HeartCore Enterprises, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking statements made by or on behalf of HeartCore Enterprises, Inc. (the “Company”). The Company and its representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as the same may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. Business Overview We are a leading software development company based in Tokyo, Japan. We provide software through two business units. The first business unit includes a customer experience management business that has been in existence for 12 years. Our customer experience management platform (the “CXM Platform”) includes marketing, sales, service and content management systems, as well as other tools and integrations, that enable companies to attract and engage customers throughout the customer experience. We also provide education, services and support to help customers be successful with our CXM Platform. The second business unit is a digital transformation business which provides customers with robotics process automation, process mining and task mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software that supports the narrow needs of large enterprise customers. We have made significant investments in our sales and marketing efforts globally. As of March 31, 2022, our sales and marketing organization was comprised of 15 employees including our field sales organization, which maintains a physical sales presence in the Japanese software market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified revenue and customer base. As of March 31, 2022, our combined business units (customer experience management business unit and digital transformation business unit) had a total of 858 customers in Japan. We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly-owned subsidiary, HeartCore Co., Ltd., a Japanese corporation (“HeartCore Co”), which was established in Japan by Mr. Sumitaka Yamamoto, our CEO, in 2009. We acquired 97.5% of the equity interest of HeartCore Co in July 2021 and acquired the remaining interest in February 2022. HeartCore Co started out with helping companies effectively managing content with its powerful content management system. Since then, HeartCore Co has expanded offerings to help companies manage all forms of business processes. 18 The acquisition of HeartCore Co in July 2021 was accounted for as a recapitalization among entities under common control since the same controlling shareholders controlled all these entities before and after the transaction. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements. Recent Developments Moveaction Consulting Agreement On March 31, 2022, we entered into a Consulting and Services Agreement (the “Moveaction Consulting Agreement”) by and between the Company and Moveaction Co., Ltd. (“Moveaction”). Pursuant to the terms of the Moveaction Consulting Agreement, the Company agreed to provide Moveaction certain services, including the following (collectively, the “Services”): ● Assistance with the selection and negotiation of terms for a law firm, underwriter and auditing firm; ● Provision of process mining and task mining licenses for internal audit and internal control; ● Assisting in the preparation of documentation for internal controls required for an initial public offering by Moveaction on the NASDAQ Stock Market, the New York Stock Exchange or the NYSE American; ● Providing support services to remove problematic accounting accounts upon listing support; ● Translation of requested documents into English; ● Attend and, if requested by the other party, lead, meetings of management and employees; ● Provide support services related to the NASDAQ listing; ● Conversion of accounting data from Japanese standards to U.S. GAAP; ● Assist in the preparation of S-1 or F-1 filings; ● Creation of English web page; and ● Preparing an investor presentation/deck and executive summary of the operations. In providing the Services, the Company will not perform accounting services, and will not act as an investment advisor or broker/dealer. Pursuant to the terms of the Consulting Agreement, the parties agreed that the Company will not provide the following services, among others: negotiation of the sale of Moveaction’s securities; participation in discussions between Moveaction and potential investors; assisting in structuring any transactions involving the sale of Moveaction’s securities; pre-screening of potential investors; due diligence activities; and providing advice relating to valuation of or financial advisability of any investments in Moveaction. Pursuant to the terms of the Consulting Agreement, Moveaction agreed to compensate the Company as follows in return for the provision of Services during the initial term of nine months: (a) $460,000, to be paid as follows: (i) $180,000 on March 31, 2022; (ii) $140,000 on the three-month anniversary of March 31, 2022; and (iii) $140,000 on the six-month anniversary of March 31, 2022; and (b) Issuance by Moveaction to the Company of a warrant (the “Moveaction Warrant”) to acquire shares of Moveaction capital stock. 