ITEM
1. BUSINESS
This
Business section, along with other sections of this annual report on Form 10-K, includes statistical and other industry and market data
that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party
research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although
they do not guarantee the accuracy or completeness of such information. While we believe that these industry publications and third-party
research, surveys and studies are reliable, we have not independently verified such data and we do not make any representation as to
the accuracy of the information. Unless the context
otherwise requires, “HeartCore,” “we,” “us,” “our,” or the “Company” refers
to HeartCore Enterprises, Inc. and its consolidated subsidiary, including, but not limited to, HeartCore Co., Ltd.
Overview
We
are a leading software development company based in Tokyo, Japan. We provide software through two business units. The first business
unit includes a customer experience management business that has been in existence for 12 years. Our CXM Platform includes marketing,
sales, service and content management systems, as well as other tools and integrations, that enable companies to attract and engage customers
throughout the customer experience. We also provide education, services and support to help customers be successful with our CXM Platform.
The
second business unit is a digital transformation business which provides customers with robotics process automation, process mining and
task mining to accelerate the digital transformation of enterprises. We also have an ongoing technology innovation team to develop software
that supports the narrow needs of large enterprise customers.
We
have made significant investments in our sales and marketing efforts globally. As of December 31, 2021, our sales and marketing organization
was comprised of 45 employees including our field sales organization, which maintains a physical sales presence in the Japanese software
market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified
revenue and customer base. As of December 31, 2021, our combined business units (customer experience management business unit and digital
transformation business unit) had 839 total customers in Japan, of which 581, or 69.2%, were paying customers, and 24 total customers
outside Japan, of which 2, or 1.0%, was a paying customer. Our 280 non-paying customers were originally paying customers that utilized
our paid services but now use a free version of the CXM Platform. There is the potential for non-paying customers to become paying customers
again if and when they start utilizing our paid services again.
Industry
Overview
Customer
Experience Management Business
Companies
must manage a huge amount of content, collaborate with other kinds of business processes, and build infrastructure to fulfill customers’
needs. To make it happen, companies need a content management system that allows easy implementation of a wide range of features including
content creation, analysis, search capability and access controls into their websites, and enables them to deliver and receive content
at the best time responding market changes. A customer experience management system is also becoming essential for companies to manage
customers and deliver personalized content based on the users’ behavior, device, location and context. A customer experience management
system is also required to analyze big data to deliver even the subconscious wants and needs of customers. Furthermore, these capabilities
are not supposed to be limited to general websites but also to various kinds of services such as E-commerce, smartphone sites, smartphone
apps, social networking services, blogs, and digital signage. Content management systems and customer experience management systems need
to provide rich features to fill the new generation of customers’ needs.
Digital
Transformation Business
RPA
is a technology that allows automation for a defined set of tasks. RPA robots can emulate most human-computer interactions to carry out
error-free tasks at high volume and speed. Some common tasks RPA can do include: (i) invoice processing; (ii) process sales orders; (iii)
account reconciliation; (iv) enterprise resource planning data entry for core processes such as finance, human resources, manufacturing,
supply chain, services, and procurement; (v) employee onboarding; (vi) payroll; and (vii) data queries.
As
companies have strived to automate, it has become more and more challenging to identify RPA opportunities. This has included uncovering
processes that would be good candidates for automation and having fundamental metrics about those processes (via task mining and process
mining technology) at their disposal – like utilization and the specific steps in the process if it is not already documented –
to aid them in their decision.
Task
mining is a technology that enables organizations to discover, understand, and analyze the tasks employees perform as they relate to
completing larger processes. Task mining software works by monitoring the actions users take. A recorder is installed on an employee’s
computer to capture their interactions in the different applications they use, recording data like keystrokes, clicks, data entry, etc.,
to uncover how tasks are completed within the organization. The purpose of using task mining software is to discover and understand the
tasks employees are performing. The ultimate objective is to find ways to improve how those tasks are carried out or automate them to
increase operational efficiency, reduce errors, and improve employee engagement.
Process
mining is a technology that investigates the mountains of data in enterprise event logs to discover and present end-to-end processes
that the organization is performing to complete work. Event logs are essentially banks of data that store different information. The
benefit of process mining software is that it presents the process it successfully mined, along with the process’ variants and
suggestions on how to optimize and improve that process. Like task mining, the most common use case for adopting process mining technology
is to improve processes, with the ideal goal of automating them for all the benefits and returns that come with automation, like improved
customer and employee experiences.
Industry
Characteristics
Explosive
Growth of Cloud-Based Applications Creating a New Era of IT Complexity. Businesses around the world are spending hundreds of billions
of dollars to adopt applications that help advance digital transformation and drive competitive advantages. With the proliferation of
cloud technologies and SaaS, traditional software suites have been disaggregated into point solutions. For example, human capital management
software has been segregated across recruiting, payroll, benefits administration, and other key business functions. As a result, enterprises
have transitioned from managing a handful of multi-purpose, largely on-premises applications to managing hundreds and even thousands
of specialized point solutions deployed across on-premises, cloud, and hybrid environments. According to the Wall Street Journal, in
2019 the number of software applications deployed by large firms across all industries worldwide had increased by approximately 70% over
the previous four years. These applications, which were generally not designed for interoperability, run in tandem with long-running,
legacy technologies. The increasing volume of applications has a compounding effect on the complexity of business processes and the IT
environments that support them.
The
Benefits of Digital Transformation Have Yet to Make Their Way to the Workforce. Modern enterprise applications enable deep and nuanced
functionalities, such as conducting personalized marketing campaigns, predictive service delivery, and real time visibility of goods
movement across the supply chain. However, despite massive functional advancement, the true promise and potential of digital transformation—reallocating
human capital towards cognitive, higher-value activities—remains elusive, which is limiting improvements in productivity. For example,
in the United States, non-farm real output per hour grew 31% during the decade ended December 31, 2009, but only 13% in the subsequent
decade ended December 31, 2019.
Individual
Business Processes Rely on Multiple Business Applications, and Workers to Orchestrate Them. While specialized applications deliver
extensive functionality, they do not account for the full spectrum of how work gets done. The proliferation of specialized applications
has resulted in humans being the connective tissue in an enterprise, working across a wide range of applications that individually are
not built to address the needs of the actual processes they are supporting. As a result, activities performed by many workers today are
still manual, mundane, and administrative tasks, limiting workers from focusing on higher-value activities that can directly improve
business performance.
Automation
is the New Frontier of Competitive Differentiation. Enterprises are demanding a new approach to unify, tailor, and run applications
without significant IT resources or changes to existing infrastructure. Automation enables organizations to design and optimize business
processes to improve productivity and business performance. Additionally, automation solutions that can accurately and consistently emulate
human behavior can work within existing business processes in a way that traditional applications cannot. This allows businesses to harness
the power of specialized applications in a differentiated manner. With the ability to emulate human behavior, this new approach to automation
is disrupting traditional automation and transforming data-processing work by allowing customers to find efficiencies without materially
changing business processes and supporting infrastructure.
Empowering
Workers to Automate their Personal Workflows is Leading to a Democratization of Automation. The emerging workforce is graduating
with increasingly advanced technical skills and training in automation. Individuals are entering the workforce with higher expectations
related to job impact, satisfaction, and efficiency, and view software as a driving force in realizing those expectations. As a result,
organizations are looking to empower workers with tools to optimize the more tedious parts of their jobs. The combination of technology
that can emulate human behavior and a workforce with the knowledge and tools to create their own automations has enabled enterprises
to begin to automate a significant number of use cases, from individual tasks to enterprise-wide processes.
Cost
of Skilled Human Capital is Accelerating the Evolution Towards the Fully Automated Enterprise. The cost of skilled human capital
continues to rise due to growing demand. We believe it is increasingly imperative for enterprises to leverage automation to liberate
workers from menial, repetitive, and less productive tasks and to better utilize the positive qualities that only humans have, such as
abstract thinking, making connections, dealing with ambiguity, creativity, innovation, passion, and community engagement. We believe
this will drive business value and greater employee engagement. According to a 2020 Gallup study, business units with highly engaged
employees are more present and productive; more attuned to the needs of customers; and more observant of processes, standards, and systems.
When taken together, the behaviors of highly engaged business units result in 21% greater profitability.
Limitations
of Existing Offerings
A
number of technology companies have attempted to address the automation needs of organizations through the application of business process
management, application development software offerings, RPA tools, and AI point offerings, as well as other horizontal software applications.
However, these existing offerings are challenged by a number of inherent limitations, including:
Lack
of An End-to-End Software. Many existing automation software offerings are point technologies and cannot offer end-to-end automation
capabilities on an integrated software.
Not
Capable of Emulating Human Behavior, Relying too Heavily on APIs. Many existing offerings do not effectively integrate AI computer
vision and machine learning (“ML”) capabilities needed to accurately identify and emulate human actions in conjunction with
APIs. Without these capabilities, organizations are limited to pursuing automation only within the narrow pathways permitted by existing
APIs. Even when applications have an API, the functionality provided often does not fully capture what is required to conduct the business
process. As the scope of a task or process expands from a single, discrete action to a sequence of multiple steps and sub-processes,
the limitation in scope and complexity of supported API actions becomes more of an impediment to fully emulating the process. This frequently
prevents this work from being truly automated solely through APIs alone. Bringing APIs together with an emulative approach made possible
by AI computer vision and machine learning greatly expands the use cases for automation.
Inability
to Automate Across Applications. While business processes typically involve multiple applications, many existing automation capabilities
are built into specific applications and are limited in their ability to automate business processes across multiple applications. Accordingly,
we believe enterprises build inefficient business processes to compensate for limited cross-functional automation capabilities.
Difficult
to Link AI Capabilities to Execution. AI and ML (“AI/ML”) capabilities are needed to automate cognitive, high-value tasks.
In recent years, enterprises have made significant investments in developing AI/ML models. However, it is difficult to leverage these
models as the environments for developing them, typically used by data scientists, are distinct from the environments where processes
are carried out, typically by employees using enterprise applications. This separation of environments limits the ability of an organization
to deploy models that are necessary to automate complex processes.
Need
to Change an Enterprise’s Underlying Infrastructure. Existing offerings generally are unable to emulate the human’s role
in executing a business process, requiring organizations to make significant changes either to their applications and infrastructure
or to the business processes themselves. The costs associated with changing underlying infrastructure and business processes make it
uneconomical to automate anything outside of narrowly defined, high-volume tasks.
Unable
to Realize Full Value of Automation Throughout an Organization. Existing solutions do not typically make automations accessible to
everyone within the organization as they are often built with non-intuitive user interfaces and code heavy technology stacks. These solutions
are too technical for most knowledge workers, limiting their application to a small number of use cases and users with significant developer
experience. Existing solutions also frequently require additional time and resources to enable the resulting automation to be used by
non-technical workers or to adapt the automation to nonstandard circumstances and environments.
Lack
Governance Capabilities at Scale. Existing offerings do not typically offer centralized, secure governance capabilities to enforce,
manage, and deploy organizational development standards.
Difficult
to Deploy. We believe existing automation solutions generally require complicated, invasive implementation processes that, in turn,
require extensive upfront and ongoing training and time commitment. This makes it difficult to build and maintain automations, resulting
in the persistence of manual processes throughout enterprises.
Lack
of Openness and Interoperability. Many existing solutions are not modular and lack the ability to integrate new, third-party technologies
and operate with customized applications. Enterprises using these solutions are locked into a limited set of proprietary options not
built for the future.
Lack
of an Engaged Community of Automation Developers. Many existing automation vendors do not have open software and have not invested
the time and resources required to cultivate a vibrant ecosystem of automation developers that freely exchange innovations and best practices.
Addressable
Market
Our
software addresses the market for intelligent process automation, which, in February 2021, International Data Corporation estimates to
grow at a five-year compound annual growth rate of approximately 18.4% to $37.9 billion by the end of 2024. However, we believe that
this does not fully encompass the opportunity associated with our vision of the fully automated enterprise.
According
to an estimate by Bain & Company in the report Beyond Cost Savings: Reinventing Business Through Automation, the expansion
of automation software by incorporating broader capabilities and technologies has increased the size of the addressable market for automation
software to approximately $65 billion.
The
size of our addressable market opportunity is underpinned by the substantial amount of business processes that could be improved through
automation but are not currently automated. According to Forbes, there are more than 1 billion knowledge workers globally as of December
10, 2020. We expect our estimated global market opportunity will continue to expand as customers increase the size of their business
units and hire additional employees, resulting in a greater number of users and processes that can benefit from automation throughout
these enterprises. Additionally, we believe that we are unlocking a myriad of still unexplored automation possibilities as we continue
to contribute to this market. We believe those possibilities represent a significant greenfield opportunity for us.
Organizations
across the world are only beginning to understand the power of automation and we believe we are at the forefront of a revolution in the
way that people do work. We believe that the opportunity that lies ahead of us is largely untapped and has the potential to be one of
the largest ever in enterprise software.
Our
CXM Platform
Our
CXM Platform includes marketing, sales, service and content management systems, as well as other tools and integrations, that enable
companies to attract and engage customers throughout the customer experience. We also provide education, services and support to help
customers be successful with our CXM Platform.
We
focus on selling our CXM Platform to mid-market business-to-business companies, which we define as companies that have between 100 and
5,000 employees. We sell our CXM Platform on a subscription basis. As of December 31, 2021, our combined business units (customer experience
management business unit and digital transformation business unit) had 839 total customers in Japan, of which 581, or 69.2%, were paying
customers and 24 total customers outside Japan, of which 2, or 1.0%, was a paying customer. Our 280 non-paying customers were originally
paying customers that utilized our paid services but now use a free version of the CXM Platform. There is the potential for non-paying
customers to become paying customers again if and when they start utilizing our paid services again.
Advantages
of our CXM Platform
Our
CXM Platform features a central database of lead and customer interactions and integrated applications designed to help businesses attract
visitors to their websites, convert visitors into leads, close leads into customers, and fulfill the needs of customers so they become
promoters of those businesses.
Designed
to Help Companies Grow Better. Our CXM Platform was architected from the ground up to enable businesses to transform their marketing,
sales, services, and content management playbook to meet the demands of customers today. Our CXM Platform includes both a system of record
for maintaining a unified view of the customer experience and a system of engagement for efficiently engaging customers through search
engine optimization, web content, social, blogging, email, marketing automation, messaging, support ticketing, knowledge base and more.
And it is also easy to integrate with customer data platforms.
Ease
of Use of a Single, Extensible Platform. We provide a set of integrated applications on a common platform, which offers businesses
ease of use and simplicity. Our CXM Platform has one login, one user interface, one database, and one team for support. Our CXM Platform
starts free and grows with our customers. It is designed to scale its power and technical sophistication without losing its ease-of-use.
In addition to being a comprehensive suite itself, our CXM Platform seamlessly integrates with external applications, making it easy
to extend the functionality of our CXM Platform and customize it for any business.
