HeartCore Enterprises, Inc. — Q2 2023 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2023, compared with the same 2022 periods. HeartCore develops and sells software, principally in Japan, and also provides U.S. IPO consulting. Its February 1, 2023 acquisition of 51% of Sigmaways added U.S. software development operations; the company consolidates Sigmaways and reports a non-controlling interest.
Financial and operating metrics
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Revenue | $5.10 million, up 90.8% | $13.83 million, up 179.6% |
| Gross profit and margin | $1.51 million; 29.6% (49.9% in Q2 2022) | $7.14 million; 51.6% (unchanged) |
| Operating income (loss) | $(1.47) million | $832,489 |
| Net income (loss), consolidated | $(1.02) million | $785,191 |
| Net income (loss) attributable to HeartCore | $(911,800); $(0.04) per share | $970,489; $0.05 per share |
| Operating cash flow | Not separately presented here | $(1.37) million, versus $(2.09) million |
At June 30, cash and cash equivalents were $4.24 million, down from $7.18 million at year-end 2022. Working capital was $3.49 million. Current assets were $9.38 million and current liabilities $5.89 million. Accounts receivable was $2.81 million, including $328,967 factored with recourse. Long-term debt was $1.87 million in aggregate principal, including $548,297 current; additional financing included $239,785 of insurance-premium financing and $328,967 outstanding under the factoring arrangement. Operating lease liabilities totaled $2.33 million.
Six-month investing cash outflow was $1.18 million, including $724,910 net cash paid for Sigmaways, a $300,000 note purchase, and $180,451 of property and equipment. Financing cash outflow was $243,897. Cash decreased by $2.94 million overall. The company had an accumulated deficit of $9.60 million.
Material changes versus prior periods
- Revenue growth reflected $5.83 million of six-month IPO consulting revenue, up from $448,355, and $3.93 million of Sigmaways customized software revenue, which was absent in the prior-year period. On-premise software revenue declined $456,944 for the six-month comparison.
- Six-month operating results improved from a $3.23 million operating loss to $832,489 of operating income, and HeartCore-attributable results improved from a $3.28 million loss to $970,489 of income. Q2 nevertheless remained loss-making.
- Q2 gross margin fell to 29.6% from 49.9%, despite higher revenue. Management cited lower on-premise software and IPO consulting gross profit and third-party software costs; six-month gross margin was unchanged at 51.6%.
- Cash fell during the half-year, while accounts receivable and deferred revenue increased. Stock-based compensation was $1.09 million for the six months.
Outlook, commentary, risks and unusual items
- No quantified financial guidance is provided. Management said IPO consulting growth helped offset weaker customer experience and digital transformation sales. As of August 14, 2023, the company reported consulting agreements with 10 IPO-seeking companies, with stated fees of $350,000–$900,000 each plus warrants or acquisition rights generally representing 1%–4% of fully diluted capital.
- IPO consulting revenue can include noncash warrant consideration. During the half-year, $4.01 million of warrants were received as noncash consideration; the company recorded $2.92 million of warrant investments and $1.03 million of marketable securities at June 30. Fair-value movements reduced Q2 earnings, including a $229,022 marketable-securities loss.
- Q2 included a $622,002 income-tax benefit, which management attributed to considering prior-year net operating losses. This substantially reduced the reported quarterly net loss.
- The company’s disclosure controls and procedures were concluded to be ineffective as of June 30, 2023, for the reason previously disclosed in its 2022 Form 10-K. No material change in internal control was identified during the quarter.
- Risks include customer and vendor concentration, collection exposure, variable fair-value estimates for Level 3 warrants, and the recourse factoring obligation. Three customers accounted for 42.8% of six-month revenue; two vendors represented 83.6% of purchases.
- The May 2023 at-the-market sales agreement permits up to $5 million of stock sales; the company stated it had received no proceeds under the agreement as of the filing. A subsequent event was a July 25 five-year JPY 30 million (approximately $207,000) bank loan. Management reported no material pending legal proceedings or material defaults.
Important facts for investors to verify
- How much reported IPO consulting revenue and earnings depended on noncash warrants, and how those Level 3 valuations may change.
- Whether Sigmaways can sustain its contribution and improve consolidated quarterly margins; it contributed $3.93 million of revenue and a $378,159 net loss from acquisition through June 30.
- Cash conversion, aging and collectability of receivables, factoring with recourse, and the company’s capacity to meet debt and lease payments.
- Potential dilution and actual use of the $5 million at-the-market facility, alongside shares outstanding of 20,842,690 as of August 14, 2023.
- The previously disclosed control deficiencies and whether management remediates them; also review the tax benefit and acquisition purchase-price allocation, which remained subject to a measurement period.