19 During any Renewal Term (as defined below), Moveaction will compensate the Company for Services at the rate of $150 per hour. The Moveaction Consulting Agreement has an initial term of nine months, which will automatically renew for additional nine month period (each, a “Renewal Term”) unless either party provides at least 30 days’ prior notice. As provided in the Moveaction Consulting Agreement, on the Effective Date, Moveaction issued to the Company the Moveaction Warrant. Pursuant to the terms of the Moveaction Warrant, the Company may, at any time on or after the date that Moveaction completes its first initial public offering of stock in the United States resulting in any class of Moveaction’s stock being listed for trading on any tier of the Nasdaq Stock Market, the New York Stock Exchange or the NYSE American (the “IPO Date”) and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the Moveaction Warrant to purchase eight shares of Moveaction common stock for an exercise price per share of $0.01, subject to adjustment as provided in the Moveaction Warrant. The Warrant contains a 9.99% equity blocker. A.L.I. Consulting Agreement On April 13, 2022, the Company entered into a Consulting and Services Agreement (the “ALI Consulting Agreement”) by and between the Company and A.L.I. Technologies Inc. (“ALI”). Pursuant to the terms of the ALI Consulting Agreement, the Company agreed to provide consultant services to assist ALI to exposure to the US stock market. Pursuant to the terms of the ALI Consulting Agreement, the parties agreed that the Company will provide the following services, among others: negotiation of the sale of ALI’s securities; participation in discussions between ALI and potential investors; assisting in structuring any transactions involving the sale of ALI’s securities; pre-screening of potential investors; due diligence activities; providing advice relating to valuation of or financial advisability of any investments in ALI. Pursuant to the terms of the ALI Consulting Agreement, ALI agreed to compensate the Company as follows in return for the provision of Services during the six-month term (the “Term”): (a) $400,000, to be paid as follows: (i) $200,000 on April 13, 2022; (ii) $100,000 on the three-month anniversary of April 13, 2022; and (iii) $100,000 on the six-month anniversary of April 13, 2022; and (b) Issuance by ALI to the Company of a warrant (the “ALI Warrant”) to acquire a number of shares of capital stock of ALI, to initially be equal to 1% of the fully diluted share capital of ALI as of April 13, 2022, subject to adjustment as set forth in the ALI Warrant. For any services performed by the Company beyond the Term, ALI will compensate the Company for Services at the rate of $150 per hour. The ALI Consulting Agreement has a term of six months, which shall expire unless renewed upon mutual written agreement of the parties. As provided in the ALI Consulting Agreement, on April 13, 2022, ALI issued to the Company the ALI Warrant. Pursuant to the terms of the ALI Warrant, the Company may, at any time on or after the IPO Date and on or prior to the close of business on the tenth anniversary of the IPO Date, exercise the ALI Warrant to purchase 1% of the fully diluted share capital of ALI as of April 13, 2022 for an exercise price per share of $0.01, subject to adjustment as provided in the ALI Warrant. The number of shares for which the ALI Warrant will be exercisable will be automatically adjusted on the IPO Date to be 1% of the fully diluted number and class of shares of capital stock of ALI as of the IPO Date that are listed for trading. The Warrant contains a 9.99% equity blocker. Going forward, we expect that we will offer services substantially similar to the Services to other third parties, as well. Financial Overview For the three months ended March 31, 2022 and 2021, we generated revenues of $2,276,001 and $2,110,309, respectively, and reported net losses of $1,578,451 and $188,237, respectively, and cash out flow used in operating activities of $2,393,853 and $850,812, respectively. As noted in our unaudited consolidated financial statements, as of March 31, 2022, we had an accumulated deficit of $5,474,564. 