Power
of a Unified Customer View. At the core of our CXM Platform is a single customer experience management database for each business
that captures its lead and customer activity throughout the customer lifecycle. Our CXM Platform creates a unified timeline incorporating
all the interactions with a particular customer. In contrast to many customer experience management system suites which are cobbled together,
we have a set of core functionalities, including reporting, content, messaging, data, and automation, which runs across our product lines,
which we refer to as functions.
Scalability.
Our CXM Platform was designed and built to serve a large number of customers with demanding use cases. Our CXM Platform currently processes
billions of data points each week, and we use leading global cloud infrastructure providers and our own automation technology to dynamically
allocate capacity to handle processing workloads of all sizes. We have built our CXM Platform on modern, scalable distributed technologies.
We built the infrastructure to support hundreds of microservices and can easily add new features and capabilities to the CXM Platform.
We utilize a variety of open-source distributed systems including customer data platform and consent management platform to scale our
data collection and processing. Our scalability gives us flexibility for future growth and enables us to service a large variety of businesses
of different sizes across different industries.
Extensible
and Open Architecture. Our CXM Platform features a variety of open APIs that allow easy integration of our platform with other
applications. We enable our customers to connect our platform to their other applications, such as ecommerce, event management and videoconferencing
applications. By connecting third-party applications, our customers can leverage our centralized inbound database to perform additional
functions and analysis.
CXM
Platform Functions
Our
CXM Platform features integrated applications and tools that enable companies to create a cohesive and adaptable customer experience.
Each function can be used standalone or in conjunction with the other functions. Our functions are available in both free and paid tiers
(i.e., Starter, Professional and Enterprise) with gradually increasing levels of functionality that support the needs of our customers
as they see success with our tools and their businesses grow.
Customer
Experience Management. The core of our CXM Platform is a single database of lead and customer information that allows businesses
to track their interactions with contacts and customers, manage their sales activities, and report on their pipeline and sales. This
allows a complete view of lead and customer interactions across all of our integrated functions, giving our CXM Platform substantial
power. This integration makes it possible to personalize every aspect of the customer interaction across web content, social media engagement,
and email messages across devices, including mobile. The integrated functions on our CXM Platform have a common user interface and are
accessed through a single login. There is a free version of our CXM Platform that can be used standalone, or with any combination of
content management systems function, marketing function, sales function, and/or service function.
Marketing
Function. The marketing function is an all-in-one toolset for marketers to attract, engage, and nurture new leads towards sales
readiness over the entire customer lifecycle. The marketing function is available in both free and paid tiers, and can be used standalone,
with our customer experience management system, a third party customer experience management system, and/or any version of content management
systems function, sales function or service function. Features include marketing automation and email, social media, search engine optimization,
and reporting and analytics.
Sales
Function. We designed the sales function to enhance the productivity and effectiveness of sales teams. Businesses can empower
their teams with tools that deliver a personalized experience for prospects with less work for sales representatives. The sales function
is available in both free and paid tiers, and can be used with our customer experience management system, a third party customer experience
management system, and/or any version of marketing function, content management system function or service function. Features include
email templates and tracking, conversations and live chat, meeting and call scheduling, lead and website visit alerts, sales automation,
and lead scoring.
Service
Function. The service function is our customer service software that is designed to help businesses manage and connect with customers.
The service function is available in free and paid tiers, and can be used standalone, with our customer experience management system,
a third party customer experience management system, and/or any version of marketing function, content management system function or
sales function. Features include tickets and help desk, automation and routing, knowledge base, team emails, feedback and reporting tools,
and set customer goals.
Content
Management System Function. Our content management system function combines the power of customer experience management and a
content management system into one integrated platform. Our content tools enable businesses to create new and edit existing web content
while also personalizing their websites for different visitors and optimizing their websites to convert more visitors into leads and
customers. Our content management system function can be purchased as a standalone product, with our customer experience management system,
a third party customer experience management system, and/or with any version of marketing function, sales function, or service function.
Features include manage website pages, business blogging, smart content, landing pages and forms, search engine optimization tools, forms
and lead flow, web analytics reporting, calls-to-action, and digital asset management and product information management file manager.
Platform
Application (“App”) Partners. Businesses that use software outside of our software can leverage our ecosystem of
third-party integrations. We make it easy to find and install new or existing software solutions that complement our CXM Platform. Over
20 integrations and applications are available for our users, across a wide range of categories, including integrations with leading
social media, email, sales, video, analytics, content and webinar tools.
CXM
Platform Services
We
complement our product offerings with professional services, customer success and support, which we view as critical elements of ensuring
the long-term retention of our customers. The majority of our services and support is offered over email, phone, chat applications and
via web meeting technology rather than in-person, which is a more efficient business model for us and our customers.
Professional
Services. We offer professional services to educate and train customers on how to leverage our CXM Platform to transform how
their business attracts, engages and delights customers. Depending on which functions and services a customer purchases, they receive
one-on-one training and guidance from one of our onboarding or technical specialists by web meeting and can purchase additional group
training and education in online or in-person classes. Our professional services are also available to customers who need additional
assistance on a one-time or ongoing basis for an additional fee.
Customer
Success. Our customers have access to a customer success manager or customer success team which are responsible for our customers’
long term success, retention and growth on the CXM Platform. Our customer success managers and customer success teams address the unique
needs and goals of our customers through a series of ongoing interactions and strategy calls on how to best engage and use our CXM Platform.
Support.
In addition to assistance provided by our online articles and customer discussion forums, we offer phone and/or email and chat-based
support, which is included in the cost of a subscription for our Hubs. Phone support is available starting at the Professional product
level for all functions while email and chat-based support is available for Starter functions. We strive to maintain an exceptional quality
of customer service. We continuously monitor key customer service metrics such as ticket resolution rates, and we monitor the customer
satisfaction of our customer support interactions. We believe our customer support is an important reason why businesses choose our CXM
Platform and recommend it to their colleagues.
CXM
Platform Technology
Our
customers have chosen us as their CXM Platform, which we architected and built to be secure, highly distributed and highly scalable.
Since our founding, we have embraced rapid, iterative product development lifecycles, cloud automation and open-source technologies,
including big data platforms, to power marketing, sales, service, and content management programs and provide insights not previously
possible or available.
Our
CXM Platform is a multi-tenant, single code-based, globally available software-as-a-service delivered through APIs, web browsers or mobile
applications. Our commitment to a highly available, reliable, and scalable platform for businesses of all sizes is accomplished through
the use of these technologies.
Platform
Approach. We built our customer experience management system on a single platform with reusable and composable libraries, allowing
us to rapidly address new feature areas and bring new products to market that have a consistent user experience and data model. We have
built this platform with scale in mind, supporting thousands of components including hundreds of microservices.
Modern
Database Architecture. We process billions of data points weekly across various channels, including social media, email, search
engine optimization and website visits, and continue to drive nearly real-time analytics across these channels. This is possible because
we built our database from the ground up using distributed big data technologies such as content delivery network, Edge computing and
customer data platform to both process and analyze the large amounts of data we collect. We also utilize cloud environment to operate
customer data at scale, allowing our engineers to choose the best datastore for each task.
Agility.
Our infrastructure and development and software release processes allow us to update our platform for specific groups of customers or
our entire customer base at any time. This means we can rapidly innovate and deliver new functionality frequently, without waiting for
quarterly or annual release cycles. We typically make a significant number of customer data updates to our software platform in a single
day, enabling us to gather immediate customer feedback and improve our product quickly and continuously.
Cost
Leverage. Because our CXM Platform was built on an almost exclusive footprint of open-source software, own developed source code
and designed to operate in cloud-based data centers, we have benefited from large-scale price reductions by these cloud computing service
providers as they continue to innovate and compete for market share. As our processing volume continues to grow, we continue to receive
larger volume discounts on a per-unit basis for costs such as storage, bandwidth and computing capacity. We also believe that our extensive
use of open-source software will provide additional leverage as we scale our CXM Platform and infrastructure.
Scalability.
By leveraging leading cloud infrastructure providers along with our automated technology stack, we are able to scale workloads of varying
sizes at any time. This allows us to handle customers of all sizes and demands without traditional operational limitations such as network
bandwidth, computing cycles, or storage capacity as we can scale our platform on-demand.
Reliability.
Customer data is distributed and processed across multiple data centers within a region to provide redundancy. We built our CXM Platform
on a distributed computing architecture with reduced single points of failure and we operate across data center boundaries daily. In
addition to datacenter level redundancy, this architecture supports multiple live copies of each data set along with snapshot capabilities
for faster, point-in-time data recovery instead of traditional backup and restore methodologies.
Security.
We leverage industry standard network and perimeter defense technologies, distributed denial-of-service, protection systems (including
web application firewalls) and enterprise grade domain name system services across multiple vendors. Our data-center providers operate
and certify to high industry compliance levels. Due to the broad footprint of our customer base, we regularly test and evaluate our platform
with trusted third-party vendors to ensure the security and integrity of our services.
Digital
Transformation Solutions
Our
mission is to unlock human creativity and ingenuity by enabling the fully automated enterprise and empowering workers through automation.
The
modern enterprise is complex as employees must navigate an ever-increasing number of systems and applications to perform their day-to-day
work. This dynamic forces workers to constantly execute manual, time-consuming, and repetitive tasks to get their work done. The friction
faced by workers often results in lost productivity that can have a direct impact on a company’s bottom line. Traditional automation
solutions intended to reduce this friction have generally been designed to be used by developers and engineers, rather than the employees
directly involved in executing the actual work being automated. As a result, employees are limited by the lack of flexibility of these
traditional automation technologies causing employee productivity, innovation, and satisfaction to suffer.
Our
software is designed to transform the way humans work. We provide our customers with a robust set of capabilities to discover automation
opportunities and build, manage, run, engage, measure, and govern automations across departments within an organization. Our software
leverages the power of AI based computer vision to enable our software robots to perform a vast array of actions as a human would when
executing business processes. These actions include, but are not limited to, logging into applications, extracting information from documents,
moving folders, filling in forms, and updating information fields and databases. Our robots’ ability to learn from and replicate
workers’ steps in executing business processes drives continuous improvements in operational efficiencies and enables companies
to deliver on key digital initiatives with greater speed, agility, and accuracy.
Our
software is designed to interact with and automate processes across a company’s existing enterprise stack. As a result, our customers
can leverage the power of our software with lower overall IT infrastructure cost. Our software enables employees to quickly build automations
for both existing and new processes. Employees can seamlessly maintain and scale automations across multiple deployment options, constantly
improve and evolve automations, and continuously track and measure the performance of automations, all without substantial technical
experience.
At
the core of our automation software is a set of capabilities that emulates human behavior, which provides our customers with the ability
to automate both simple and complex use cases. Automations on our software can be built, consumed, managed, and governed by any employee
who interacts with computers, resulting in the potential for broad applicability of our software across departments within an organization.
Society is at a turning point in how organizations execute work, and we believe the ability to leverage software to enrich the employee
experience will unlock tremendous value and efficiency opportunities. While we are still in the early days of a multi-year journey to
the fully automated enterprise, momentum is growing as organizations across the world are only now beginning to understand the power
of automation.
Many
of our customers expand the scope and size of use cases of our software across their organizations as they quickly realize the power
of our software. We believe that the success of our land-and-expand business model is centered on our ability to deliver significant
value in a very short time. We grow with our customers as they identify and expand the number of business processes to automate, which
increases the number of robots deployed and the number of users interacting with our robots. Our ability to expand within our customer
base is demonstrated by our net retention rate, which represents the rate of net expansion of annualized renewal run-rate from existing
customers over the last 12 months. Our net retention rate for our paying customers of our digital transformation business unit (RPA business)
was 45%, 52% and 75% as of December 31, 2021, December 31, 2020 and December 31, 2019, respectively. The reduction in the net retention
rate was due to a number of small and medium-sized customers cancelling their contracts due to the COVID-19 pandemic.
Advantages
of our Solutions
Our
mission is to be at the forefront of innovation and thought leadership in enterprise business automation, analyzing enterprise users’
desktops and mission-critical systems, and creating end-to-end software that provides business automation based on the results of that
analysis and further simulating the numbers. We create end-to-end software that provides business automation. Our software uses a combination
of RPA, task mining, and process mining to remove pain points in business operations, allowing software robots to emulate human behavior
and perform specific business processes, thereby eliminating the need for employees to perform specific manual or routine tasks. This
allows employees to focus on higher value-added tasks, and also allows them to seamlessly automate business processes, from legacy IT
systems and on-premise applications to new cloud-native infrastructure and applications, without making significant changes to the organization’s
underlying technology infrastructure. It can seamlessly automate business processes. Our software enables you to automate legacy mission-critical
systems as well as work without desktops, and automate across multiple applications where no APIs exist. It is also intended to be used
by employees within an enterprise, and supports a variety of use cases, from simple tasks to complex business processes over time.
Key
Benefits to Organizations
Our
software is built to help companies run their operations in a fully automated manner. Our solutions are designed to remove the friction
that exists between employees and departments by increasing operational transparency, fostering collaboration between departments, and
allowing people to focus on the work that matters. In addition, companies can deploy highly customized robots to support agile and fast
automation creation, while reducing the overall cost of their IT infrastructure. Our goal is to shorten the time to value creation, increase
efficiency, and drive innovation. Our software delivers the following key benefits to enterprises:
Empower
Customers to Achieve Digital Transformation. Our software makes it fast and easy to drive digital transformation, which is typically
time-consuming. Companies use our solutions to continuously discover and automate both simple tasks and complex business processes to
increase operational efficiency and digital transformation. Our software reduces the time it takes for people to complete tasks from
days and hours to minutes and seconds, allowing employees to focus on more creative, mission-critical, and innovative work. As a result,
our software helps companies accelerate innovation, improve productivity, create competitive differentiation, and enrich the employee
and customer experience. We help companies achieve true digital transformation.
Build
Business Resiliency and Agility into Digital Business Operations. Our software provides our customers with the flexibility they need
to operate under ever-changing conditions. A company’s operations change over time. If companies have to modify their robots each
time a change occurs, true efficiency will not be achieved. Our software robots are not only capable of performing tasks just like humans,
but they can also keep changing as the business changes. Our robots can be deployed manned, unmanned, desktop, server-side, or hybrid,
and can adjust seamlessly as conditions change. If necessary, they can also utilize spare resources in the enterprise (such as desktops
at midnight) to perform time-consuming tasks and processes. Our software provides our customers with the ability to have a virtually
unlimited digital workforce that operates 24/7, resulting in a more efficient and less error-prone digital workflow.
Fast
Time-to-Value. We believe that our solutions provide companies with an immediate return on investment. Our software can be easily
installed on any operating system, or company. It is also designed to be intuitive, minimizing the need for time-consuming and costly
implementation and training. With automatic recording and playback capabilities, workers can create robots by simply performing routine
tasks. Our simulation feature also allows us to verify the efficiency of the automation before it goes live and measure its effectiveness.
By using our software, customers can reap significant benefits such as improved costs and increased worker productivity.
