HeartCore Enterprises, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Filed April 8, 2024. The company is a Tokyo-based software and services provider, with customer-experience management (CXM), digital transformation (DX), and U.S. IPO consulting businesses. FY2023 includes Sigmaways from its February 1, 2023 acquisition; FY2022 does not.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $21.85 million | $8.82 million | +147.7% |
| Gross profit / margin | $8.07 million / 36.9% | $3.35 million / 38.0% | Margin down 1.1 percentage points |
| Operating loss | $4.12 million | $6.70 million | Loss narrowed |
| Consolidated net loss | $4.88 million | $6.68 million | Loss narrowed 27.0% |
| Net loss attributable to HeartCore | $4.19 million | $6.68 million | Loss narrowed 37.3% |
| Operating cash flow | $(4.33) million | $(4.81) million | Cash use continued |
| Cash and cash equivalents | $1.01 million | $7.18 million | Down $6.16 million |
| Working capital | $(1.02) million | Not clearly stated | Deficit at year-end |
Revenue growth was driven primarily by $8.78 million of customized software development revenue following the Sigmaways acquisition and $6.21 million of consulting revenue, including GO IPO services. By contrast, CXM revenue was $5.60 million, down from $5.95 million; management cited cancellations, a weak distributor, and approximately 8% yen depreciation as factors affecting parts of the software business.
Operating expenses were $12.19 million, up 21.3%; general and administrative expense rose 46.7% to $9.65 million, while selling expense fell 46.4% to $1.52 million. Other expense was $891,009, including $615,520 of marketable-securities fair-value losses and $501,445 of warrant fair-value losses, partly offset by other income. FY2023 basic and diluted loss per share was $0.21, versus $0.37.
Liquidity, debt, and capital
- Year-end current assets were $5.49 million and current liabilities $6.51 million. Accounts receivable totaled $2.62 million, with no allowance for credit losses recorded.
- Gross long-term debt principal was $2.16 million, plus $135,937 of short-term debt and $562,767 outstanding under a recourse factoring arrangement. The factoring facility is secured by Sigmaways assets; its obligations are personally guaranteed by Sigmaways’ CEO. The short-term loan carried a reported 36.84% annual interest rate.
- Operating lease liabilities were $2.53 million; finance lease liabilities were $84,224. The company reported net cash used in investing activities of $1.78 million, including the Sigmaways acquisition, $600,000 of advances on notes receivable, and $526,260 of property and equipment purchases.
- Financing cash flow was $136,194, compared with $8.92 million provided in FY2022, which included IPO proceeds. The company had an at-the-market offering authorization of up to approximately $1.99 million; the filing does not specify sales under it during FY2023.
Material changes, outlook, and risks
- The February 2023 acquisition of 51% of Sigmaways added $8.78 million of revenue and $1.40 million of net loss from acquisition through year-end. HeartCore issued 2.5 million shares as part of the $4.15 million purchase consideration.
- GO IPO consulting agreements covered 11 clients at year-end. Contract fees ranged from $380,000 to $900,000 per client, plus warrants or stock acquisition rights for 1%–4% of each client’s fully diluted equity. Warrant consideration contributed $3.76 million of noncash revenue in FY2023; warrant and marketable-security valuations also generated significant fair-value losses.
- Customer concentration increased: three customers represented 15.1%, 10.4%, and 10.1% of FY2023 revenue. The CXM paying-customer net retention rate declined to 88% from 92% in 2022 and 95% in 2021.
- Management provided no specific revenue, earnings, or cash-flow guidance. It describes international expansion, customer growth, product development, and cost control as priorities. It also notes that GO IPO revenue helped offset declines in CX and DX sales in Japan.
- Liquidity is a key risk given the cash decline, working-capital deficit, and continuing operating cash outflow. Management says it monitors cash, future revenue generation, and spending commitments; the filing does not provide a clear quantified liquidity forecast.
- Nasdaq notified the company in October 2023 that its share price was below the $1 minimum bid requirement. The stated initial cure deadline was April 23, 2024; the company was evaluating alternatives, including a possible reverse split, and gave no assurance it would regain compliance. The filing reports a $0.96 closing price on April 5, 2024.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2023 because of insufficient accounting and financial-reporting personnel with U.S. GAAP and SEC reporting expertise. The auditor expressed an unmodified opinion on the financial statements but did not audit ICFR.
- Subsequent events include a February 29, 2024 agreement to sell part of customer warrants for $9.0 million cash; the filing does not establish whether the transaction had closed by filing date. On April 1, 2024, the board declared a $0.02-per-share dividend payable May 3 to holders of record April 26.
- The company reported no pending litigation it believed would have a material effect. Other stated risks include competition, subscription renewals, foreign-exchange movements, data privacy and cybersecurity, customer and warrant valuation uncertainty, controlled-company governance, and potential Nasdaq delisting.
Most important facts for investors to verify
- Whether the $9.0 million warrant-sale agreement closed, the amount actually received, and any resulting accounting or liquidity impact.
- Cash conversion and collectability of the $2.62 million receivables, including factored receivables with recourse; monitor cash burn, the working-capital deficit, and debt maturities.
- How much FY2023 growth came from acquired Sigmaways, consulting and noncash warrant revenue versus recurring software activity, and whether customer concentration and retention improve.
- Progress in remediating the material weakness and improving disclosure controls and financial-reporting staffing.
- Nasdaq bid-price compliance status and any subsequent listing actions, financing, or share dilution.
- Valuation assumptions and realizability of customer warrants and related marketable securities, given material fair-value changes and unobservable valuation inputs.