20 Results of Operations Comparison of Results of Operations for the Three Months ended March 31, 2022 and 2021 The following table summarizes our operating results as reflected in our unaudited statements of operations during the three months ended March 31, 2022 and 2021, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods. For the Three Months ended March 31, 2022 2021 Variance % of % of Amount revenue Amount revenue Amount % of REVENUES $ 2,276,001 100.0 % $ 2,110,309 100.0 % $ 165,692 7.9 % COST OF REVENUES 1,055,356 46.4 % 1,407,632 66.7 % (352,276 ) -25.0 % GROSS PROFIT 1,220,645 53.6 % 702,677 33.3 % 517,968 73.7 % Operating expenses Selling expenses 205,918 9.0 % 46,341 2.2 % 159,577 344.4 % General and administrative expenses 2,468,933 108.5 % 762,748 36.1 % 1,706,185 233.7 % Research and development expenses 108,259 4.8 % 52,146 2.5 % 56,113 107.6 % Total operating expenses 2,783,110 122.3 % 861,235 40.8 % 1,921,875 223.2 % Loss from operations (1,562,465 ) -68.7 % (158,558 ) -7.5 % (1,403,907 ) 885.4 % Other expenses (16,802 ) -0.7 % (21,990 ) -1.0 % 5,188 -23.6 % Loss before income tax provision (1,579,267 ) -69.4 % (180,548 ) -8.5 % (1,398,719 ) 774.7 % Income tax expense (benefit) (816 ) 0.0 % 7,689 0.4 % (8,505 ) -110.6 % Net loss (1,578,451 ) -69.4 % (188,237 ) -8.9 % (1,390,214 ) 738.5 % Less: net loss attributable to non-controlling interest - - % (4,988 ) -0.2 % 4,988 -100.0 % NET LOSS ATTRIBUTABLE TO HEARTCORE ENTERPRISES, INC. $ (1,578,451 ) -69.4 % $ (183,249 ) -8.7 % $ (1,395,202 ) 761.4 % 21 For the Three Months ended March 31, 2022 2021 Variance % of % of Amount total revenue Amount total revenue Amount % of Revenues Revenue from on-premise software $ 801,601 35.2 % $ 249,608 11.8 % $ 551,993 221.1 % Revenue from maintenance and support services 845,339 37.1 % 942,215 44.7 % (96,876 ) -10.3 % Revenue from software as a service (“SaaS”) 126,654 5.6 % 151,808 7.2 % (25,154 ) -16.6 % Revenue from software development and other miscellaneous services 502,407 22.1 % 766,678 36.3 % (264,271 ) -34.5 % Total revenue 2,276,001 100.0 % 2,110,309 100.0 % 165,692 7.9 % Cost of Revenue Costs of on-premise software 220,432 9.7 % 282,252 13.4 % (61,820 ) -21.9 % Costs of maintenance and support services 308,286 13.6 % 331,817 15.7 % (23,531 ) -7.1 % Costs of software as a service (“SaaS”) 70,924 3.1 % 115,541 5.5 % (44,617 ) -38.6 % Costs of software development and other miscellaneous services 455,714 20.0 % 678,022 32.1 % (222,308 ) -32.8 % Total cost of revenue 1,055,356 46.4 % 1,407,632 66.7 % (352,276 ) -25.0 % Gross Profit On-premise software 581,169 25.5 % (32,644 ) -1.5 % 613,813 -1,880.3 % Maintenance and support services 537,053 23.6 % 610,398 28.9 % (73,345 ) -12.0 % Software as a service (“SaaS”) 55,730 2.4 % 36,267 1.7 % 19,463 53.7 % Software development and other miscellaneous services 46,693 2.1 % 88,656 4.2 % (41,963 ) -47.3 % Total gross profit $ 1,220,645 53.6 % $ 702,677 33.3 % $ 517,968 73.7 % 22 Revenues Our total revenues increased by $165,692, or 7.9%, to $2,276,001 for the three months ended March 31, 2022 from $2,110,309 for the three months ended March 31, 2021. The increase in our revenues was attributable to the following reasons: (i) the revenues from sales of on-premise software increased by $551,993, or 221.1%, to $801,601 for the three months ended March 31, 2022 from $249,608 for the three months ended March 31, 2021, mainly attributable to the increased sales volume of 15 in CMS licenses; (ii) Offset by the revenues from maintenance and support services decreased by $96,876, or 10.3%, to $845,339 for the three months ended March 31, 2022 from $942,215 for the three months ended March 31, 2021, mainly attributable to the depreciation of Japanese Yen, without which, the sales would have slightly decreased by $15,301, or 1.5%. (iii) Offset by the decrease of $264,271, or 34.5% in our revenue from software development and other service, to $502,407 in the three months ended March 31, 2022 from $766,678 in the three months ended March 31, 2021. An important customer who contributed $229,035 to our revenue in the three months ended March 31, 2021, was finished in the prior year and accordingly generated no revenue in the current period Cost of Revenues Our total costs of revenues decreased by $352,276, or 25.0%, to $1,055,356 for the three months ended March 31, 2022 from $1,407,632 for the three months ended March 31, 2021. The decrease in our costs was attributable to the following