Organization-Wide
Automation. Powerful, easy-to-use software allows workers across an enterprise organization to automate their work. Our software
is designed to automate any business process or task, from individual desktop tasks to complex mission-critical business processes for
departments across the enterprise. It also provides development software that does not require technical skills, allowing any employee
in the organization to spread the automation. This will help spread automation throughout the organization as employees across departments
and job functions use our technology to improve their performance.
Inspect,
improve, and analyze business execution. Our solutions provide visibility into how work is actually being done in the enterprise,
enabling our customers to understand, identify, and execute automation opportunities on an ongoing basis. For example, if there is duplication
of work between multiple departments, you can choose to automate one of them but not the other. This allows us to optimize the automation.
Our solution leverages advanced process discovery techniques and ML models from actual log data to understand individual patterns for
executing work and address bottlenecks and inefficiencies. It is a very powerful solution that can optimize the entire company.
Improve
Employee Productivity, Experience, and Satisfaction. By using our solutions, companies can achieve true digital transformation and
establish a better work environment for their workers. With our software, enterprise workers will be able to automate tasks that can
be used and operated efficiently and automate time-consuming manual tasks. We believe that this will improve the overall experience of
our customers’ employees and allow them to focus on developing higher value-added skill sets. As a result, our clients will be
able to retain a high-value, engaged workforce that is capable of delivering optimal business results.
Improve
Accuracy and Compliance with Speed. Operations automated by our software are designed to be performed consistently as designed, allowing
companies to achieve greater accuracy. For example, a sudden change in the user interface of a website will not affect the execution
of the robot. It is very highly adaptive and is designed to eliminate human errors and inconsistencies that are common to workers who
do their work manually. The work performed by the robot generates a log that can be reviewed and monitored at any time, allowing administrators
to better control and comply with the work.
Enhance
Customer Experiences. Companies can use our robots to solve known problems faster and more efficiently. We can also identify potential
problems and help solve them. Business is always changing, and our software allows employees to focus on addressing critical customer
issues and concerns, rather than performing repetitive, routine, and low-value tasks. Our robots improve the overall speed, accuracy,
and effectiveness of a company’s customer service, increasing customer retention and loyalty.
Key
Benefits to Employees
Our
software is designed to eliminate the need for employees to execute low-value, manual tasks, freeing up time to focus on more meaningful,
strategic work. We believe that this, in turn, causes employees to feel empowered and be more valuable in contributing to broader organizational
goals. “Robotics Engineer” is one of the fastest emerging job roles globally, with LinkedIn reporting a 40% compound annual
growth rate in job postings from 2015 to 2019. According to a survey conducted by International Data Corporation, 53% of respondents
indicated that AI and robotics would have a positive impact on jobs in their companies. Additionally, according to a survey published
in UiPath, Inc.’s 2020 “State of the RPA Developer Report,” 84% of respondents believe that having RPA skills would
positively impact their future career moves.
We
believe the democratization of automation leads to the following benefits tied to an improved employee experience:
|
● |
greater
professional fulfillment and job satisfaction; |
|
● |
increased
creativity and innovation; |
|
● |
improved
performance and accuracy; |
|
● |
enhanced
skillsets; |
|
● |
increased
autonomy and job opportunities; and |
|
● |
more
collaboration and better human interactions. |
Our
Digital Transformation Software
Our
software is purpose-built to advance the next generation of automation. By addressing the complete lifecycle of automation, including
identifying specific tasks and processes to automate, building and managing automation software robots, deploying them to execute processes,
and measuring their business impact, our software is intended to address a wide and diverse array of automation opportunities, including
complex, long-running workflows. We believe our software delivers compelling ease-of-use and intuitive user experiences through our low-code
development environment and seamlessly integrates with an ever-expanding ecosystem of third-party technologies and enterprise applications
without changing the existing infrastructure of an organization. In doing all of this, we enable businesses to redefine the relationship
between enterprise applications and business processes.
Our
software encapsulates seven modular product pillars that together address the automation lifecycle within an enterprise:
|
● |
Robot
Automation Portal. Our RPA and Robot Automation Portal products combine AI with desktop recording, back-end mining of both
human activity and system logs, and intuitive visualization tools, enabling users to discover, analyze, and identify unique processes
to automate in a centralized portal. |
|
● |
Recorder.
Our RPA products are low-code or no-code development environments with easy-to-use, drag-and-drop functionality that users in an
organization can learn to use to create attended and unattended automations without any prior knowledge of coding. |
|
● |
Object-Oriented.
The products in our automation category offer centralized tools designed to securely and resiliently manage, test, and deploy automations
and ML models across the entire enterprise, with seamless access, enterprise-grade security, and endless scalability of data. |
|
● |
Orchestration.
With our RPA products, an enterprise can deploy our robots in highly immersive attended experiences or in standalone, unattended
modes behind the scenes, and can leverage hundreds of native connectors built for commonly used line-of-business applications. |
|
● |
GUI
and CUI interface. With our RPA products, there are multiple ways for users to remain connected and interact with robots,
whether they are running in a data center, in the cloud, or right on their desktop. This capability allows our customers to manage
long running processes that orchestrate work between robots and humans. |
|
● |
Monitoring.
Our RPA products enable users to track, measure, and forecast the performance of automation in their enterprise. |
|
● |
Governance.
We offer powerful, centralized governance capabilities designed to help businesses ensure compliance with business standards. |
Our
software is powered by the following key differentiating elements that are necessary for end-to-end automation within today’s enterprise:
|
● |
AI
Computer Vision. Our robots are powered by a multi-pronged approach, combining proprietary computer vision technology that
uses highly-trained AI with technical introspection of visual hierarchy to dynamically recognize and interact with constantly changing
elements of on-screen documents, images, and applications. |
|
● |
Document
Understanding. We combine our proprietary computer vision technology with optical character recognition, natural language
processing, and a variety of ML technologies to classify and extract data from unstructured, semi-structured, and structured documents
and images, handwriting, and scans. |
|
● |
Low-Code
Development Experiences. Our software is built to be intuitive and easy to use with low-code, drag-and-drop development tools,
and interfaces that knowledge workers can understand. |
|
● |
Widespread
and Rich Human and Robot Interaction. Our software facilitates a broad array of interactions between humans and robots, allowing
users to easily engage with robots when, where, and how they want. |
|
● |
Enterprise-Grade
Governance and Security. We deliver centralized governance and data security capabilities built for businesses to securely
and resiliently deploy and manage automations at enterprise scale. |
|
● |
Open
and Extensible Software Architecture. Our software delivers both user interface automation and API integration on a single
software. We offer hundreds of out-of-the-box, native integrations with a wide range of enterprise applications and productivity
tools from our technology partners. |
|
● |
Flexible
Deployment. We have built our software to be multi-tenant and deployable across on-premises, private and public cloud, and
hybrid environments to meet any level of scaling, availability, and infrastructure requirements. |
HeartCore
Community
We
have created and cultivated a vibrant, global network of nearly several hundred thousand automation professionals who are building and
sharing automations that are transforming work and their organizations.
Our
Digital Transformation Products
Our
software is built so that automation processes can be used throughout the enterprise. Customers can either adopt our products as a unified
solution or use a subset of our products for each.
Discover
Process
Mining. Process mining visualizes the event logs generated through various systems and applications by connecting them in chronological
order and by pattern, by using process mining tools. This enables us to identify problems and their causes, such as exception processing
that creates a burden for corrective actions, insufficient segregation of duties and rule deviations, inefficient business processing,
bottlenecks, etc., so that we can improve our business effectively and speedily. In addition, if using the function to evaluate whether
or not there is a problem by using the best practices of business processes as benchmarks, it becomes easier to examine the image of
appropriate business processes. Furthermore, by updating the data to be captured and monitoring it continuously, it is possible to recognize
the performance of business quality, changes, and anomalies in a timely manner, which can lead to improvements.
Currently,
business process reforms are rapidly advancing, as exemplified by the automation of routine tasks through the introduction of RPA. In
business process reform efforts, business processes have traditionally been visualized and evaluated in order to identify inefficient
operations that need to be improved. However, these methods require a great deal of time and effort, such as interviewing the person
in charge of the business, manually transcribing the contents of the business manual, which lacks accuracy and completeness, into a business
flow, and repeatedly checking and revising the transcribed contents with various parties involved in the business. Furthermore, depending
on the level of understanding and risk sensitivity of the interviewees, infrequent exceptions and so-called local rules were sometimes
overlooked.
One
of the concepts that will drive and enhance digital transformation is digital twin technology. Digital twin technology reproduces what
is happening in a factory in a computer, for example, by outputting logs of information on machine tools, manufacturing equipment, and
products in production, and putting the logs into process mining. It is also called a digital twin organization, which is an organization
model that makes it easier to understand and manage business processes in real time, and to plan for the future. Using a model that behaves
like a twin of a real factory system, it is possible to test the effects of production conditions that are not possible in reality, to
test processes for efficiency, and to predict fatigue when manufacturing equipment is kept running. This factory simulation environment
can reproduce the same environment as in reality.
In
the 5G era, local 5G will be able to collect even more detailed logs of the factory. This will increase the accuracy of the simulations
and enable even more advanced operational efficiency. By recreating not only factories but also white-collar workplaces in a digital
twin, it will be possible to identify problems, eliminate bottlenecks, change workflows, and reform work styles.
Task
Mining. Task mining is a method of analyzing individual PC operations of staff engaged in various tasks, i.e., detailed PC operation
log data such as “application launch,” “screen launch,” “file open,” “mouse click,” “text
input,” “copy and paste,” etc., to discover issues and problems. Task mining can highlight task-level issues such as,
for example, whether a series of tasks to convert paper documents into digital data by reading them with OCR is taking longer than expected
(inefficient tasks), or copying and pasting from email body to Excel is repeated with high frequency (repetitive tasks).
The
merit of task mining is that it can point out issues and problems related to tasks, i.e., the various tasks that individual staff members
perform on their PCs, based on facts such as the actual time required and the number of tasks processed. Conventional business analysis
based on interviews can only provide information based on the subjective and sensory perceptions of the workers themselves, and the accuracy
and reliability of the analysis results are not always high. In addition, the on-site measurement work by a researcher with a stopwatch
was not only time-consuming and costly, but also had the possibility of adversely affecting the work itself of the workers to be measured.
On the other hand, in the case of task mining, since the analysis targets the PC operation logs automatically collected through the sensors
(agents) installed on each PC, the flow of work based on the facts as they can be reproduced. Therefore, the analysis results are extremely
accurate and reliable. Moreover, it does not place a burden on the person in charge in the field.
Using
task mining, the time and cost of collecting detailed business data can be significantly reduced and because it is fact-based, highly
accurate and reliable analysis results can be obtained.
Manage
Robot
Automation Portal. Our Robot Automation Portal is a web portal that allows customers to monitor and manage automation with RPA over
a TCP/IP network (Internet and/or Intranet). The Robot Automation Portal records the results generated from the time the robot machine
is registered in the portal. Customers can manage and operate all RPA robots in their company, and also report the results and monitor
their status. Our Robot Automation Portal also provides an orchestration function that allows customers to send a robot to a terminal
where RPA is not installed, run it in free time, and return only the results. This allows our clients to make full use of their internal
resources.
Orchestrator.
Our Orchestrator can provision, deploy, trigger, monitor, measure, and track the successful operation of robots on any supported device,
and when combined with the Robot Automation Portal, it does so through a GUI interface.
CUI
interface. There are many cases where GUI is not available for servers such as Linux and UNIX, etc., so our RPA also has a CUI command
interface.
All
robots are provided as JAR files, so as long as customers have a Java environment, they can run the robots and automate their operations
without installing RPA.
Run
Development
RPA. It is possible to create robots freely using flowcharts in a GUI interface, or to create robots by coding in the same way as
Java development, using an interface similar to a Java IDE. It also comes with three types of OCR, making it suitable for creating a
business robot that scans documents.
Execution
RPA. The license is only for running the robot. Only one robot can be run simultaneously per license. The execution environment can
be any device and any operating system. Although there is only one concurrent execution, there can be an unlimited number of installations.
Measure
When
we start to automate with RPA robots, we tend to automate even tasks that would be more efficient without automation. This is an ironic
result of automation becoming inefficient, but it is difficult to identify. Using our simulation and reporting functions, it is possible
to identify inefficient automated tasks and change them to efficient operations. That may possibly be tasks that are performed by people,
but the cost will vary greatly.
Govern
We
offer powerful, centralized governance capabilities designed to ensure compliance with business standards. Our software balances compliance
with empowerment through granular control of what can be automated, who can build and publish automations, and complete lifecycle management
with role-based access control and enforcement. Governance capabilities are embedded across our software. The combination of our measurement
and governance capabilities are critical as they are key to enterprise-scale automation programs and are a differentiated feature of
our software.
Sales
and Marketing
We
have an efficient go-to-market model, which consists primarily of an enterprise field sales force supplemented by a high velocity inside
sales team focused on small and mid-sized customers as well as a global strategic sales team focused on the largest global customers.
We
have made significant investments in our sales and marketing efforts globally. As of December 31, 2021, our sales and marketing organization
was comprised of 16 employees including our field sales organization, which maintains a physical sales presence in the Japanese software
market. Using our go-to-market strategy, we believe we have made significant contributions in Japan and have established a diversified
revenue and customer base. Our sales and marketing strategy is focused on driving growth through selling products to new customers and
driving expansion within our existing customers. Our products officer, together with our sales, marketing, and executive teams, promote
our brand by working to cultivate long-term relationships with current and prospective customers, expand our partnership network and
foster our developer community.
We
sell our solutions through a direct sales team and through channel partnerships. Our sales organization is segmented into three areas:
enterprise sales, which sells to large businesses and public sector organizations; high-velocity inside-sales, which is focused on landing
a high volume of new small and mid-sized customers; and a global strategic sales team focused on the largest strategic global accounts.
Additionally, our sales team is supported by our renewals team that is focused on identifying upsell potential for our sales team and
handling the operations behind the renewal. In collaboration with the sales team, they can also help execute on small upsells so that
our field sellers can focus on the larger opportunities. Supplementing our direct sales organization are channel sales partnerships with
system integrators, regional developers, business process outsourcing providers and distributors. Our channel partners enable us to extend
our local and global reach, in particular with smaller customers and in geographies where we have less direct sales presence. Additionally,
our customer success team on-boards new customers and accelerates expansion within our largest customers. Our enterprise and high velocity
teams are organized regionally across Japan. In Japan, we maintain specialized vertical teams within our enterprise sales organization
that concentrate their efforts on selling into banking and financial services, healthcare, and government entities. Our sales organization
is supported by a team of pre-sales engineers and our professional services organization that offer technical expertise to help customers
speed adoption and return on investment.
We
sell to organizations of all sizes across a broad range of industries, with a focus on enterprise customers. Our go-to-market strategy
is focused on a model. Our ability to expand within our existing customer base is facilitated by the breadth of our software. Our customers
frequently see rapid time to value with our products, and we are able to quickly expand sales within organizations as customers add features,
expand use cases and increase the number of software robots beyond their initial deployment. The potential for broad applicability of
our software enables us to sell across all levels of an organization, from the C-Suite to the IT department, and to sell into multiples
departments within an enterprise, which reduces friction for expansion of our products across the enterprise.
