HeartCore Enterprises, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. HeartCore is a Japan-focused software company offering customer experience management and digital transformation products and services. Its common stock trades on Nasdaq under HTCR.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1.87 million | $3.47 million | $6.82 million | $8.45 million |
| Gross profit / margin | $0.33 million / 17.6% | $1.68 million / 48.5% | $2.88 million / 42.3% | $4.08 million / 48.3% |
| Operating income (loss) | ($2.01 million) | $0.21 million | ($5.24 million) | $0.54 million |
| Net income (loss) | ($1.97 million) | $0.19 million | ($5.25 million) | $0.41 million |
| Basic and diluted EPS | ($0.11) | $0.01 | ($0.29) | $0.03 |
- Cash flow: Nine-month operating cash outflow was $4.21 million, versus $1.24 million provided in 2021. Investing cash outflow was $0.01 million; financing cash inflow was $9.12 million. Ending cash was $7.84 million.
- Liquidity: Current assets were $9.27 million and current liabilities $3.12 million, yielding reported working capital of $6.15 million. Accounts receivable was $0.62 million; deferred revenue was $1.39 million.
- Debt and leases: Long-term debt was $1.76 million in aggregate principal ($0.62 million current and $1.13 million non-current, net of issuance costs). Operating lease liabilities totaled $2.52 million. Insurance premium financing balance was $0.09 million; the original financing carried a 12.8% annual rate.
- Balance sheet: Total assets were $12.63 million, total liabilities $6.64 million, and shareholders’ equity $5.99 million. Accumulated deficit was $9.15 million.
Material changes versus prior period
- Q3 revenue fell 46.0% year over year; nine-month revenue fell 19.3%. Management attributed the decline mainly to a major customer’s on-premise software renewal in July 2021 not recurring in the comparable period, lower software development revenue, and, for the nine-month period, yen depreciation. Newly established consulting revenue partly offset declines.
- Q3 gross margin contracted to 17.6% from 48.5%; nine-month gross margin fell to 42.3% from 48.3%.
- Nine-month operating expenses rose 129.8% to $8.12 million. Selling expense increased to $1.71 million, primarily from U.S. and Japan advertising; general and administrative expense rose to $5.83 million, including higher share-based compensation, salaries, U.S. parent-company costs and D&O insurance. R&D rose to $0.58 million.
- Cash increased from $3.14 million at year-end 2021, principally reflecting $13.82 million of net IPO and pre-IPO share proceeds, partly offset by operating cash use and $3.50 million of share repurchases.
- The company completed its February 2022 IPO at $5.00 per share and acquired the remaining HeartCore Japan shares, making the subsidiary wholly owned. It repurchased 1,349,390 shares for approximately $3.5 million; the program was exhausted and terminated in September.
Outlook, commentary, risks and unusual items
- No quantified financial guidance or forecast is provided. Management cites forward-looking-statement uncertainty and risks described in its annual and quarterly filings.
- A proposed acquisition of 51% of California-based Sigmaways remained unclosed as of the filing date. Consideration was to be finalized and could include 2.0 million HeartCore shares, initially expected $1.0 million cash, a warrant for 1.5 million shares, and a separate $2.0 million investment for additional Sigmaways shares. Conditions include agreement on valuation and forgiveness of Sigmaways’ PPP loan; the agreement could terminate if not closed by December 31, 2022.
- After quarter-end, HeartCore amended a Metros consulting agreement to $500,000 cash over nine months and a warrant initially representing 3% of Metros fully diluted capital. It also reported a SYLA warrant arrangement in lieu of a $150,000 scheduled cash payment, with a reduced remaining cash fee of $150,000 due November 13, 2022.
- The company reported that disclosure controls and procedures were not effective as of September 30, 2022, for the reason previously disclosed in its 2021 Form 10-K. No material internal-control changes during the quarter were identified.
- Foreign exchange is relevant: operations are principally in Japan, the yen weakened during 2022, and the nine-month foreign-currency translation adjustment was positive $0.43 million. COVID-19-related customer, collection and economic uncertainty is also noted, without a specific identified adjustment at issuance.
- Customer concentration was 10.0% of nine-month revenue for one customer. Four vendors accounted for 25.9%, 19.7%, 16.3% and 15.5% of nine-month purchases, respectively.
- The filing’s cover states the company checked “No” to having filed all required reports during the preceding 12 months. No material legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Confirm the status and final economics of the proposed Sigmaways acquisition, including financing, dilution, closing conditions and any subsequent updates.
- Assess whether consulting revenue can offset weaker software-license and development sales, and whether gross margins can recover from Q3’s 17.6%.
- Track operating cash burn, cash available after repurchases, debt and lease payments, and the collection of receivables.
- Review the previously disclosed control deficiencies and progress toward effective disclosure controls.
- Clarify the “No” response concerning required SEC filings and confirm the company’s filing-compliance status.
- Evaluate dilution from outstanding options and warrants, including transaction-related warrants and any future equity issuance.