reasons: (i) the costs of on-premises software decreased by $61,820, or 21.9%, to $220,432 for the three months ended March 31, 2022 from $282,252 for the three months ended March 31, 2021. In addition to the depreciation of the yen, CMS license costs were fixed monthly and not proportional to sales. On the other hand, the sales deceased in the three months ended March 31, 2022 for process mining products, the costs of which were proportional to sales, resulting in a decrease in cost of sales. (ii) the costs of SaaS decreased by $44,617, or 38.6%, to $70,924 for the three months ended March 31, 2022 from $115,541 for the three months ended March 31, 2021. There were specialized supporting employees and subcontractors for CXM Cloud (SaaS) in the first quarter of 2021. As the product entered into a mature phase and operations became stable in 2022, specialized supporting employees and subcontractors were no longer needed, and the costs decreased accordingly. (iii) the costs of software development and other miscellaneous services decreased by $222,308, or 32.8%, to $455,714 for the three months ended March 31, 2022 from $678,022 for the three months ended March 31, 2021. As mentioned above, we incurred development costs for the product sold to the important customer in the first quarter 2021, and we incurred no such costs in 2022 because the project development completed in 2021. 23 Gross Profit Our total gross profit increased by $517,968, or 73.7%, to $1,220,645 for the three months ended March 31, 2022 from $702,677 for the three months ended March 31, 2021. The increase in our gross profit was attributable to the gross profit from sales of on-premises software increased by $613,813, or -1,880.3% from -$32,644 for the three months ended March 31, 2021 to $581,169 for the three months ended March 31, 2022, primarily due to the increased sales in CMS licenses, the costs of which is not proportional to sales, but fixed monthly. For the reasons discussed above, our overall gross profit margin increased by 20.3% to 53.6% in the three months ended March 31, 2022 from 33.3% in the three months ended March 31, 2021. Operating Expenses The following table sets forth the breakdown of our operating expenses for the three months ended March 31, 2022 and 2021: For the Three Months ended March 31, 2022 2021 Variance % of % of Amount revenue Amount revenue Amount % of Total revenues $ 2,276,001 100.0 % $ 2,110,309 100.0 % $ 165,692 7.9 % Operating expenses Selling expenses 205,918 9.0 % 46,341 2.2 % 159,577 344.4 % General and administrative expenses 2,468,933 108.5 % 762,748 36.1 % 1,706,185 223.7 % Research and development expenses 108,259 4.8 % 52,146 2.5 % 56,113 107.6 % Total operating expenses $ 2,783,110 122.3 % $ 861,235 40.8 % $ 1,921,875 223.2 % Selling Expenses Our selling expenses primarily include advertising expenses, sales commissions, and sales promotion expenses. Our selling expenses increased by $159,577, or 344.4%, to $205,918 in the three months ended March 31, 2022 from $46,341 in the three months ended March 31, 2021, primarily attributable to an increase in advertising expenses by $157,270, or 527.8%, to 187,070 in the three months ended March 31, 2022 from $29,800 in the three months ended March 31, 2021. The U.S. parent company launched advertising activities to increase its visibility in the U.S. after the Company going public in the U.S. As a percentage of revenues, our selling expenses accounted for 9.0% and 2.2% of our total revenue for the three months ended March 31, 2022 and 2021, respectively. 24 General and Administrative Expenses Our general and administrative expenses primarily consist of employee salaries and welfare, consulting and professional service fees incurred for company reorganization and going public, depreciation and amortization expenses, rental expenses, office, utility and other expenses, listing-related expenses, travel and entertainment expenses, and share-based compensation expense. Our general and administrative expenses increased by $1,706,185 or 223.7%, to $2,468,933 in the three months ended March 31, 2022 from $762,748 in the three months ended March 31, 2021, primarily attributable to (i) our office, utility and other expenses increased by $121,627 or 149.0%, to $203,257 in the three months ended March 31, 2022 from $81,630 in the three months ended March 31, 2021, primarily due to the increase in the U.S. parent company’s office expenses, and D&O indemnity insurance premiums of the parent company; (ii) our consulting and professional fees increased by $412,713 or 399.3%, to $516,072 in