Our
marketing team drives brand awareness, cultivates a large and growing community, and drives demand through a combination of global and
local campaigns. We employ a variety of marketing tactics to reach prospective customers, including community evangelism, in-person and
digital events, content marketing, digital advertising, search optimization, partner marketing, social media, and public relations. We
host and present at regional and global events, which both launched during the COVID-19 pandemic, to share customer success stories,
developer breakthroughs, and analyst insights and to deepen customer relationships.
A
key marketing objective is to have prospective customers try our software. We provide easy access to our software through our website
and partner portal. This ‘try-before-you-buy’ strategy has been a key driver of developer education and future customer purchases
of our products and software. To democratize automation, we offer a free Community Edition to small businesses, university students,
and individuals. Our Enterprise Trial edition, which is a time-limited license, provides prospective customers with full functionality
of our software to learn, build, and deploy automations. We nurture users through their trial license by providing training and certifications
through our Academy, detailing best practices and use cases, and offering continuous support through our interactive forum or pre-sales
organization.
Customers
We
have a large and diversified customer base. One customer accounted for more than 10% of our revenue for the
year ended December 31, 2021. As of December 31, 2021, our combined business units (customer experience management business unit and
digital transformation business unit) had 839 total customers of varying sizes. We pride ourselves in providing what we believe to be
a great experience to every single customer and user of our software. Our customers span a variety of industries and across various departments
within an organization and include:
Consumer
and Retail
SONY
Panasonic
Bridgestone
Philips |
|
Energy
Tohoku
Electric Power Co
The Kansai Electric Power Co., Inc.
Tokyo
GAS
|
|
Financial
Services
Bank
of Japan
AEON Bank, Ltd
au
Jibun Bank Corporation
Nomura
Securities Co., Ltd
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. |
|
|
|
Healthcare
/ Pharmaceuticals
Takeda
Pharmaceutical Company
GE
Healthcare
Kobayashi
Pharmaceutical
Sysmex
Corporation, |
|
Insurance
Aflac
Sumitomo
Life Insurance
Tokio
Marine Holdings, Inc.
The
Dai-ichi Life Insurance |
|
Manufacturing
Hitachi
Toshiba
FujiFilm
Richo
Nippon
Steel Corporation |
|
|
|
Technology
NTT
Data
NEC
Roland
Canon |
|
Telecommunications
NTT
Docomo
Softbank
KDDI |
|
Other
TOYOTA
HONDA
NNK
JAL
ANA
JR
East |
These
customers are representative of the Company’s overall customer base, but that are also particularly well-known customers and often
appear in the Company’s case studies. The objective criteria the Company used to determine which customers to highlight above are
that the customer: (i) be in the top five in its industry; (ii) have a global presence; (iii) have sales in excess of $1 billion; and (iv) must be well-known through commercials.
Partnerships
We
develop and maintain business and technology partnerships that help us seamlessly integrate the latest technology into our software and
market and deliver our software to our customers around the world.
Our
business partners include more than five global and regional system integrators, value-added resellers, and business consultants. We
provide tiering recognition through Platinum, Gold, and Silver levels for partners that meet competency requirements and deliver and
maintain a specified number of satisfied customers. These partnerships enhance our market presence and drive greater sales efficiencies.
Our
technology partners bring specialized capabilities to our software. In collaboration with our technology partners, we develop integrations
that simplify the interoperability of our software with their technology, resulting in faster time-to-value. These integrations give
our customers more choices on how they integrate and offer a low-code option of traditional native integration.
We
also maintain relationships with leading cloud vendors, such as Amazon Web Services Inc., Google Inc., and Microsoft Corporation, to
simplify both the deployment of our software and to extend our software to offer customers the benefits of cloud-based AI capabilities.
Our
partnerships with other leading technology companies power the significant extensibility of our software and offer our customers the
ability to use the technologies of their choice on our software, driving increased customer affinity and product stickiness.
Competition
Customer
Experience Management Business
Our
market is evolving, highly competitive and fragmented, and we expect competition to increase in the future. We believe the principal
competitive factors in our market are:
| ● | vision
for the market, product strategy and pace of innovation; |
| ● | inbound
marketing focus and domain expertise; |
| ● | integrated
all-in-one CXM Platform; |
| ● | breadth
and depth of product functionality; |
| ● | scalable,
open architecture; |
| ● | time
to value and total cost of ownership; |
| ● | integration
with third-party applications and data sources; |
| ● | name
recognition and brand reputation; and |
| ● | “free
products to paid services” go-to-market motion. |
We
believe we compete favorably with respect to all of these factors.
We
face intense competition from other software companies that develop marketing, sales, service, and content management software. Our competitors
offer various point applications that provide certain functions and features that we provide, including:
| ● | cloud-based
marketing automation providers; |
| ● | content
management systems; |
| ● | email
marketing software vendors; |
| ● | sales
force automation and customer experience management software vendors; |
| ● | customer
service platform vendors; and |
| ● | large-scale
enterprise suites. |
In
addition, instead of using our CXM Platform, some prospective customers may elect to combine disparate point applications, such as content
management, marketing automation, analytics, social media management, ticketing, and conversational bots. We expect that we will develop
and introduce, or acquire, applications serving customer-facing and other front office functions.
Digital
Transformation Business
The
market for RPA is one of the fastest growing enterprise software markets and is increasingly competitive. We believe our competitors
primarily exist across the across the following three categories:
| ● | RPA
software providers¸ which provide RPA software, but lack end-to-end automation
capabilities. |
| ● | Automation
lifecycle enhancing technology providers, such as low-code, iBPMS, iPaaS, process mining,
and test automation vendors, which provide additional features that can be
useful for automations. We have alliances and integrate with the key vendors in each category,
but they often develop and market automation capabilities as extensions of their core software. |
| ● | Enterprise
software vendors, which provide horizontal applications and productivity tools and
are acquiring, building, or investing in RPA functionality or partnering with RPA providers. |
Our
Competitive Strengths
Customer
Experience Management Business
We
believe that our market leadership position is based on the following key strengths:
Leading
Platform. We have designed and built a world-class CXM Platform. We believe our customers choose our CXM Platform over others
because of its powerful, integrated, and easy-to-use applications. We built our customer experience management system on a single, unified,
and intuitive platform, which we believe contrasts positively with many other customer experience management suites.
Market
Leadership and Strong Brand. Our focus is to be a recognized thought leader in the cloud-based marketing, sales, customer service,
and content management software industry with a leading brand. Our marketing, sales, service, and content management experience attracts,
engages, and delights customers by being more relevant, more helpful, more personalized, and less interruptive than traditional marketing
and sales tactics.
Large
and Growing Solutions Partner Program. Our solutions partners promote our brand and offer our CXM Platform to their clients.
Solutions partners and customers referred to us by our solutions partners represented approximately 59% of our total customers as of
December 31, 2021, and approximately 53% of our total revenue for the year ended December 31, 2021. These solutions partners help us
to promote the vision of the inbound experience, efficiently reach new mid-market businesses at scale, and provide our mutual customers
with more diverse and higher-touch services.
Premium
Pricing Strategy. Our free model attracts customers who begin using our CXM Platform through our free products and then upgrade
to our paid services. Through our free products, our customers are able to receive value from us before converting to a paid product
or engaging with sales.
Mid-Market
Focus. We believe we have significant competitive advantages reaching mid-market businesses and efficiently reach this market
at scale as a result of our inbound methodology, premium pricing strategy, and our solutions partner channel.
Powerful
Network Effects. We have built a large and growing ecosystem around our CXM Platform and company. Thousands of our customers
integrate third-party applications with our CXM Platform. We believe this ecosystem drives more businesses and professionals to embrace
the inbound playbook. As our engaged audience grows, more solutions partners collaborate with us, more third-party developers integrate
their applications with our CXM Platform, and more professionals complete our certification programs, all of which help to drive more
businesses to adopt our CXM Platform.
Digital
Transformation Business
We
believe that the following are key strengths of our digital transformation business:
Broad
Set of Complementary Solutions. Our software combines OCR, AI, task mining, process mining, RPA, and process discovery capabilities
to enable automation across multiple non-desktop systems, mission-critical system-to-system automation deployment environments, and cloud-to-cloud
applications. We can help you automate multiple systems without desktops, automation deployment environments between mission-critical
systems, and across cloud applications. We provide our customers with a comprehensive set of capabilities to discover, build, manage,
execute, engage, measure, and control automation across departments and personas within an organization or agency. Our software can run
on multiple operating systems, including Linux, Unix, Mac, AS-400, as well as Windows, allowing for automation across a variety of systems.
Also, since it is coded in Java, any Java engineer can easily build add-on functions.
Open
Architecture. Our software embraces an open ecosystem with hundreds of enterprise application integrations that have been built
by us and our community of technology partners. Our solution includes a variety of pre-built activities and connectors so customers can
quickly create and deploy robots that execute operations and seamlessly interact with third-party systems. Our open ecosystem is architecture
agnostic, which allows organizations to automate existing infrastructure and accelerate digital innovation without the need to replace
or make large investments in their existing infrastructure.
Built-In
AI/ML Capabilities. We incorporate our own Java components into our products to drive continuous improvement in business automation.
Our RPA is a system that allows the reuse of existing programming assets to address complex use cases. Users can incorporate their current
Java applications, if any, into our RPA. Furthermore, it does not only automate that application, but also expands the scope of integration
with other applications. The capabilities of our software are not limited to automating existing operations, but can also adapt to ever-changing
variables, such as the application of new business models, to achieve automation capabilities that dramatically improve business results
and increase the competitive advantage of our customers.
Human
Emulation Enables Addressing Expansive Use Cases. Our RPA robots emulate human behavior and adapt to the ever-changing external
variables of business. By having the robots emulate the usual business behavior of humans, companies can leverage our software to address
a myriad of use cases, from simple to complex. We believe that the power of our software is only limited by the use cases that human
users can come up with.
Built
for Mid to Enterprise Deployment. Our software grows as our customers increase their automation operations across their organizations.
Customers can deploy our software on desktops, on-premises, in public clouds, private clouds, or in hybrid environments. In addition,
it can be deployed on multiple operating systems and across multiple devices. Our software is designed with security and governance at
its core, allowing our customers to seamlessly expand the scope of automation while ensuring that IT departments have the security they
need to automate.
Adoption
Across Workers and Functions. We make sure that workers across the organization have access to automation when they need it.
Workers can interact with robots in the same way they interact with humans. For example, they can use manned robots on their desktops
to get human work done faster, use unmanned robots in the background to run business processes, build applications that interact indirectly
with robots, send email to robots, interact with chatbots, and so on. This will give them the freedom to choose whether to ask a robot
or a human to do the work.
Simple,
Intuitive, Quickly Deployed. Our software is easy to use, with an intuitive interface and low-code, drag-and-drop, desktop recording
and playback capabilities, so that anyone working across the organization can easily take advantage of our automation features at their
disposal. Automation features can be quickly and efficiently deployed throughout an organization to create immediate value. Our software
can be easily learned and operated by employees with or without technical knowledge, without the need for large implementation costs
or costly professional services.
Resilient
Automations. Our software is capable of fully emulating the behavior of enterprise workers as they manipulate applications and
systems to execute processes. Our robots can leverage our proprietary capabilities to fully emulate human behavior, interpreting a very
wide variety of document types and adapting and responding to changes in the work environment. It can also adapt to changes in display
resolution and scale, as well as user interface changes, by utilizing our proprietary OCR capabilities. For example, the process of scanning
and importing postal invoices does not require the user to memorize the format of each invoice, and a single template can be used for
all types of invoices. In addition, we have developed a variety of features to enable elasticity in the process and execution of automation.
For example, when testing the user interface of a website, our software can create the same state as a human being browsing the site
and perform operational validation tests. It also allows for management, reuse and reliability of user interface elements. Thanks to
this feature, when changes are made to the application, the operation can continue without having to update the robot. With such flexibility,
robots demonstrate their resilience in automating tasks and reducing the number of errors across the enterprise.
Integrated
and Portable Object API Models. Our customers can reuse our object-oriented robots. This capability allows them to extend the
capabilities of our software and improve automation results. Our software makes it easy to deploy, manage, and improve objects built
by customers and third parties, allowing you to allocate more human resources to business problems and use cases. objects are designed
to be deployed and customized once created.
Automation
Performance and Business Outcome Analytics. Our software enables customers to gain powerful insights and generate key performance
indicators with actionable metrics by tracking, measuring, and predicting automation performance through the use of a Robot Automation
Portal. Out-of-the-box dashboards display execution metrics and allow users to measure performance and report on the value of their automation.
Built
for Collaboration with Human and Robot. Our software is designed to allow humans and robots to work together, so that each can
focus on the tasks they do best. Robots can perform time-consuming, repetitive, and routine tasks that make work less interesting and
satisfying, while humans can focus on more creative thinking, innovation, solving complex problems, and improving the customer experience.
Our software allows our customers to harness the power of automation to create fully automated, highly efficient enterprises where humans
and robots work in harmony.
Accelerating
the Adoption of Automation within the Enterprise. The adoption of our software will automate simple, duplicative, repetitive
and time-consuming tasks in the organization that are not interesting to people, thus allowing them to focus on creative and rewarding
tasks. Most of our clients use our solutions to find and automate all the tasks that can be automated in their companies. Our solution
works with your employees to evaluate and score high-value automation possibilities. As employees become more comfortable with automation,
they will more easily adopt and implement it, discover new processes to automate within a particular, and provide new automation ideas
to RPA for development and deployment. After a few iterations of this kind of behavior, a phenomenon occurs in which certain employees
build useful automation on their own, which is then deployed throughout the organization. This action is different from the automation
that has been discovered so far and contributes to further operational efficiency. It helps to organically surface a number of automation
ideas that could not be achieved with the traditional top-down approach.
Our
Growth Strategies
Customer
Experience Management Business
The
key elements to our growth strategy for our customer experience management business are:
Grow
Our Customer Base. The market for our CXM Platform is large and underserved. Mid-market businesses are particularly underserved
by existing point application vendors and often lack sufficient resources to implement complex solutions. Our all-in-one CXM Platform
allows mid-market businesses to efficiently adopt and execute an effective inbound marketing, sales, customer service, and content management
strategy to help them expand and grow. We will continue to leverage our inbound go-to-market approach, freemium pricing strategy and
our network of solutions partners to keep growing our business.
Increase
Revenue from Existing Customers. With 839 total customers from our combined business units in Japan as of December 31, 2021,
we believe we have a significant opportunity to increase revenue from our existing customers. We plan to increase revenue from our existing
customers by expanding their use of our CXM Platform by upselling additional offerings and features, adding additional users, and cross-selling
our marketing, sales, service, and content management products to existing customers through touchless or low touch in-product purchases.
Our scalable pricing model allows us to capture more spend as our customers grow, increase the number of their customers and prospects
managed on our CXM Platform, and offer additional functionality available from our higher price tiers and add-ons, providing us with
a substantial opportunity to increase the lifetime value of our customer relationships.
