, 2022. The fair value of the RSUs at grant date was $ 224,999 . For the three months ended March 31, 2022, the Company recognized RSU-related share-based compensation of $ 129,352 . The outstanding unamortized share-based compensation related to RSUs was $ 520,456 (which will through February 2026) as of March 31, 2022. NOTE 12 – SHAREHOLDERS’ EQUITY (DEFICIT) The Company was authorized to issue 200,000,000 shares of common shares, par value of $ 0.0001 per share, and 20,000,000 shares of preferred shares, par value of $ 0.0001 per share. During the period from January 1, 2022 through January 13, 2022, the Company issued 96,000 shares of common shares at a purchase price of $ 2.50 per share for an aggregate net proceeds of $ 220,572 in a private placement, including 30,000 shares of common shares issued to the officers of the Company. On February 14, 2022, the Company completed its initial public offering on the NASDAQ Capital Market under the symbol of “HTCR”. The Company offered 3,000,000 common shares at $ 5.00 per share. Net proceeds raised by the Company from the initial public offering amounted to $ 13,724,167 after deducting underwriting discounts and commissions and other offering expenses. The Company has deferred costs of $ 300,460 directly attributed to the offering, among which $ 178,847 offering costs were paid and deferred as of December 31, 2021. Those costs were also charged against the proceeds from the offering. On February 14, 2022, 273,489 shares of common shares were issued from exercise of stock options by settling share repurchase liability of $ 16 (also see NOTE 11). As of March 31, 2022 and December 31, 2021, there were 18,915,943 and 15,819,943 shares, respectively, of common shares issued; and 18,915,943 and 15,546,454 shares, respectively, of common shares outstanding. No preferred shares were issued and outstanding as of March 31, 2022 and December 31, 2021. NOTE 13 – MANDATORILY REDEEMABLE FINANCIAL INTEREST On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY 50,040,000 on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022. The Company has determined such shares to be a mandatorily redeemable financial instrument and is recorded as a liability of JPY 50,040,000 (approximately $ 448,000 ) in the consolidated balance sheet as of December 31, 2021. On February 24, 2022, the Company purchased the 278 shares of HeartCore Japan from Dentsu Digital for JPY 50,040,000 (approximately $ 430,000 ) . As a result, HeartCore Japan became a wholly-owned subsidiary of the Company. 16 HEARTCORE ENTERPRISES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 – LOSS PER SHARE Basic loss per share is calculated on the basis of weighted-average outstanding common shares. Diluted loss per share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock unit awards and other dilutive securities. The computation of basic and diluted loss per share for the three months ended March 31, 2022 and 2021 is as follows: Schedule of Computation of Basic and Diluted Earnings (Loss) Per Share 2022 2021 For the Three Months Ended March 31, 2022 2021 Loss per share – basic Numerator: Allocation of net loss attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating loss per common share — basic $ ( 1,578,451 ) $ ( 183,249 ) Net loss attributable to common shareholders ( 1,578,451 ) ( 183,249 ) Denominator: Weighted average number of common shares outstanding used in calculating basic loss per share 17,265,332 15,242,454 Denominator used for loss per share 17,265,332 15,242,454 Loss per share — basic $ ( 0.09 ) $ ( 0.01 ) For the Three Months Ended March 31, 2022 2021 Loss per share – diluted Numerator: Allocation of net loss attributable to HeartCore Enterprises, Inc.’s common shareholders used in calculating loss per common share — diluted $ ( 1,578,451 ) $ ( 183,249 ) Net loss attributable to common shareholders ( 1,578,451 ) ( 183,249 ) Denominator: Weighted average number of common shares outstanding used in calculating diluted loss per share 17,265,332 15,242,454 Denominator used for loss per share 17,265,332 15,242,454 Loss per share — diluted $ ( 0.09 ) $ ( 0.01 ) For the three months ended March 31, 2022 and 2021, the weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common shares equivalents of 273,489 and 1,703,653 , respectively, would have an anti-dilutive effect. NOTE 15 - SUBSEQUENT EVENTS On February 25, 2022, the Company entered into a service agreement with a marketing company pursuant to which the Company agreed to issue 83,333 RSUs for 6-month marketing services to be provided from February 25, 2022 to August 26, 2022. The RSUs were issued on May 15, 2022. 17