the three months ended March 31, 2022 from $103,359 in the three months ended March 31, 2021, primarily due to the increase in consulting and legal fees related to going public; (iii) an increase in listing-related expenses of $283,468, or 100%, as compared the prior period; (iv) an increase in salaries and welfare by $384,388, or 79.8%, to $866,207 in the three months ended March 31, 2022 from $481,819 in the three months ended March 31, 2021, primarily due to the salaries paid to the parent company’s newly hired U.S. employees. In addition, the company paid approximately $150,000 in executive bonuses in the first quarter 2022; (v) an increase in share-based compensation of $422,164, or 100%, to $422,164 in the three months ended March 31, 2022 from nil in the three months ended March 31, 2021, primarily due to the amortization of fair value of stock options and restricted stock units granted. The overall increase in our general and administrative expenses in three months ended March 31, 2021 as compared to the three months ended March 31, 2020 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 108.5% and 36.1% of our revenue for the three months ended March 31, 2022 and 2021, respectively. Research and development expenses Our research and development expenses primarily consist of employee salaries and welfare, and outsourcing expenses. 25 Our research and development expenses increased by $56,113 or 107.6%, to $108,259 in the three months ended March 31, 2022 from $52,146 in the three months ended March 31, 2021, primarily attributable to an increase in outsourcing expenses by $57,302, or 126.1%, to $102,750 in the three months ended March 31, 2022 from $45,448 in the three months ended March 31, 2021, as we outsourced certain development activities for more efficiency and experience, relating to CMS UI renewal and PIM/DAM large-scale development starting in September 2021. The overall increase in our research and development expenses in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 reflected the above-mentioned factors combined. As a percentage of revenues, research and development expenses were 4.8% and 2.5% of our revenue for the three months ended March 31, 2022 and 2021, respectively. Other Expenses, net Our other income (expenses) primarily includes interest income generated from bank deposits and loans to related-parties, interest expenses for bank loans, bonds, and leases, other incomes, and other expenses. Total other expenses, net, decreased by $5,188 or 23.6%, from $21,990 in the three months ended March 31, 2021 to $16,802 in the three months ended March 31, 2022. Provision for Income Taxes Our income taxes benefit was $816 in the three months ended March 31, 2022, as compared to the income taxes provision of $7,689 in the three months ended March 31, 2021, mainly due to the increased loss. Net Loss As a result of the foregoing, we reported a net loss of $1,578,451 for the three months ended March 31, 2022, representing a $1,390,214 or 738.5% increase from a net loss of $188,237 for the three months ended March 31, 2021. Net loss attributable to non-controlling interest We own 97.35% of the outstanding shares of the operation subsidiary, HeartCore Co, which located in Japan, as of March 31, 2021. Accordingly, we recorded net loss attributable to the non-controlling interest. The net loss attributable to non-controlling interest was $4,988 in the three months ended March 31, 2021. On August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”), a non-controlling shareholder of HeartCore Japan, entered into a stock purchase agreement, pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Japan held by Dentsu Digital in accordance with certain terms and conditions in the stock purchase agreement for JPY50,040,000 on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public offering of common shares, filed by the Company with the SEC or (ii) December 20, 2022. On February 24, 2022, the Company purchased 278 shares of HeartCore Co from Dentsu Digital for JPY50,040,000 (approximately $435,500 when paid). As a result, HeartCore Co became a wholly owned subsidiary of the Company. Accordingly, we did not record non-controlling interest income in the three months ended March 31, 2022. Net loss attributable to HeartCore Enterprises, Inc. As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $1,578,451 for the three months ended March 31, 2022, representing a $1,395,202 or 761.4% increase from a net loss of $183,249 for the three months ended March 31, 2021. Liquidity and Capital Resources As of March 31, 2022, we had $13,913,886 in cash as compared to $3,136,839 as of December 31, 2021. As of March 31, 2022, our working capital was $12,526,450 as compared to $62,919 as of December 31, 2021. We also had $1,116,254 in accounts receivable as of March 31, 2022. Our accounts receivable primarily include balance due from customers for our on-premises software sold and services provided and accepted by customers. 