Keep
Expanding Internationally. We intend to grow our presence in international market through additional investments in local sales,
marketing and professional service capabilities, as well as by leveraging our solutions partner network. We plan to open international
offices. We have significant website traffic from regions outside the United States, and we believe that markets outside the United States
represent a significant growth opportunity.
Continue
to Innovate and Expand Our CXM Platform. Mid-market businesses are increasingly realizing the value of having an integrated marketing,
sales, customer service, and content management platform. We believe we are well positioned to capitalize on this opportunity by introducing
new products and applications to extend the functionality of our CXM Platform.
Selectively
Pursue Acquisitions. We plan to selectively pursue acquisitions of complementary businesses, technologies and teams that would
allow us to add new features and functionalities to our platform and accelerate the pace of our innovation.
Digital
Transformation Business
For
our digital transformation business, we are pursuing a large market opportunity with growth strategies that include:
Acquire
New Customers. Our market is rapidly growing. We believe that as more organizations adopt our automation software and experience
quantifiable competitive advantages, other organizations will also adopt automation as a necessary tool to compete. While we sell to
organizations of all sizes and across a broad range of industries, our go-to-market team’s key focus is on the largest organizations,
including large enterprises and governments. We also use an inside sales team focused on small and mid-sized businesses. We plan to continue
to invest in our go-to-market team to grow our customer base both domestically and internationally.
Expand
Within Our Existing Customer Base. Our customer base represents a significant opportunity for us to become a strategic partner
to our customers in their automation journeys and drive further sales expansion through the following vectors:
| ● | deploy
more software robots across different departments; |
| ● | provide
more employees with their own robot assistants; |
| ● | increase
adoption of software products; and |
| ● | expand
use cases for automation in the organization. |
Over
time, we seek to deploy our solution where every employee interacts with multiple robots. We believe we will be able to accomplish this
through our continued democratization of automation and enablement of citizen developers. The power of our strategy is evidenced by our
net retention rate of our customers of our RPA business, which was 45%, 52% and 75% as of December 31, 2021, December 31, 2020 and December
31, 2019, respectively. The reduction in the net retention rate was due to a number of small and medium-sized customers cancelling their
contracts due to the COVID-19 pandemic.
Grow
and Cultivate Our Partner and Channel Network. We are focused on maintaining and growing our ecosystem of partners that build,
train, and certify skills on our technology as well as deploy our technology on behalf of their customers. We have built a global partner
ecosystem of more than 40 systems integrators, value-added resellers, business consultants, technology partners, and public cloud vendors.
Our partner network includes, among others, content management systems, customer experience management systems, Heartcore Robo (RPA),
Apromore, myInvenio and Controlio. We intend to continue to expand and enhance our partner relationships to grow our market presence
and drive greater sales efficiencies.
Extend
Our Technology Leadership Through Continued Innovation and Investment in Our Software. We believe that we have built a differentiated
automation software and intend to continually increase the value we provide to our customers by investing in extending the capabilities
of our software. For example, we have introduced over four new products and multiple new features over the last 24 months. We have made
and will continue to make significant investments in research and development to bolster our existing technology and enhance usability
to improve our customers’ productivity.
Foster
the Next Generation of Workers and Grow Our Community. We have built an extensive ecosystem focused on training and supporting
individuals on working with our software. We have created forums addressing automation in the workplace and learning plans for all the
important roles in automation. We believe automation will be a foundation of the future of work and, as individuals build out their skillsets,
this will drive greater adoption of our software.
Continue
to Invest in Major Markets. Since inception, we have invested in developing an infrastructure that would allow us to scale globally.
We continue seeing adoption of our products across all geographies in which we operate and believe we have a significant runway ahead
of us. We believe there is a significant opportunity to expand use of our software in the top 25 countries as measured by gross domestic
product. As of December 31, 2021, sales to customers located in such countries represented 100% of our total annualized renewal run-rate .
We intend to continue to make significant investments to expand our sales and drive adoption of our software throughout those markets.
In particular, we believe that North America represents a significant opportunity for us, and we intend on continuing to expand our sales
and drive adoption of our software across the region. As of December 31, 2021, customers located in the United States represented 0%
of our total annualized renewal run-rate.
Opportunistically
Pursue Strategic Acquisitions. We will evaluate acquisition opportunities that we believe will be complementary to our existing
software, enhance our technology, and increase the value proposition we deliver to our customers.
Intellectual
Property
Intellectual
property rights are important to the success of our business. We rely on a combination of patent, copyright, trademark, and trade secret
laws in the United States and other jurisdictions, as well as license agreements, confidentiality procedures, non-disclosure agreements
with third parties, and other contractual protections, to protect our intellectual property rights, including our proprietary technology,
software, know-how, and brand.
As
of December 31, 2021, we held one issued patent in Japan. Our issued patent is scheduled to expire between October 2028 and January 2030.
As of December 31, 2021, we held one pending U.S. trademark application, and more than two active foreign trademark filings. As of December
31, 2021, we held two domain names in the United States and in foreign jurisdictions. We continually review our development
efforts to assess and identify the existence and patentability of new intellectual property.
The
terms of individual patents extend for varying periods of time, depending upon the date of filing of the patent application, the date
of patent issuance, and the legal term of patents in the countries in which they are obtained. Generally, patents issued for applications
filed in the United States are effective for 20 years from the earliest effective filing date of a non-provisional patent application.
The duration of patents outside of the United States varies in accordance with provisions of applicable local law, but typically is also
20 years from the earliest effective filing date. However, the actual protection afforded by a patent varies on a country-to-country
basis and depends upon many factors, including the type of patent, the scope of its coverage, the availability of legal remedies in a
particular country, and the validity and enforceability of the patent.
Although
we rely on intellectual property rights, including patents, copyrights, trademarks, and trade secrets, as well as contractual protections
to establish and protect our proprietary rights, we believe that factors such as the technological and creative skills of our personnel,
development of new services, features, and functionality, and frequent enhancements to our software are equally essential to establishing
and maintaining our technology leadership position.
We
control access to and use of our proprietary technology and other confidential information through the use of internal and external controls,
including contractual protections with employees, contractors, customers, and partners. We require our employees, consultants, and other
third parties to enter into confidentiality and proprietary rights agreements and we control and monitor access to our software, documentation,
proprietary technology, and other confidential information. Our policy is to require all employees and independent contractors to sign
agreements assigning to us any inventions, trade secrets, works of authorship, developments, processes, and other intellectual property
generated by them on our behalf and under which they agree to protect our confidential information. In addition, we generally enter into
confidentiality agreements with our customers and partners.
Despite
our efforts to protect our intellectual property, unauthorized parties may still copy or otherwise obtain and use our technology. In
addition, we intend to continue to expand our international operations, and effective intellectual property, copyright, trademark and
trade secret protection may not be available or may be limited in foreign countries. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete.
Impact
of the COVID-19 Pandemic
In
December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020,
the World Health Organization characterized COVID-19 as a pandemic. The pandemic, which has continued to spread, and the related adverse
public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely
affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased
market volatility. It has also disrupted the normal operations of many businesses, including ours.
For
example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement
of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions,
closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings.
These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide.
In March 2020, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all
HeartCore Co. employees were required to work from home for several months during the height of the pandemic. We cancelled or
shifted our customer and industry events to virtual-only experiences. Although we have begun to slowly re-open our offices on a staggered,
region-by-region basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel
entirely additional customer, employee or industry events in the future. All of these changes may disrupt the way we operate our business.
In addition, our management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic
and seeking to minimize the risk of the virus and manage its effects on our business and workforce.
Although
we were recently formed, our wholly owned operating subsidiary, HeartCore Co., has been operating through the pandemic. The operations
of HeartCore Co. have been impacted by a range of external factors related to the pandemic that are not within our control. As
for existing customers, the pandemic has not affected their use our software. As for new customers in the travel, hotel, airline, railroad,
and restaurant industry for the CX division, the pandemic has resulted in a reduction in new orders. However, as for new customers in
the retail and finance industry for the CX division, orders have increased despite the pandemic, resulting in an overall increase in
sales for the CX division of $2,159,372 for the year ended December 31, 2021 as compared to the year ended December 31, 2020. As for
the impact of the pandemic on the DX division, large companies were forced to change the way they operate, as employees were forced to
work remotely, which increased the demand for our DX software, but due to the delay in the sales cycle by the pandemic, realization of
sales were delayed resulting in reduction of sales of $363,321 for the year ended December 31, 2021 as compared to the year ended December
31, 2020. We have also lost customers due to the impact of the pandemic. Our net retention rate of our customers in our digital transformation
business (RPA business) was 45%, 52% and 75% as of December 31, 2021, December 31, 2020 and December 31, 2019, respectively. The reduction
in the net retention rate was due to a number of small and medium-sized customers cancelling their contracts due to the COVID-19 pandemic.
The
duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time,
such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused
by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees,
customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will
be harmed.
To
the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the
other risks described in the “Risk Factors” section, including, in particular, risks related to our dependence on customer
renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively
affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions
may harm our industry, business and results of operations.
Corporate
History
We
were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly owned subsidiary,
HeartCore Co., a Japanese corporation, which was established in Japan by Sumitaka Yamamoto in 2009.
Share
Exchange Agreement
On
July 16, 2021, pursuant to the terms of a share exchange agreement among the Company, HeartCore Co., the shareholders of HeartCore
Co. (excluding Dentsu Digital Investment Limited) and Sumitaka Yamamoto, as the representative of the shareholders of HeartCore
Co., we issued 15,999,994 shares of our common stock to the shareholders of HeartCore Co. in exchange for 10,706 shares HeartCore
Co.’s common stock, representing 97.5% of the issued and outstanding capital stock of HeartCore Co. As a result of
this transaction, HeartCore Co. became our 97.5%-owned subsidiary and the former shareholders of HeartCore Co. became the
owners of 100% of our outstanding common stock as of July 16, 2021.
On
February 24, 2022, the Company purchased 278 shares of HeartCore Co. from Dentsu Digital for 50,040,000 Japanese Yen (approximately $435,500).
As a result, effective February 24, 2022, HeartCore Co. is a wholly owned subsidiary of the Company.
Memorandum
to Share Exchange Agreement - Information Services International-Dentsu Ltd.
On
July 15, 2021, the Company, HeartCore Co. and Mr. Yamamoto entered into a memorandum regarding share exchange agreement (the “Memorandum”)
with Information Services International-Dentsu Ltd. (“ISI-Dentsu”), a shareholder of HeartCore Co., which became a
stockholder of the Company pursuant to the share exchange agreement.
Pursuant
to the Memorandum, the parties agreed on certain matters related to the operations of the Company and HeartCore Co., which would
remain in place until the earlier of (1) the parties unanimous agreement to terminate the Memorandum; (2) if Dentsu ceases to be a stockholder
of the Company; (3) if an application by the Company for the listing of its shares is approved by Nasdaq; or (4) upon the effectiveness
of a registration statement filed by the Company under the Securities Act for an initial public offering of its stock (which was satisfied
when the Company closed its initial public offering on February 14, 2022). Therefore, the Memorandum ceased to be in effect upon the
closing of our initial public offering on February 14, 2022.
Pursuant
to the Memorandum, the Company and HeartCore Co. agreed to give advance notice to Dentsu when decisions are made with respect
to any of the following matters pertaining to the Company or HeartCore Co.:
| ● | Changes
to the certificate of incorporation or articles of incorporation, limited to the creation
of class shares, changes in the features of common shares as class shares, establishment
of or changes in share units, and other changes that may affect the position of common shareholders; |
| ● | Dissolution,
a petition for commencement of bankruptcy proceedings, civil rehabilitation proceedings or
corporate reorganization proceedings filed by the Company, HeartCore Co. or its directors; |
| ● | Approval
of demand for sale of the shares by Mr. Yamamoto; |
| ● | Loans,
capital investment or other investments; |
| ● | Issuance
of new shares, stock options, convertible bonds or debentures; |
| ● | Acquisition,
disposition or cancellation of treasury shares, acquisition, disposition or cancellation
of treasury stock acquisition rights, or redemption, purchase, cancellation or acquisition
of options or other rights; |
| ● | Stock
split or reverse stock split; |
| ● | Merger,
company split, share exchange, share transfer or share delivery; |
| ● | Transfer,
acquisition, suspension or abolition of all or a part of a business, consolidation of branch
offices or commencement of new business; |
| ● | Significant
business alliances or their dissolution; |
| ● | Approval
of transfer of shares of the Company or HeartCore Co. (including sales by the Company
of HeartCore Co.’s shares); |
| ● | Acquisition
or disposition of shares of any related party of the Company or HeartCore Co.; |
| ● | Appointment
and dismissal of directors, executive officers, auditors, managers and other important employees; |
| ● | Any
transaction between HeartCore Co. and its director which requires approval by the
board of directors under the Japanese Companies Act and any equivalent transaction between
the Company and its director; |
| ● | Execution
or change of important contracts or other legally significant juridical acts; |
| ● | Establishment
of subsidiary and affiliates; and |
| ● | Any
change of business plan. |
Pursuant
to the Memorandum, to the extent not in conflict with the laws of the United States or the State of Delaware or the rules and regulations
of any securities exchange or securities market on which the Company’s securities are traded or listed for trading, Mr. Yamamoto
agreed to notify Dentsu in advance when making a decision on the following matters pertaining to Mr. Yamamoto:
| ● | A
petition for bankruptcy or commencement of civil rehabilitation proceedings filed by Mr.
