HeartCore Enterprises, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020. HeartCore is a Tokyo-based software company with customer experience management (CXM) and digital transformation (DX, including RPA, process mining and task mining) businesses. The Delaware holding company acquired a 97.5% interest in its Japanese operating subsidiary in July 2021 as a common-control recapitalization.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $10.82 million | $9.03 million | +19.9% |
| Gross profit / margin | $5.19 million / 47.9% | $4.02 million / 44.5% | Margin +3.4 percentage points |
| Operating income | $59,018 | $258,705 | Down $199,687 |
| Net income (loss), consolidated | $(327,044) | $155,064 | Turned to loss |
| Net income (loss) attributable to HeartCore | $(338,156) | $150,955 | Turned to loss |
| Operating cash flow | $766,300 | $745,748 | +2.8% |
| Cash and cash equivalents, year-end | $3.14 million | $3.06 million | +$78,664 |
| Working capital, year-end | $62,919 | Not stated | — |
Revenue grew mainly on higher on-premise software sales, including a major CMS license renewal of $1.16 million, and increased SaaS/task-mining demand. CXM revenue was $8.83 million versus $6.87 million; process mining revenue fell to $737,504 from $1.18 million, and RPA revenue fell to $600,318 from $690,789. Task-mining revenue rose to $353,785 from $179,375.
Operating expenses rose 36.4% to $5.13 million, faster than revenue. General and administrative expense increased 34.8% to $4.32 million, including $867,624 of listing-related costs; R&D increased 64.2% to $510,740. Income tax expense was $341,945, largely deferred tax expense, and exceeded pretax income of $14,901.
Liquidity, debt and cash flow
Current assets were $4.62 million and current liabilities $4.55 million at year-end. Long-term debt was $2.72 million net of issuance costs, including $849,995 current; scheduled 2022 loan payments were $855,117. Lease liabilities totaled approximately $3.47 million ($3.41 million operating and $61,320 finance). Operating cash flow was supported in part by increases in accounts payable/accruals and deferred revenue; investing cash use was $179,029, including $142,876 of related-party advances and loans. Financing cash use was $257,353, principally reflecting debt repayments.
After year-end, the February 2022 IPO raised $13.7 million net from 3 million shares at $5 per share. Management said cash and operating cash flows should meet working-capital needs for the 12 months after issuance of the audited financial statements, while noting possible future capital raising.
Material changes, outlook and risks
- Growth in gross profit and margin did not translate into operating-profit growth: operating income declined as administrative, R&D and selling costs increased. The company attributed some cost pressure to unexpected outsourcing costs for defective CMS projects.
- COVID-19 reduced new CX orders in travel, hotels, airlines, rail and restaurants, while retail and finance demand increased. DX sales realization was delayed; management cited a $363,321 FY2021 year-over-year DX sales reduction and COVID-related customer cancellations.
- DX RPA net retention fell to 45% from 52% in 2020 and 75% in 2019; CXM retention was 95% in both 2021 and 2020, and 92% in 2019. No quantified forward revenue or earnings guidance is provided.
- One customer generated 15.2% of FY2021 revenue. Four vendors represented 31%, 24%, 20% and 11% of purchases, respectively.
- The company reported disclosure controls and internal control over financial reporting were ineffective as of December 31, 2021, citing insufficient accounting and financial-reporting personnel with U.S. GAAP and SEC reporting expertise. The auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
- Other material risks include intense competition, customer renewals and concentration, privacy and cybersecurity obligations, currency exposure, dependence on third-party hosting and integrations, and potential difficulty obtaining additional capital. The filing also describes possible HFCA Act trading/delisting risk tied to PCAOB access to audit work performed with China-based office support.
- The filing reports no material pending litigation and no off-balance-sheet arrangements. It identifies a $386,315 unsecured loan receivable from a company controlled by the CEO, and a $447,986 mandatorily redeemable interest payable to Dentsu Digital at year-end; the subsidiary purchase was completed in February 2022 for approximately $435,500.
Key investor verification points
- Reconcile reported customer counts and paying-customer figures with the company’s customer and retention definitions; confirm the durability of the major customer renewal and the 15.2% revenue concentration.
- Assess whether CXM growth, DX retention and process-mining/RPA sales trends improved after FY2021, and whether the business can sustain margins while investing in growth.
- Review the remediation plan and progress for the disclosed material weakness in financial reporting controls.
- Confirm post-IPO cash, debt repayments, lease commitments and the use of IPO proceeds, including any subsequent borrowing or equity dilution.
- Evaluate related-party balances and transactions, vendor concentration, and the implications of the auditor’s China-office support for PCAOB inspection and listing risk.