HeartCore Enterprises, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated statements are prepared under U.S. GAAP. HeartCore develops and sells software, provides digital transformation services, and offers U.S. IPO consulting to Japanese companies. Results include Sigmaways from its February 1, 2023 acquisition; HeartCore owns 51%.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $4.69 million, up 150.4% from $1.87 million | $18.52 million, up 171.6% from $6.82 million |
| Gross profit / margin | $0.83 million / 17.7%, versus $0.33 million / 17.6% | $7.97 million / 43.0%, versus $2.88 million / 42.3% |
| Operating loss | $1.79 million, versus $2.01 million | $0.96 million, versus $5.24 million |
| Net loss | $2.54 million, versus $1.97 million | $1.76 million, versus $5.25 million |
| Net loss attributable to HeartCore | $2.31 million, versus $1.97 million | $1.34 million, versus $5.25 million |
| Operating cash flow | Not separately presented for the quarter | Used $2.46 million, versus $4.21 million used |
Quarterly revenue growth reflected $2.41 million of Sigmaways customized software development revenue and increased IPO consulting revenue. For the nine-month period, growth was driven by $6.33 million from Sigmaways and a $5.52 million increase in IPO consulting revenue; on-premise software revenue declined $0.32 million. Management cited market competition for lower on-premise software performance. Nine-month gross margin improved, but the quarterly margin was nearly unchanged. Quarterly net loss increased, including $0.73 million of other expenses, principally fair-value losses on securities and warrants.
Consulting revenue includes noncash warrant consideration. During the nine months, the Company received warrants valued at $4.01 million; fair-value losses were $0.50 million on marketable securities and $0.29 million on warrants. Those valuation movements make reported earnings and revenue less directly indicative of cash generation.
Financial position and liquidity
- Cash and cash equivalents were $2.20 million at September 30, 2023, down from $7.18 million at December 31, 2022. Operating, investing and financing activities used $2.46 million, $1.78 million and $0.43 million, respectively; exchange-rate changes reduced cash by a further $0.31 million.
- Working capital was $1.10 million, compared with $4.89 million at year-end 2022. Current assets were $6.76 million and current liabilities $5.66 million.
- Accounts receivable rose to $2.56 million from $0.55 million; the filing reports no allowance for credit losses. A $0.22 million receivable was factored with recourse and remained outstanding.
- Balance-sheet long-term debt was $1.88 million in aggregate principal, before unamortized costs, including $0.53 million current and $1.35 million non-current. Separately, the Company reported $0.12 million of insurance-premium financing and $0.22 million of factoring liability. Operating lease liabilities totaled $2.48 million.
- Total assets were $21.28 million, including $4.68 million of acquired customer-relationship intangibles, $3.28 million of goodwill, and $2.46 million of warrant investments. Accumulated deficit was $11.91 million.
Material changes, outlook and risks
- Sigmaways acquisition: The February acquisition added U.S. software-development operations. Sigmaways contributed $6.33 million revenue and $0.86 million net loss from acquisition through September 30. Acquisition accounting recorded $5.10 million of customer relationships and $3.28 million of goodwill; no goodwill impairment was reported.
- IPO consulting: As of November 13, HeartCore reported agreements with 11 companies, with fees of $350,000–$900,000 per company and warrants or Japanese acquisition rights generally representing 1%–4% of fully diluted share capital. Revenue recognition and warrant values depend on estimates and contractual conditions.
- No formal financial guidance is provided. A post-quarter GATES GROUP agreement provides for $600,000 in Phase 1 and Phase 2 fees and a warrant intended to represent 3% of fully diluted share capital after specified listing or transaction events. The warrant’s value and realization depend on those events.
- Financing and dilution: The Company terminated an unused $4.21 million ATM program effective October 22, 2023, and on October 23 established a new ATM program for up to $1.99 million, with a 4% sales commission. The Company is not obligated to sell shares. Three post-quarter bank loans totaled approximately $365,000.
- Nasdaq bid-price notice: On October 26, the Company reported notice of noncompliance with the $1.00 minimum bid-price rule after 30 consecutive business days below the threshold. It had until April 23, 2024 to regain compliance; a further 180-day period may be available subject to conditions, potentially including a reverse split. No response decision had been made.
- Controls and other risks: Management concluded disclosure controls and procedures were not effective as of September 30, for the reason previously disclosed in the 2022 Form 10-K. Revenue concentration included two customers at 14.2% and 13.6% of nine-month revenue; four vendors represented 90.6% of purchases. Management also cites collection risk, competition, currency translation, and significant estimation in acquisition and Level 3 warrant valuations. No material pending legal proceedings were reported.
Important facts for investors to verify
- How much of consulting revenue and reported growth reflects noncash warrants, and what cash collections have followed?
- Whether Sigmaways can improve profitability and generate cash, given its reported post-acquisition net loss.
- Cash runway and working-capital needs, including collection of receivables and repayment of recourse factoring and other financing.
- Fair-value assumptions and potential volatility in the warrant, marketable-security, intangible-asset and goodwill balances.
- Progress toward Nasdaq minimum-bid-price compliance, any reverse-split decision, and any share sales under the new ATM.
- Remediation of the ineffective disclosure controls and the effects of customer and supplier concentration.