Yamamoto himself; |
| ● | Transfer
or acquisition of shares of HeartCore Co. or its related parties; |
| ● | Loans,
debt guarantees or collateral; |
| ● | The
filing of a lawsuit, settlement or conclusion of a suit not based on a judicial decision
by Mr. Yamamoto pertaining to a claim on property rights; |
| ● | Conclusion
or change of important contracts or other important juridical act; and |
| ● | Offering
of the shares held by Mr. Yamamoto. |
To
the extent not in conflict with the laws of the United States or the State of Delaware or the rules and regulations of any securities
exchange or securities market on which the Company’s securities are traded or listed for trading, and provided that legal counsel
to the Company does not advise the Company that any such notification is inadvisable due to such information being material non-public
information or due to such disclosure being a breach of the fiduciary duties of the officers or Directors of the Company, the Company
or HeartCore Co. also agreed to provide to Dentsu a summary of the following matters pertaining to the Company or HeartCore Co.:
| ● | Damage
arising from disasters or operations; |
| ● | Filing
of a lawsuit by a third party which may affect its financial condition, or becoming subject
to a judgment, or any order or award equivalent thereto which may affect its financial condition; |
| ● | Petition
for an injunction of the business or a provisional disposition order equivalent thereto,
or conclusion of legal proceedings not based on an order or a judgement by the court; |
| ● | Revocation
of license, suspension of business or other equivalent dispositions by an administrative
agency based on laws and regulations, or accusation by an administrative agency for violation
of the laws; |
| ● | Merger
or other reorganization involving the Company, HeartCore Co., or any of their related
parties; |
| ● | Filing
of a petition for commencement of bankruptcy proceedings, commencement of civil rehabilitation
proceedings, commencement of corporate reorganization proceedings, commencement of special
liquidation or enforcement of the corporate security interest by a third party, suspension
of payments or dishonor of bills or checks with regard to HeartCore Co. or the Company; |
| ● | Commencement
of bankruptcy proceedings, commencement of civil rehabilitation proceedings, commencement
of corporate reorganization proceedings, commencement of special liquidation or petition
for exercise of corporate security interest, suspension of payments or dishonor of bills
or checks pertaining to the Company, HeartCore Co. or any of its related parties; |
| ● | Suspension
of transactions with material customers, suppliers, distributors, agents, or other business
partners; |
| ● | The
occurrence of risk of default by an obligor of the Company or HeartCore Co., or a
principal obligor of a guarantee obligation of which the Company or HeartCore Co.
is a guarantor; and |
| ● | Cancellation
of debts by creditors, reduction or extension of interest or assumption or repayment of debts
by third parties. |
In
addition, to the extent permitted by applicable law, and provided that legal counsel to the Company does not advise the Company that
any such notification is inadvisable due to such information being material non-public information or due to such disclosure being a
breach of the fiduciary duties of the officers or Directors of the Company, if Sumitaka Yamamoto becomes aware of the occurrence of the
following matters pertaining to himself and other matters that are important in terms of credit status, etc., he agreed to immediately
report in writing the summary of the following matters that occurred to the investors:
| ● | Filing
of a lawsuit by a third party which may affect the financial condition of Mr. Yamamoto, or
becoming subject to a judgement or any order or award equivalent thereto which may affect
the financial condition of Mr. Yamamoto; and |
| ● | Petition
for commencement of bankruptcy or civil rehabilitation proceedings, suspension of payment
or dishonor of bill or check by a third party. |
Pursuant
to the Memorandum, Dentsu has the right to demand that Mr. Yamamoto purchase all or part of the shares held by it (including any other
option rights to acquire shares), in the event that the Company, HeartCore Co. or Mr. Yamamoto breaches any of its obligations
under the Memorandum and fails to remedy such breach within 30 days, if the representations and warranties in the Memorandum are not
true or accurate, or where it is subsequently found that the preconditions for the execution of the Memorandum were not been satisfied.
Mr. Yamamoto may cause a third party to acquire such shares with the approval of Dentsu.
The
per share-transfer price for the shares in this case shall be the purchase price paid by Dentsu for the acquisition of shares of HeartCore
Co., subject to appropriate adjustments for stock splits, stock consolidations, and similar events involving the shares. In the
event any withholding tax is imposed upon the transfer price of the shares the amount equivalent to such withholding tax will be borne
by the purchaser and the purchaser is required to pay Dentsu the entire amount of the transfer amount so that the amount Dentsu receives
after withholding is the transfer price set forth in the Memorandum.
The
Company and HeartCore Co. also agreed to hold regular business briefings at least once a quarter and to provide Dentsu with reports
on the business execution of the Company and HeartCore Co. and monthly trial balances of the Company and HeartCore Co.
(including balance sheets, profit and loss statements, and cash flow statements).
Mr.
Yamamoto agreed that if he wished to transfer all or part of the shares of the Company that he held to a third party, he will notify
Dentsu at least 40 business days prior to the scheduled date of payment of the transfer price of such shares, providing the details regarding
the proposed sale. Dentsu then has the right to participate in the transfer under the same terms and conditions and to transfer all of
the shares held by Dentsu to the buyer in the proposed transaction. If Dentsu makes such an election, Mr. Yamamoto agreed to negotiate
with the buyer and take all necessary measures to transfer the shares that Dentsu desires to transfer.
The
Memorandum also provides that in the event that Mr. Yamamoto voluntary resigns as a director of the Company or HeartCore Co. or
his term of office expires, the Company or HeartCore Co. shall immediately add another person who shall be concurrently responsible
for the obligations incurred by Mr. Yamamoto in connection with the Memorandum, upon approval of Dentsu.
The
Memorandum contains customary representations and warranties by Mr. Yamamoto relating to the Company and HeartCore Co. and customary
confidentiality, indemnification and other miscellaneous provisions. The Memorandum is governed by and construed in accordance with the
laws of Japan.
Stock
Purchase Agreement – Dentsu Digital Investment Limited
On
August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”)”) entered into a Stock Purchase
Agreement, pursuant to which the Company agreed to purchase the 278 shares of HeartCore Co. from Dentsu Digital in accordance
with certain terms and conditions in the Stock Purchase Agreement. In accordance with the terms of the Stock Purchase Agreement, the
Company agreed to purchase the 278 shares of HeartCore Co. from Dentsu Digital for JP¥50,040,000 (approximately $435,500)
on the earlier of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten
initial public offering of common stock, filed by the Company with the SEC or (ii) December 20, 2022.
On
February 24, 2022, the Company purchased 278 shares of HeartCore Co. from Dentsu Digital for 50,040,000 Japanese Yen (approximately $435,500).
As a result, effective February 24, 2022, HeartCore Co. is a wholly owned subsidiary of the Company.
Historical
Common Equity Transactions
On
May 18, 2021, we issued five shares of common stock to Sumitaka Yamamoto, Chief Executive Officer of the Company, for $1.00 per share
for a total subscription of $5.00.
On
July 16, 2021, pursuant to the terms of a share exchange agreement among the Company, HeartCore Co., the shareholders of HeartCore
Co. (excluding Dentsu Digital Investment Limited) and Sumitaka Yamamoto, as the representative of the shareholders of HeartCore
Co., we issued 15,999,994 shares of our common stock to the shareholders of HeartCore Co. in exchange for 10,706 shares HeartCore
Co.’s common stock, representing 97.5% of the issued and outstanding capital stock of HeartCore Co. On February 24, 2022,
the Company purchased 278 shares of HeartCore Co. from Dentsu Digital for 50,040,000 Japanese Yen (approximately $435,500). As a result,
effective February 24, 2022, HeartCore Co. is a wholly owned subsidiary of the Company.
On
November 3, 2021, the Company redeemed 484,056 shares of common stock held by Sumitaka Yamamoto, Chief Executive Officer of the Company,
for $1.00.
During
the period from October 27, 2021 through January 13, 2022, the Company issued 400,000 shares of common stock at a purchase price of $2.50
per share (for an aggregate of $1,000,000 of proceeds) to accredited investors in a private placement under Rule 506(b) of Regulation
D of the Securities Act.
On
December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to our 2021 Equity Incentive Plan
at an exercise price of $2.50 per share to various officers, directors, employees and consultants of the Company. The options vest on
each annual anniversary of the date of issuance, in an amount equal to 25% of the applicable shares of common stock, subject to the terms
and conditions of the 2021 Equity Incentive Plan and the option award agreements pursuant to which the options were awarded.
The
above issuances/sales were made pursuant to an exemption from registration as set forth in Section 4(a)(2) of the Securities Act and/or
Rule 506 of Regulation D promulgated under the Securities Act.
As
of December 31, 2021 and 2020, the Company has a due to related party balance of $1,110 and due from related party balance of $23,926,
respectively, from Sumitaka Yamamoto, the CEO and major shareholder of the Company. The balance is unsecured, non-interest bearing and
due on demand. During the years ended December 31, 2021 and 2020, the Company advanced $87,664 and $73,997, respectively, to this related
party, and the related party paid expenses of $111,350 and $59,345, respectively, on behalf of the Company. As of December 31, 2020,
Sumitaka Yamamoto held 467,622 shares issued with repurchase provision in relation to the stock options the Company granted in May 2016
that he repurchased on behalf of the Company. On November 3, 2021, the Company redeemed 484,056 shares that Sumitaka Yamamoto held on
behalf of the Company with $1 in total.
As
of December 31, 2021 and 2020, the Company has a loan receivable balance of $386,315 and $386,516, respectively, from Heartcore Technology
Inc., a company controlled by the CEO of the Company. The loan was made to the related party to support its operation. The balance is
unsecured, bears an annual interest of 1.475%, and requires repayments in installments starting from February 2022. During the years
ended December 31, 2021 and 2020, the Company loaned $55,212 and $285,931, respectively, to this related party, and the related party
paid expenses of $13,705 and $0, respectively, on behalf of the Company.
In
June 2020, Suzuyo Shinwart Corporation became an over 10% shareholder of the Company. During the year ended December 31, 2020, the Company
has revenue from this related party of $411,823 from software sales and incurred cost with this related party of $453,600 for software
development services provided. As of December 31, 2020, the Company has deferred revenue with this related party of $49,967. In July
2021, Suzuyo Shinwart Corporation sold all its shares of the Company to the Company’s CEO and ceased to be the Company’s
related party. During the period ended July 12, 2021, the Company has revenue from this related party of $157,791 from software sales
and incurred cost with this related party of $332,669 for software development services provided.
Recent
Developments
Related
Party Transactions
As
of December 31, 2021, the Company has a due from balance of approximately $386,315 from Heartcore Technology Inc., a company controlled
by the CEO of the Company.
Stock
Purchase
On
August 10, 2021, the Company and Dentsu Digital Investment Limited (“Dentsu Digital”) entered into a Stock Purchase Agreement,
pursuant to which the Company has agreed to purchase the 278 shares of HeartCore Co. from Dentsu Digital in accordance with certain
terms and conditions in the Stock Purchase Agreement. In accordance with the terms of the Stock Purchase Agreement, the Company shall
purchase the 278 shares of HeartCore Co. from Dentsu Digital for JP¥50,040,000 (approximately $435,500) on the earlier
of the (i) the date the SEC declares effective a registration statement on Form S-1, for a firm commitment underwritten initial public
offering of common stock, filed by the Company with the SEC or (ii) December 20, 2022.
On
February 24, 2022, the Company purchased 278 shares of HeartCore Co. from Dentsu Digital for 50,040,000 Japanese Yen (approximately $435,500).
As a result, effective February 24, 2022, HeartCore Co. is a wholly owned subsidiary of the Company.
Redemption
On
November 3, 2021, the Company redeemed 484,056 shares issued of HeartCore Enterprises, Inc. from the CEO of the Company for $1 in total
for the shares related to the early exercise of stock options the CEO held on behalf of the Company.
Private
Placement
During
the period from October 27, 2021 through January 13, 2022, the Company issued 400,000 shares of common stock at a purchase price of $2.50
per share (for an aggregate of $1,000,000 of proceeds) to accredited investors in a private placement under Rule 506(b) of Regulation
D of the Securities Act.
Option
Awards
On
December 25, 2021, the Company awarded options to purchase 1,534,500 shares of common stock pursuant to our 2021 Equity Incentive Plan
at an exercise price of $2.50 per share to various officers, directors, employees and consultants of the Company. The options vest on
each annual anniversary of the date of issuance, in an amount equal to 25% of the applicable shares of common stock, subject to the terms
and conditions of the 2021 Equity Incentive Plan and the option award agreements pursuant to which the options were awarded.
Initial
Public Offering
On
February 14, 2022, we closed our initial public offering of 3,000,000 shares of common stock at a public
offering price of $5.00 per share, for aggregate gross proceeds of $15.0 million, before deducting underwriting discounts, commissions,
and other offering expenses. Our common stock began trading on the Nasdaq Capital Market on February 10, 2022, under the symbol
“HTCR”. Boustead Securities, LLC acted as the sole managing underwriter and bookrunner for the
offering.
ITEM
1A. RISK FACTORS
An
investment in our securities carries a significant degree of risk. You should carefully consider the following risks, as well as the
other information contained in this annual report on Form 10-K, including our historical financial statements and related notes included
elsewhere in this annual report on Form 10-K, before you decide to purchase our securities. Any one of these risks and uncertainties
has the potential to cause material adverse effects on our business, prospects, financial condition and operating results which could
cause actual results to differ materially from any forward-looking statements expressed by us and a significant decrease in the value
of our common shares and warrants. Refer to “Cautionary Statement Regarding Forward-Looking Statements.”
We
may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause. These potential
risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional risks and uncertainties
that we are presently unaware of, or presently consider immaterial, that may become material in the future and have a material adverse
effect on us. You could lose all or a significant portion of your investment due to any of these risks and uncertainties.