26 The following table sets forth summary of our cash flows for the periods indicated: For the Three Months Ended March 31, 2022 2021 Net cash used in operating activities $ (2,393,853 ) $ (850,812 ) Net cash used in investing activities (35,281 ) (64,510 ) Net cash provided by (used in) financing activities 13,284,474 (346,391 ) Effect of exchange rate changes (78,293 ) (103,801 ) Net change in cash and cash equivalents 10,777,047 (1,365,514 ) Cash and cash equivalents, beginning of the period 3,136,839 3,058,175 Cash and cash equivalents, end of the period $ 13,913,886 $ 1,692,661 Operating Activities Net cash used in operating activities was $2,393,853 for the three months ended March 31, 2022, primarily consisting of the following: ● Net loss of $1,578,451 for the three months ended March 31, 2022. ● An increase in accounts receivable of $217,638. The increase was primarily due to the increase in our sales in the current period. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary. ● An increase in prepaid expense of $488,970, primarily due to the increase in the prepayment to an IR provider of $400,000. ● A decreased in account payable and accrued expenses of $79,982, primarily attributable to the payoff the accrued expenses related to the IPO. ● A decrease of deferred revenue of $295,176, primarily due to the completion of software development project. ● Offset by share-based compensation of $422,164. Net cash used in operating activities was $850,812 for the three months ended March 31, 2021, primarily consisting of the following: ● Net loss of $188,237 for the three months ended March 31, 2021. ● An increase in accounts receivable of $458,314. The increase was primarily due to our increased sales in the three months ended March 31, 2021. The collected accounts receivable is available cash, which can be used as working capital for our business operation, if necessary. ● An increase in prepaid expense of $186,462, primarily due to the increase in the prepayments to software venders. ● A decrease of deferred revenue of $233,170, primarily due to the completion of software development project. ● A decrease of income tax payable of 159,991, primarily due to the decreased taxable income. ● Offset by an increase in accounts payable and accrued expenses of $319,323, primarily due to the increase in the accrued expense related to the IPO. 27 Investing Activities Net cash used in investing activities amounted to $35,281 for the three months ended March 31, 2022, and primarily included the purchase of fixed assets of $18,903, and the loans provided to related parties of $25,480. Net cash used in investing activities amounted to $64,510 for the three months ended March 31, 2021, and primarily included the purchase of fixed assets of $4,239, and the loans provided to related parties of $60,271. Financing Activities Net cash provided by financing activities amounted to $13,284,474 for the three months ended March 31, 2022, primarily consisting of total proceeds of $13,823,126 from the initial public offering and issuance of common shares prior to the initial public offering, and offset by payment for mandatorily redeemable financial interest of $430,489. Net cash used in financing activities amounted to $346,391 for the three months ended March 31, 2021, primarily consisting of repayment of long-term debts of $328,799 and payments for finance leases of $16,172. Contractual Obligations Lease commitment The Company’s subsidiary, HeartCore Co., Ltd. entered into two leases for its office space and parking lot, which were classified as operating leases. HeartCore Co., Ltd. also entered into two leases for office equipment and a lease for a vehicle, and these leases were classified as finance leases. As of March 31, 2022, future minimum lease payments under the non-cancellable lease agreements are as follows: Year ending December 31, Finance lease Operating lease Remaining of 2022 $ 22,755 $ 255,580 2023 20,947 340,773 2024 308 340,773 2025 - 340,773 2026 - 340,773 Thereafter - 1,743,870 Total lease payments 44,010 3,362,542 Less: imputed interest (313 ) (217,181 ) Total lease liabilities 43,697 3,145,361 Less: current portion 29,272 313,737 Non-current lease liabilities $ 14,425 $ 2,831,624 Long Term Debt The Company’s long-term debts included bond payable and loans borrowed from banks and other financial institutions. 