HeartCore Enterprises, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless stated otherwise. The consolidated statements received an unqualified audit opinion.
Business context
HeartCore is a Tokyo-based software company with customer experience management (CXM) and digital transformation (DX) businesses, including process/task mining and robotic process automation. In 2022 it also began consulting for Japanese companies seeking U.S. public listings (“GO IPO”). The company reported one operating segment; nearly all revenue and long-lived assets were attributed to Japan.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $8.82 million | $10.82 million |
| Gross profit / margin | $3.35 million / 38.0% | $5.19 million / 47.9% |
| Operating loss | $6.70 million | Operating income of $59,018 |
| Net loss | $6.68 million | $327,044 |
| Basic and diluted loss per share | $0.37 | $0.02 |
| Net cash from (used in) operations | $(4.81) million | $766,300 |
| Cash and cash equivalents, year-end | $7.18 million | $3.14 million |
| Working capital, year-end | $4.89 million | Not stated here |
Revenue fell 18.5%. Management attributed the decline mainly to the absence of a large five-year on-premise license renewal recorded in 2021, weaker software development and related services, and yen depreciation; $1.45 million of new consulting revenue partly offset those decreases. CXM revenue was $5.95 million (2021: $8.83 million); process mining, RPA and task mining revenue was $499,724, $394,829 and $337,950, respectively.
Gross margin decreased 9.9 percentage points. Cost of revenue declined only 3.0%, while operating expenses rose 95.9% to $10.05 million. Selling expense rose to $2.83 million, including $1.90 million in advertising and $784,859 in stock-based compensation. General and administrative expense increased 52.3% to $6.58 million, reflecting higher salaries, professional fees, stock compensation and insurance costs. Research and development expense was $641,025.
Cash, debt and liquidity
Operating cash use was $4.81 million, compared with positive operating cash flow of $766,300 in 2021. Financing provided $8.92 million, principally reflecting IPO and share issuance proceeds, partly offset by a $3.50 million share repurchase and debt repayments. Investing cash use was $12,200. The company reported $1.83 million of long-term debt principal at year-end, including $697,877 current and $1.12 million non-current after debt issuance costs. Separately, lease liabilities totaled $2.73 million: $2.71 million operating and $19,753 finance. Lease commitments and debt maturities are additional cash obligations.
Material changes and subsequent events
- The company completed its Nasdaq IPO in February 2022, offering 3.0 million shares at $5.00 per share; reported net proceeds were $13.72 million.
- It repurchased and retired 1,349,390 shares for approximately $3.5 million during 2022.
- HeartCore acquired the remaining HeartCore Japan shares in February 2022, making the subsidiary wholly owned.
- After year-end, on February 1, 2023, HeartCore acquired 51% of Sigmaways for $4.15 million: $1.0 million cash and 2.5 million HeartCore shares valued at $3.15 million. Purchase accounting was incomplete at filing, and Sigmaways was not included in 2022 results.
- By March 30, 2023, HeartCore reported consulting agreements with nine IPO candidates, with fees of $350,000–$900,000 per company plus warrants or acquisition rights for 1%–4% of each client’s fully diluted equity, subject to stated terms.
- The company reported approximately $4.7 million deposited at Signature Bridge Bank on March 12, 2023; it said normal banking activities resumed the next day.
Outlook, risks and unusual matters
No quantified revenue, earnings or cash-flow guidance is provided. Management said GO IPO consulting revenue helped offset CXM and DX declines. It cited continuing uncertainty around economic conditions and COVID-19 effects, customer renewals, competition, growth execution, access to capital, yen movements and the development of the newer consulting business. CXM net retention was 92% at year-end 2022, down from 95% in both 2021 and 2020.
Management concluded disclosure controls and internal control over financial reporting were ineffective as of December 31, 2022, due to a material weakness: insufficient accounting and financial-reporting personnel with U.S. GAAP and SEC reporting expertise. The auditor did not provide an opinion on internal-control effectiveness. The filing also identifies concentrated supplier purchases (the three largest vendors represented 82% of 2022 purchases), related-party lending, data-security and privacy exposure, and substantial competitive and listing risks. CEO Sumitaka Yamamoto held approximately 52.8% of voting power as of March 31, 2023; the company uses controlled-company exemptions from certain Nasdaq governance requirements.
Investor verification points
- Track operating cash burn, cash availability and the funding needs of the acquired Sigmaways business; verify the subsequent accounting for the acquisition and related share issuance.
- Assess whether revenue stabilizes and margins recover after the lost large license renewal, yen effects and higher operating expenses; monitor CXM renewal and customer conversion trends.
- Review remediation of the material weakness and whether financial reporting controls improve.
- Confirm the status and terms of the nine IPO-consulting engagements, including fee collection, timing of revenue recognition and contingent equity rights.
- Verify bank-deposit exposure, debt and lease-payment schedules, related-party loan collection, and the effect of future equity awards or issuances on dilution.
- Reconcile customer disclosures: the filing reports 903 Japan customers, including 645 paying, and 24 customers outside Japan, including 2 paying; it also describes the latter paying share as 0.2%, which is not clearly reconciled to the stated counts.