Below
is a summary of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:
| ● | Our
industry and the markets in which we operate are highly competitive and increased competitive
pressures could reduce our share of the markets we serve and adversely affect our business,
financial position, results of operations and cash flows; |
| ● | We
are a holding company and depend upon our subsidiary for our cash flows; |
| ● | We
may require additional funding for our growth plans, and such funding may result in a dilution
of your investment; |
| ● | We
currently are a “controlled company” within the meaning of Nasdaq Capital Market
rules and the rules of the SEC and, as a result, qualify for exemptions from certain corporate
governance requirements. You do not have the same protections afforded to stockholders of
other companies that are subject to such requirements; |
| ● | If
the voting power of our capital stock continues to be highly concentrated, it may prevent
you and other minority stockholders from influencing significant corporate decisions and
may result in conflicts of interest; |
| ● | The
effects of the COVID-19 pandemic have materially affected how we and our customers are operating
our businesses, and the duration and extent to which this will impact our future results
of operations and overall financial performance remains uncertain; |
| ● | Our
common stock may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB
is unable to inspect our auditor given that they are relying upon support from their China-based
offices, and the delisting of our common stock, or the threat of their being delisted, may
materially and adversely affect the value of your investment; |
| ● | We
are dependent upon customer renewals, the addition of new customers, increased revenue from
existing customers and the continued growth of the market for content management, customer
experience management, task and process mining, and robotic process automation; |
| ● | Our
subscription renewal rates may decrease, and any decrease could harm our future revenue and
operating results; |
| ● | If
we do not accurately predict subscription renewal rates or otherwise fail to forecast our
revenue accurately, or if we fail to match our expenditures with corresponding revenue, our
operating results could be adversely affected; |
| ● | Because
we generally recognize revenue from subscriptions ratably over the term of the agreement,
near term changes in sales may not be reflected immediately in our operating results; |
| ● | We
face significant competition from both established and new companies offering digital marketing,
task and process mining, content management, customer experience management, and robotic
process automation, and other related applications, as well as internally developed software,
which may harm our ability to add new customers, retain existing customers and grow our business; |
| ● | We
have experienced rapid growth and organizational change in recent periods and expect continued
future growth. If we fail to manage our growth effectively, we may be unable to execute our
business plan, maintain high levels of service or address competitive challenges adequately; |
| ● | Failure
to effectively develop and expand our digital marketing, task and process mining, content
management, customer experience management, and robotic process automation capabilities could
harm our ability to increase our customer base and achieve broader market acceptance of our
software; |
| ● | The
rate of growth of our business depends on the continued participation and level of service
of our third-party partners; |
| ● | We
may experience quarterly fluctuations in our operating results due to a number of factors,
which makes our future results difficult to predict and could cause our operating results
to fall below expectations or our guidance; |
| ● | If
we fail to maintain our inbound thought leadership position, our business may suffer; |
| ● | If
we fail to further enhance our brand and maintain our existing strong brand awareness, our
ability to expand our customer base will be impaired and our financial condition may suffer; |
| ● | If
we fail to adapt and respond effectively to rapidly changing technology, evolving industry
standards and changing customer needs or requirements, our software may become less competitive; |
| ● | If
we fail to offer high-quality customer support, our business and reputation may suffer; |
| ● | We
may not be able to scale our business quickly enough to meet our customers’ growing
needs and if we are not able to grow efficiently, our operating results could be harmed; |
| ● | Our
ability to introduce new products and features is dependent on adequate research and development
resources. If we do not adequately fund our research and development efforts, we may not
be able to compete effectively and our business and operating results may be harmed; |
| ● | Changes
in the sizes or types of businesses that purchase our software or in the applications within
our software purchased or used by our customers could negatively affect our operating results; |
| ● | We
have in the past completed acquisitions and may acquire or invest in other companies or technologies
in the future, which could divert management’s attention, fail to meet our expectations,
result in additional dilution to our stockholders, increase expenses, disrupt our operations
or harm our operating results; |
| ● | Because
our long-term growth strategy involves further expansion of our sales to customers outside
Japan, our business will be susceptible to risks associated with international operations; |
| ● | If
we cannot maintain our company culture as we grow, we could lose the innovation, teamwork,
passion and focus on execution that we believe contribute to our success and our business
may be harmed; |
| ● | We
rely on our management team and other key employees, and the loss of one or more key employees
could harm our business; |
| ● | The
failure to attract and retain additional qualified personnel could prevent us from executing
our business strategy; |
| ● | Interruptions
or delays in service from our third-party data center providers could impair our ability
to deliver our software to our customers, resulting in customer dissatisfaction, damage to
our reputation, loss of customers, limited growth and reduction in revenue; |
| ● | If
our software has outages or fails due to defects or similar problems, and if we fail to correct
any defect or other software problems, we could lose customers, become subject to service
performance or warranty claims or incur significant costs; |
| ● | We
are dependent on the continued availability of third-party data hosting and transmission
services; |
| ● | If
we do not or cannot maintain the compatibility of our software with third-party applications
that our customers use in their businesses, our revenue will decline; |
| ● | We
rely on data provided by third parties, the loss of which could limit the functionality of
our software and disrupt our business; |
| ● | Privacy
concerns and end users’ acceptance of Internet behavior tracking may limit the applicability,
use and adoption of our software; |
| ● | If
our or our customers’ security measures are compromised or unauthorized access to data
of our customers or their customers is otherwise obtained, our software may be perceived
as not being secure, our customers may be harmed and may curtail or cease their use of our
software, our reputation may be damaged and we may incur significant liabilities; |
| ● | Our
business may suffer if it is alleged or determined that our technology infringes the intellectual
property rights of others; |
| ● | If
we fail to adequately protect our proprietary rights, in Japan and abroad, our competitive
position could be impaired and we may lose valuable assets, experience reduced revenue and
incur costly litigation to protect our rights; |
| ● | Our
use of “open-source” software could negatively affect our ability to offer our
software and subject us to possible litigation; |
| ● | We
are subject to governmental regulation and other legal obligations, particularly related
to privacy, data protection and information security, and our actual or perceived failure
to comply with such obligations could harm our business. Compliance with such laws could
also impair our efforts to maintain and expand our customer base, and thereby decrease our
revenue; |
| ● | The
standards that private entities use to regulate the use of email have in the past interfered
with, and may in the future interfere with, the effectiveness of our software and our ability
to conduct business; |
| ● | Existing
federal, state and foreign laws regulate Internet tracking software, the senders of commercial
emails and text messages, website owners and other activities, and could impact the use of
our software and potentially subject us to regulatory enforcement or private litigation; |
| ● | We
are subject to governmental export controls and economic sanctions laws that could impair
our ability to compete in international markets and subject us to liability if we are not
in full compliance with applicable laws; |
| ● | Our
substantial indebtedness could have important adverse consequences and adversely affect our
financial condition; |
| ● | We
may be unable to generate sufficient cash flow to satisfy our significant debt service obligations,
which could have a material adverse effect on our business, financial condition and results
of operations; |
| ● | Despite
our level of indebtedness, we and our subsidiary may still be able to incur substantially
more debt, including off-balance sheet financing, contractual obligations and general and
commercial liabilities. This could further exacerbate the risks to our financial condition
described above; and |
| ● | There
can be no assurance that we will be able to comply with Nasdaq Capital Market’s continued
listing standards. |
Risks
Related to Our Business and Strategy
We are a holding company and depend upon our
subsidiary for our cash flows.
We are a holding company. All
of our operations are conducted, and almost all of our assets are owned, by our subsidiary. Consequently, our cash flows and our
ability to meet our obligations depend upon the cash flows of our subsidiary and the payment of funds by this subsidiary
to us in the form of dividends, distributions or otherwise. The ability of our subsidiary to make any payments to us depends on
their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal restrictions. Any failure to
receive dividends or distributions from our subsidiary when needed could have a material adverse effect on our business, results
of operations or financial condition.
We
may require additional funding for our growth plans, and such funding may result in a dilution of your investment.
We
attempted to estimate our funding requirements in order to implement our growth plans. If the costs of implementing such plans should
exceed these estimates significantly or if we come across opportunities to grow through expansion plans which cannot be predicted at
this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise additional funds to
meet these funding requirements.
These
additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure you
that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain additional
financing on terms that are acceptable to us, we will not be able to implement such plans fully if at all. Such financing even if obtained,
may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’ consent for payment of
dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain corporate actions.
Further,
if we raise additional funds by way of a rights offering or through the issuance of new shares, any shareholders who are unable or unwilling
to participate in such an additional round of fund raising may suffer dilution in their investment.
The
effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and
extent to which this will impact our future results of operations and overall financial performance remains uncertain.
In
December 2019, a novel coronavirus disease (“COVID-19”) was reported to have surfaced in Wuhan, China, and on March 11, 2020,
the World Health Organization characterized COVID-19 as a pandemic. The pandemic, which has continued to spread, and the related adverse
public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely
affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased
market volatility. It has also disrupted the normal operations of many businesses, including ours.
For
example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on the physical movement
of our employees, partners and customers to limit the spread of the pandemic, including physical distancing, travel bans and restrictions,
closure of non-essential business, quarantines, work-from-home directives, shelter-in-place orders, and limitations on public gatherings.
These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide.
In March 2020, we temporarily closed our offices, including our corporate headquarters, suspended all company-related travel, and all
HeartCore Co. employees were required to work from home for several months during the height of the pandemic. We cancelled or
shifted our customer and industry events to virtual-only experiences. Although we have begun to slowly re-open our offices on a staggered,
region-by-region basis in accordance with local authority guidelines, we may deem it advisable to similarly alter, postpone or cancel
entirely additional customer, employee or industry events in the future. All of these changes may disrupt the way we operate our business.
In addition, our management team has, and will likely continue, to spend significant time, attention and resources monitoring the pandemic
and seeking to minimize the risk of the virus and manage its effects on our business and workforce.
Although
we were recently formed, our wholly owned operating subsidiary, HeartCore Co., has been operating through the pandemic. The operations
of HeartCore Co. have been impacted by a range of external factors related to the pandemic that are not within our control. As
for existing customers, the pandemic has not affected their use our software. As for new customers in the travel, hotel, airline, railroad,
and restaurant industry for the CX division, the pandemic has resulted in a reduction in new orders. However, as for new customers in
the retail and finance industry for the CX division, orders have increased despite the pandemic, resulting in an overall increase in
sales for the CX division of $2,159,372 for the year ended December 31, 2021 as compared to the year ended December 31, 2020. As for
the impact of the pandemic on the DX division, large companies were forced to change the way they operate, as employees were forced to
work remotely, which increased the demand for our DX software, but due to the delay in the sales cycle by the pandemic, realization of
sales were delayed resulting in reduction of sales of $363,321 for the year ended December 31, 2021 as compared to the year ended December
31, 2020. We have also lost customers due to the impact of the pandemic. Our net retention rate of our customers in our digital transformation
business (RPA business) was 45%, 52% and 75% as of December 31, 2021, December 31, 2020 and December 31, 2019, respectively. The reduction
in the net retention rate was due to a number of small and medium-sized customers cancelling their contracts due to the COVID-19 pandemic.
The
duration and extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time,
such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the disruption caused
by such actions, the effectiveness of vaccines and other treatments for COVID-19, and the impact of these and other factors on our employees,
customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will
be harmed.
To
the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the
other risks described in this “Risk Factors” section, including, in particular, risks related to our dependence on customer
renewals, the addition of new customers and increased revenue from existing customer, risks that our operating results could be negatively
affected by changes in the sizes or types of businesses that purchase our platform and the risk that weakened global economic conditions
may harm our industry, business and results of operations.
Our
common stock may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditor given
that they are relying upon support from their China-based offices, and the delisting of our common stock, or the threat of their being
delisted, may materially and adversely affect the value of your investment.
The
Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines
that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for
three consecutive years beginning in 2021, the SEC shall prohibit our shares of common stock from being traded on a national securities
exchange or in the over the counter trading market in the United States.
Our
financial statements contained in this Annual Report on Form 10-K have been audited by MaloneBailey, LLP, an independent registered public
accounting firm that is headquartered in the United States with offices in Beijing and Shenzhen, China. MaloneBailey, LLP is a firm registered
with the PCAOB, and is required by the United States laws to undergo regular inspections by the PCAOB to assess its compliance with the
laws of the U.S. and professional standards. While MaloneBailey, LLP has been inspected by the PCAOB on a regular basis, no overseas
securities regulator is allowed to directly conduct investigation or evidence collection activities in China according to Article 177
of the PRC Securities Law (last amended in December 2019). Accordingly, without the consent of the competent PRC securities regulators
and relevant authorities, MaloneBailey, LLP may not provide the documents and materials relating to securities business activities in
China to the PCAOB, an overseas securities regulator under the PRC Securities Law. As a result, the audit working papers of our financial
statements may not be inspected by the PCAOB, to the extent that the audit work was carried out by MaloneBailey, LLP with the collaboration
of their China-based offices and the PCAOB has not obtained such requisite approval. Given that MaloneBailey, LLP is relying upon support
from their China-based offices, the trading of our common stock may be prohibited and our common stock may be delisted from Nasdaq Capital
Market or any other U.S. stock exchange under the HFCA Act if the PCAOB is unable to inspect our auditor. The prohibition of trading
of our common stock and the delisting of our common stock, or the threat of their being prohibited or delisted, may cause the value of
our common stock to significantly decline or, in extreme cases, become worthless.
On
March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements
of the HFCA Act. On December 2, 2021, the SEC adopted amendments to finalize such rules. We will be required to comply with these rules
if the SEC identifies us as having a “non-inspection” year by evaluating the annual report we file, in which we will identify
the auditor who provide opinions related to the financial statements presented in our annual report, the location where the auditor’s
report has been issued and the PCAOB ID number of such audit firm or branch. If we have three consecutive non-inspection years, the SEC
will implement the trading prohibition of our common stock through stop orders, and the exact timeline for when the SEC will delist an
issuer after three consecutive non-inspection years remains imprecise. On June 22, 2021, the United States Senate passed the Accelerating
Holding Foreign Companies Accountable Act, which, if enacted, would decrease the number of non-inspection years from three years to two,
thus reducing the time period before our common stock may be prohibited from trading or delisted.
We
are dependent upon customer renewals, the addition of new customers, increased revenue from existing customers and the continued growth
of the market for content management, customer experience management, task and process mining, and robotic process automation.
We
derive, and expect to continue to derive, a substantial portion of our revenue from the sale of subscriptions to use our software for
digital marketing, task and process mining, content management, customer experience management, and robotic process animation. The market
for digital marketing, task and process mining, content management, customer experience management, and robotic process animation is
still evolving, and competitive dynamics may cause pricing levels to change as the market matures and as existing and new market participants
introduce new types of point applications and different approaches to enable businesses to address their respective needs. As a result,
we may be forced to reduce the prices we charge for our software and may be unable to renew existing customer agreements or enter into
new customer agreements at the same prices and upon the same terms that we have historically. In addition, our growth strategy involves
a scalable pricing model intended to provide us with an opportunity to increase the value of our customer relationships over time as
we expand their use of our software, sell to other parts of their organizations, cross-sell our sales products to existing marketing
product customers and vice versa through touchless or low touch in product purchases, and upsell additional offerings and features. If
our cross-selling efforts are unsuccessful or if our existing customers do not expand their use of our software or adopt additional offerings
and features, our operating results may suffer.
Our
subscription renewal rates may decrease, and any decrease could harm our future revenue and operating results.
Our
customers have no obligation to renew their subscriptions for our software after the expiration of their subscription periods, substantially
all of which are one year or less. In addition, our customers may seek to renew for lower subscription tiers, for fewer contacts or seats,
or for shorter contract lengths. Also, customers may choose not to renew their subscriptions for a variety of reasons. Our renewal rates
may decline or fluctuate as a result of a number of factors, including limited customer resources, pricing changes, the prices of services
offered by our competitors, adoption and utilization of our services and add-on applications by our customers, adoption of our new software,
customer satisfaction with our services, mergers and acquisitions affecting our customer base, reductions in our customers’ spending
levels or declines in customer activity as a result of economic downturns or uncertainty in financial markets. If our customers do not
renew their subscriptions for our software or decrease the amount they spend with us, our revenue will decline and our business will
suffer. In addition, a subscription model creates certain risks related to the timing of revenue recognition and potential reductions
in cash flows. A portion of the subscription-based revenue we report each quarter results from the recognition of deferred revenue relating
to subscription agreements entered into during previous quarters. A decline in new or renewed subscriptions in any period may not be
immediately reflected in our reported financial results for that period, but may result in a decline in our revenue in future quarters.
If we were to experience significant downturns in subscription sales and renewal rates, our reported financial results might not reflect
such downturns until future periods.
If
we do not accurately predict subscription renewal rates or otherwise fail to forecast our revenue accurately, or if we fail to match
our expenditures with corresponding revenue, our operating results could be adversely affected.
Because
our recent growth has resulted in the rapid expansion of our business, we do not have a long history upon which to base forecasts of
renewal rates with customers or future operating revenue. As a result, our operating results in future reporting periods may be significantly
below the expectations of the public market, equity research analysts or investors, which could harm the price of our common stock.
Because
we generally recognize revenue from subscriptions ratably over the term of the agreement, near term changes in sales may not be reflected
immediately in our operating results.