28 As of March 31, 2022, future minimum loan payments are as follows: Year ending December 31, Loan Payment Remaining of 2022 $ 569,006 2023 767,586 2024 475,901 2025 273,036 2026 248,436 Thereafter 203,859 Total $ 2,537,824 Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of March 31, 2022. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements. These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenue and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenue and expenses incurred during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed herein reflect the more significant judgments and estimates used in preparation of our unaudited consolidated financial statements. Revenue Recognition The Company recognizes revenue under ASC Topic 606, “Revenue from Contracts with customers”. To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value, net of a value-added tax (“Consumption Tax”) and applicable local government levies. The Consumption Tax on sales is calculated at 10% of gross sales. The Company currently generates its revenue from the following main sources: Revenue from On-Premise Software Licenses for on-premise software provide the customer with a right to use the software as it exists when made available to the customer. The Company provides on-premise software in the form of both perpetual licenses and term-based licenses which grant the customers with the right for a specified term. Revenue from on-premise licenses is recognized upfront at the point in time when the software is made available to the customer. Licenses for on-premise software are typically sold to the customer with maintenance and support services in a bundle. Revenues under the bundled arrangements are allocated based on the relative standalone selling prices (“SSP”) of on-premise software and maintenance and support service. The SSP for maintenance and support services is estimated based upon observable transactions when those services are sold on a standalone basis. The SSP of on-premise software is typically estimated using the residual approach as the Company is unable to establish the SSP for on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. Revenue from Maintenance and Support service Maintenance and support services provided with software licenses consist of trouble shooting, technical support and the right to receive unspecified software updates when and if available during the subscription. Revenues from maintenance and support services are recognized over time as such services are performed. Revenues for consumption-based services are generally recognized as the services are performed and accepted by the customers. Revenue from Software as a Service (“SaaS”) The Company’s software is available for use as hosted application arrangements under subscription fee agreements without licensing the rights of the software to the customers. Subscription fees from these applications are recognized over time on a ratable basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. The subscription contracts are generally one year or less in length. Revenue from Software Development and other Miscellaneous Services The Company provides customers with software development and support service pursuant to their specific requirements, which primarily compose of consulting, integration, training, custom application, and workflow development. The Company also provides other miscellaneous services, such as 3D Space photography. The Company generally recognized revenue at a point in time when control is transferred to the customers and the Company is entitled to the payment, which is when the promised services are delivered and accepted by the customers. The timing of revenue recognition may differ from the timing of invoicing to the customers. The Company records a contract asset, which is included in accounts receivable on the consolidated balance sheets, when revenue is recognized prior to invoicing. The Company records deferred revenues on the consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Deferred revenues are reported net of related uncollected deferred revenues in the consolidated balance sheets. The amount of revenues recognized during the three months ended March 31, 2022 and 2021 that were included in the opening deferred revenues balance was approximately $0.8 million and $0.9 million, respectively. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.