HeartCore Enterprises, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited U.S. GAAP consolidated results. HeartCore develops and sells software, principally in Japan, including customer experience management and digital transformation products. It acquired the remaining 2.5% of HeartCore Japan in February 2022, making the operating subsidiary wholly owned.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $2.276 million | $2.110 million |
| Gross profit / margin | $1.221 million / 53.6% | $0.703 million / 33.3% |
| Operating loss | $1.562 million | $0.159 million |
| Net loss | $1.578 million | $0.188 million |
| Net loss per share | $0.09 | $0.01 |
| Cash used in operating activities | $2.394 million | $0.851 million |
- Revenue increased 7.9%. On-premises software revenue rose 221.1% to $802,000, while maintenance and support fell 10.3%, SaaS fell 16.6%, and software development and miscellaneous services fell 34.5%.
- Gross margin improved by 20.3 percentage points, chiefly as on-premises CMS license sales increased while associated costs were described as largely fixed. Lower costs on completed prior-year development work also supported gross profit.
- Operating expenses rose 223.2% to $2.783 million, exceeding revenue. General and administrative expense increased to $2.469 million, including IPO-related professional and listing costs, new U.S. parent-company costs, executive bonuses and $422,000 of share-based compensation.
- At March 31, cash was $13.914 million, versus $3.137 million at year-end. Working capital was $12.526 million, versus $63,000 at year-end. The cash increase largely reflected IPO and other share proceeds; operating cash burn increased year over year.
- Total liabilities were $8.408 million. Debt carrying value was about $2.524 million, excluding $13,660 of unamortized issuance costs; the company also had $347,000 of insurance-premium financing and $3.189 million of lease liabilities. The insurance financing bears 12.8% annual interest and is payable over nine months.
Material changes and capital
- On February 14, 2022, HeartCore completed its Nasdaq IPO, offering 3.0 million shares at $5.00 each. The filing reports net proceeds of $13.724 million in the equity note; the cash-flow statement separately lists $13.603 million of IPO proceeds and $221,000 of pre-IPO share proceeds.
- Common shares outstanding were 18,915,943 at March 31 and 18,999,276 at May 16, 2022. The quarter included 3,096,000 shares issued for cash and share-based compensation awards.
- Deferred revenue declined to $1.316 million from $1.691 million at year-end. The company recognized about $0.8 million of Q1 revenue from the opening deferred-revenue balance.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management describes its sales and marketing investment and reports 858 Japanese customers as of March 31.
- Management cites Japanese-yen depreciation as a factor affecting reported maintenance and support revenue. It also notes uncertainty around continuing COVID-19 effects, including possible customer losses and collection delays.
- One customer represented 13.3% of Q1 2022 revenue. Three vendors represented 36.1%, 29.4% and 10.8% of purchases, respectively. A $356,000 unsecured loan receivable was due from a company controlled by the CEO.
- The company entered a March 2022 consulting agreement with Moveaction for $460,000 plus a warrant; a separate April 2022 agreement with A.L.I. provides for $400,000 plus a warrant. These arrangements include services supporting prospective U.S. listings; the A.L.I. agreement is subsequent to quarter-end.
- Disclosure controls and procedures were assessed as ineffective at March 31, 2022. Management reported no material changes in internal control over financial reporting during the quarter. The filing reports no material pending legal proceedings and no defaults on material payments.
- The cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months; investors should clarify the reason and any compliance implications.
Important facts for investors to verify
- Reconcile the IPO proceeds figures in the equity note and cash-flow statement, and confirm the final share count and dilution from outstanding awards and warrants.
- Assess whether revenue growth and improved gross margin can continue, particularly given declines in recurring support and SaaS revenue and the increased operating loss and cash burn.
- Review the remediation plan and status for ineffective disclosure controls, and clarify the “No” filing-compliance response on the cover page.
- Evaluate near-term liquidity against operating cash consumption, debt repayments, high-rate insurance financing and lease commitments.
- Review customer and supplier concentration, the CEO-related loan, and recognition, collectability and potential value of consulting fees and warrant consideration.