HeartCore Enterprises, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. HeartCore develops and sells software, principally through its Japan-based subsidiary, with customer experience management and digital transformation offerings. The company completed its U.S. IPO in February 2022 and acquired the remaining interest in its subsidiary, making it wholly owned.
Financial performance and liquidity
| Metric | Q2 2022 | Six months 2022 | Comparable 2021 |
|---|---|---|---|
| Revenue | $2.67 million | $4.95 million | Q2: $2.87 million; six months: $4.98 million |
| Gross profit / margin | $1.33 million / 49.9% | $2.55 million / 51.6% | Q2: $1.69 million / 59.0%; six months: $2.39 million / 48.1% |
| Operating income (loss) | $(1.66) million | $(3.23) million | Q2: $0.49 million; six months: $0.33 million |
| Net income (loss) | $(1.70) million | $(3.28) million | Q2: $0.41 million; six months: $0.22 million |
| Operating cash flow | Not separately stated | $(2.09) million | Six months: $0.35 million provided |
- Q2 revenue fell 6.8% year over year; six-month revenue declined 0.6%. Q2 gross margin contracted 9.1 percentage points, while the six-month margin improved 3.5 points.
- Cash and cash equivalents were $12.46 million at June 30, up from $3.14 million at year-end. Working capital was $10.00 million. Current assets were $14.51 million and current liabilities $4.50 million.
- Long-term debt had $2.11 million of outstanding principal, including $0.73 million current; balance-sheet debt net of issuance costs was approximately $2.10 million. Lease liabilities totaled $2.78 million, mostly non-current. Insurance-premium financing carried a 12.8% annual rate, with $0.22 million outstanding.
- Accumulated deficit was $7.18 million. Six-month basic and diluted loss per share was $0.18.
Material changes and notable items
- Q2 operating expenses increased 149% to $3.00 million, including higher advertising, public-company and professional costs, payroll, share-based compensation, and R&D. Six-month operating expenses increased 180% to $5.78 million.
- Management attributed revenue pressure to lower on-premise software sales, terminated major maintenance contracts, fewer software-development clients, and yen depreciation. Newly generated consulting revenue of $448,355 from three Japan-based companies seeking U.S. listings partly offset declines.
- The company raised net IPO proceeds of approximately $13.72 million and completed a $3.5 million share-repurchase authorization. By June 30 it had repurchased 558,809 shares for approximately $1.34 million, leaving about $2.16 million authorized. From July 1 through August 9, it repurchased a further 651,251 shares for approximately $1.9 million; about $0.3 million remained available.
- April and May consulting agreements with A.L.I. Technologies and SYLA Holdings provide for $400,000 and $500,000 in cash fees, respectively, plus warrants initially representing 1% and 2% of each company’s fully diluted equity. Warrant exercise depends on a qualifying IPO and is subject to stated terms and blockers.
- Share-based compensation was $0.89 million for the first half. At June 30, $1.61 million of option compensation and $0.34 million of RSU compensation remained unamortized.
Outlook, risks and controls
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management describes planned continued sales and marketing investment and expects to offer listing-related consulting services to other third parties.
- Key exposures include yen-dollar exchange movements, customer collections and customer concentration, and supplier concentration. Two customers represented 12.9% and 10.4% of first-half revenue; two vendors represented 44.5% and 29.8% of purchases.
- Management noted continuing uncertainty around COVID-19 impacts, including possible customer losses or collection delays. No material legal proceedings or off-balance-sheet arrangements were reported.
- Management concluded disclosure controls and procedures were not effective as of June 30, 2022, for the reason previously disclosed in the 2021 Form 10-K; no material changes to internal controls were identified during the quarter.
- The cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months. This is a filing-status item investors should clarify, particularly given the company’s recent public-company history.
Most important facts for investors to verify
- Whether operating costs and cash burn can be reduced or supported by sustainable revenue growth after the IPO-related spending increase.
- Cash collection, customer and vendor concentration, and the continuing effect of yen depreciation on reported results.
- Remaining share-repurchase activity, post-quarter share count, and the use of cash relative to operating needs and debt obligations.
- Consulting-fee collection, warrant accounting and valuation, and whether the clients’ prospective listings occur.
- The remediation plan for ineffective disclosure controls and the basis for the cover-page report-filing response.