We
offer our software primarily through a mix of monthly, quarterly and single-year subscription agreements, which are generally paid upfront
and some are with ratable revenue recognition over the subscription period. As a result, some of the revenue we report in each quarter
is derived from agreements entered into during prior months, quarters or years. In addition, we do not record deferred revenue beyond
amounts invoiced as a liability on our balance sheet. A decline in new or renewed subscriptions or marketing solutions agreements in
any one quarter is not likely to be reflected immediately in our revenue results for that quarter. Such declines, however, would negatively
affect our revenue and deferred revenue balances in future periods, and the effect of significant downturns in sales and market acceptance
of our software, and potential changes in our rate of renewals, may not be fully reflected in our results of operations until future
periods. Our subscription model also makes it difficult for us to rapidly increase our total revenue and deferred revenue balance through
additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
We
face significant competition from both established and new companies offering digital marketing, task and process mining, content management,
customer experience management, and robotic process automation, and other related applications, as well as internally developed software,
which may harm our ability to add new customers, retain existing customers and grow our business.
The
digital marketing, task and process mining, content management, customer experience management, and robotic process automation market
is evolving, highly competitive and significantly fragmented. With the introduction of new technologies and the potential entry of new
competitors into the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales,
maintain or increase renewals and maintain our prices.
We
face intense competition from other companies that develop software for digital marketing, task and process mining, content management,
customer experience management, and robotic process automation and from marketing services companies that provide interactive marketing
services. Competition could significantly impede our ability to sell subscriptions to use our software on terms favorable to us. Our
current and potential competitors may develop and market new technologies that render our existing or future products less competitive,
or obsolete. In addition, if these competitors develop software with similar or superior functionality to our software, we may need to
decrease the prices or accept less favorable terms for our software subscriptions in order to remain competitive. If we are unable to
maintain our pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected.
Our
competitors include:
|
● |
task and process mining vendors; |
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email marketing software vendors; |
|
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|
● |
content management system providers; |
|
|
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|
● |
customer experience management system providers; |
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|
● |
robotic process automation vendors; |
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cloud-based marketing automation providers; |
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large-scale enterprise suites; |
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customer service software providers; and |
|
|
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Customer experience management systems. |
In
addition, instead of using our software, some prospective customers may elect to combine disparate point applications, such as content
management, marketing automation, analytics and social media management. We expect that new competitors, such as enterprise software
vendors that have traditionally focused on enterprise resource planning or other applications supporting back office functions, will
develop and introduce applications serving customer-facing and other front office functions. This development could have an adverse effect
on our business, operating results and financial condition. In addition, sales force automation and contact relationship management vendors
could acquire or develop applications that compete with our marketing software offerings. Some of these companies have acquired social
media marketing and other marketing software providers to integrate with their broader offerings.
Our
current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able
to devote greater resources to the development, promotion, sale and support of their products and services, may have more extensive customer
bases and broader customer relationships than we have, and may have longer operating histories and greater name recognition than we have.
As a result, these competitors may respond faster to new technologies and undertake more extensive marketing campaigns for their products.
In a few cases, these vendors may also be able to offer marketing, sales, customer service and content management software at little
or no additional cost by bundling it with their existing suite of applications. To the extent any of our competitors has existing relationships
with potential customers for either marketing software or other applications, those customers may be unwilling to purchase our software
because of their existing relationships with our competitor. If we are unable to compete with such companies, the demand for our software
could substantially decline.
In
addition, if one or more of our competitors were to merge or partner with another of our competitors, our ability to compete effectively
could be adversely affected. Our competitors may also establish or strengthen cooperative relationships with our current or future strategic
distribution and technology partners or other parties with whom we have relationships, thereby limiting our ability to promote and implement
our software. We may not be able to compete successfully against current or future competitors, and competitive pressures may harm our
business, operating results and financial condition.
We
expect continued future growth and if we fail to manage our growth effectively, we may be unable to execute our business plan,
maintain high levels of service or address competitive challenges adequately.
Our
head count and operations have grown. We plan to open international offices in the future. This growth has placed, and will continue
to place, a significant strain on our management, administrative, operational and financial infrastructure. We anticipate further growth
will be required to address increases in our product offerings and continued expansion. Our success will depend in part upon our ability
to recruit, hire, train, manage and integrate a significant number of qualified managers, technical personnel and employees in specialized
roles within our company, including in technology, sales and marketing. Furthermore, preservation of our corporate culture has been made
more difficult as our work force has been working from home in connection with restrictions placed upon businesses due to the pandemic.
A long-term continuation of these restrictions could, among other things, negatively impact employee morale and productivity. Any failure
to preserve our culture could harm our future success, including our ability to retain and recruit personnel, innovate and operate effectively
and execute on our business strategy. Furthermore, as our employees work remotely from geographic areas across the globe and more of
our employees work remotely on a permanent basis due to the pandemic, we may need to reallocate our investment of resources and closely
monitor a variety of local regulations and requirements, including local tax laws, and we may experience unpredictability in our expenses
and employee work culture. If we experience any of these effects in connection with future growth, if our new employees perform poorly,
or if we are unsuccessful in recruiting, hiring, training, managing and integrating these new employees, or retaining these or our existing
employees, it could materially impair our ability to attract new customers, retain existing customers and expand their use of our software,
all of which would materially and adversely affect our business, financial condition and results of operations.
In
addition, to manage the expected continued growth of our head count, operations and geographic expansion, we will need to continue to
improve our information technology infrastructure, operational, financial and management systems and procedures. Our anticipated additional
head count and capital investments will increase our costs, which will make it more difficult for us to address any future revenue shortfalls
by reducing expenses in the short term. If we fail to successfully manage our growth, we will be unable to successfully execute our business
plan, which could have a negative impact on our business, results of operations or financial condition.
Failure
to effectively develop and expand our digital marketing, task and process mining, content management, customer experience management,
and robotic process automation capabilities could harm our ability to increase our customer base and achieve broader market acceptance
of our software.
To
increase total customers and achieve broader market acceptance of our software, we will need to expand our digital marketing, task and
process mining, content management, customer experience management, and robotic process automation operations, including our sales force
and third-party channel partners. We will continue to dedicate significant resources to inbound sales and marketing programs. The effectiveness
of our inbound sales and marketing and third-party channel partners has varied over time and may vary in the future and depends on our
ability to maintain and improve our digital marketing, task and process mining, content management, customer experience management, and
robotic process automation capabilities. All of these efforts will require us to invest significant financial and other resources. Our
business will be seriously harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve
anticipated revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our
new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if our sales and marketing programs
are not effective.
The
rate of growth of our business depends on the continued participation and level of service of our third-party partners.
We
rely on our task and process mining third-party partners to provide certain services to our customers, as well as pursue sales of our
software to customers. To the extent we do not attract new partners, or existing or new partners do not refer a growing number of customers
to us, our revenue and operating results would be harmed. In addition, if our partners do not continue to provide services to our customers,
we would be required to provide such services ourselves either by expanding our internal team or engaging other third-party providers,
which would increase our operating costs.
We
may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to
predict and could cause our operating results to fall below expectations or our guidance.
Our
quarterly operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many
of which are outside of our control. As a result, our past results may not be indicative of our future performance, and comparing our
operating results on a period-to-period basis may not be meaningful. In addition to the other risks described in this Annual Report on
Form 10-K, factors that may affect our quarterly operating results include the following:
| ● | changes
in spending on marketing, task and process mining, content management, customer experience
management, and robotic process automation software by our current or prospective customers; |
| ● | pricing
our software subscriptions effectively so that we are able to attract and retain customers
without compromising our profitability; |
| ● | attracting
new customers for our marketing, sales, customer service, and content management software,
increasing our existing customers’ use of our software and providing our customers
with excellent customer support; |
| ● | customer
renewal rates and the amounts for which agreements are renewed; |
| ● | global
awareness of our thought leadership and brand; |
| ● | changes
in the competitive dynamics of our market, including consolidation among competitors or customers
and the introduction of new products or product enhancements; |
| ● | changes
to the commission plans, quotas and other compensation-related metrics for our sales representatives; |
| ● | the
amount and timing of payment for operating expenses, particularly research and development,
sales and marketing expenses and employee benefit expenses; |
| ● | the
amount and timing of costs associated with recruiting, training and integrating new employees
while maintaining our company culture; |
| ● | our
ability to manage our existing business and future growth, including increases in the number
of customers on our software and the introduction and adoption of our software in new markets
outside of the United States; |
| ● | unforeseen
costs and expenses related to the expansion of our business, operations and infrastructure,
including disruptions in our hosting network infrastructure and privacy and data security; |
| ● | foreign
currency exchange rate fluctuations; and |
| ● | general
economic and political conditions in our domestic and international markets. |
We
may not be able to accurately forecast the amount and mix of future subscriptions, revenue and expenses and, as a result, our operating
results may fall below our estimates or the expectations of public market analysts and investors. If our revenue or operating results
fall below the expectations of investors or securities analysts, or below any guidance we may provide, the price of our common stock
could decline.
If
we fail to maintain our inbound thought leadership position, our business may suffer.
We
believe that maintaining our thought leadership position in inbound digital marketing, content management, customer experience management,
and robotic process automation, is an important element in attracting new customers. We devote significant resources to develop and maintain
our thought leadership position, with a focus on identifying and interpreting emerging trends in the inbound experience, shaping and
guiding industry dialog and creating and sharing the best inbound practices. Our activities related to developing and maintaining our
thought leadership may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred
in such effort. We rely upon the continued services of our management and employees with domain expertise with inbound digital marketing,
content management, customer experience management, and robotic process automation, and the loss of any key employees in this area could
harm our competitive position and reputation. If we fail to successfully grow and maintain our thought leadership position, we may not
attract enough new customers or retain our existing customers, and our business could suffer.
If
we fail to further enhance our brand and maintain our existing strong brand awareness, our ability to expand our customer base will be
impaired and our financial condition may suffer.
We
believe that our development of the HeartCore brand is critical to achieving widespread awareness of our existing and future inbound
and automation experience solutions, and, as a result, is important to attracting new customers and maintaining existing customers. In
the past, our efforts to build our brand have involved significant expenses, and we believe that this investment has resulted in strong
brand recognition. Successful promotion and maintenance of our brands will depend largely on the effectiveness of our marketing efforts
and on our ability to provide a reliable and useful software at competitive prices. Brand promotion activities may not yield increased
revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully
promote and maintain our brand, our business could suffer.
If
we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and changing customer needs or requirements,
our software may become less competitive.
Our
future success depends on our ability to adapt and innovate our software. To attract new customers and increase revenue from existing
customers, we need to continue to enhance and improve our offerings to meet customer needs at prices that our customers are willing to
pay. Such efforts will require adding new functionality and responding to technological advancements, which will increase our research
and development costs. If we are unable to develop new applications that address our customers’ needs, or to enhance and improve
our software in a timely manner, we may not be able to maintain or increase market acceptance of our software. Our ability to grow is
also subject to the risk of future disruptive technologies.
If
we fail to offer high-quality customer support, our business and reputation may suffer.
High-quality
education, training and customer support are important for the successful marketing, sale and use of our software and for the renewal
of existing customers. Providing this education, training and support requires that our personnel who manage our online training or provide
customer support have specific inbound experience domain knowledge and expertise, making it more difficult for us to hire qualified personnel
and to scale up our support operations. The importance of high-quality customer support will increase as we expand our business and pursue
new customers. If we do not help our customers use multiple applications within our software and provide effective ongoing support, our
ability to sell additional functionality and services to, or to retain, existing customers may suffer and our reputation with existing
or potential customers may be harmed.
We
may not be able to scale our business quickly enough to meet our customers’ growing needs and if we are not able to grow efficiently,
our operating results could be harmed.
As
usage of our software grows and as customers use our software for additional inbound applications, we will need to devote additional
resources to improving our application architecture, integrating with third-party systems and maintaining infrastructure performance.
In addition, we will need to appropriately scale our internal business systems and our services organization, including customer support
and professional services, to serve our growing customer base, particularly as our customer demographics change over time. Any failure
of or delay in these efforts could cause impaired system performance and reduced customer satisfaction. These issues could reduce the
attractiveness of our software to customers, resulting in decreased sales to new customers, lower renewal rates by existing customers,
the issuance of service credits, or requested refunds, which could impede our revenue growth and harm our reputation. Even if we are
able to upgrade our systems and expand our staff, any such expansion will be expensive and complex, requiring management’s time
and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover,
there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that
the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all.
These efforts may reduce revenue and our margins and adversely affect our financial results.
Our
ability to introduce new products and features is dependent on adequate research and development resources. If we do not adequately fund
our research and development efforts, we may not be able to compete effectively and our business and operating results may be harmed.
To
remain competitive, we must continue to develop new product offerings, applications, features and enhancements to our existing software.
Maintaining adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable
to develop our software internally due to certain constraints, such as high employee turnover, lack of management ability or a lack of
other research and development resources, we may miss market opportunities. Further, many of our competitors expend a considerably greater
amount of funds on their research and development programs, and those that do not may be acquired by larger companies that would allocate
greater resources to our competitors’ research and development programs. Our failure to maintain adequate research and development
resources or to compete effectively with the research and development programs of our competitors could materially adversely affect our
business.
Changes
in the sizes or types of businesses that purchase our software or in the applications within our software purchased or used by our customers
could negatively affect our operating results.
Our
strategy is to sell subscriptions to our software to mid to enterprise-sized businesses, but we have sold and will continue to sell to
organizations ranging from small businesses to enterprises. Our gross margins can vary depending on numerous factors related to the implementation
and use of our software, including the sophistication and intensity of our customers’ use of our software and the level of professional
services and support required by a customer. Sales to enterprise customers may entail longer sales cycles and more significant selling
efforts. Selling to small businesses may involve greater credit risk and uncertainty. If there are changes in the mix of businesses that
purchase our software or the mix of the product plans purchased by our customers, our gross margins could decrease and our operating
results could be adversely affected.
We
may acquire or invest in other companies or technologies in the future, which could divert management’s attention, fail to meet
our expectations, result in additional dilution to our stockholders, increase expenses, disrupt our operations or harm our operating
results.
We
may in the future acquire or invest in, businesses, products or technologies that we believe could complement or expand our software,
enhance our technical capabilities or otherwise offer growth opportunities. We may not be able to fully realize the anticipated benefits
of these or any future acquisitions. The pursuit of potential acquisitions may divert the attention of management and cause us to incur
various expenses related to identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.
There
are inherent risks in integrating and managing acquisitions. If we acquire additional businesses, we may not be able to assimilate or
integrate the acquired personnel, operations and technologies successfully or effectively manage the combined business following the
acquisition and our management may be distracted from operating our business. We also may not achieve the anticipated benefits from the
acquired business due to a number of factors, including: unanticipated costs or liabilities associated with the acquisition; incurrence
of acquisition-related costs, which would be recognized as a current period expense; inability to generate sufficient revenue to offset
acquisition or investment costs; the inability to maintain relationships with customers and partners of the acquired business; the difficulty
of incorporating acquired technology and rights into our software and of maintaining quality and security standards consistent with our
brand; delays in customer purchases due to uncertainty related to any acquisition; the need to integrate or implement additional controls,
procedures and policies; challenges caused by distance, language and cultural differences; harm to our existing business relationships
with business partners and customers as a result of the acquisition; the potential loss of key employees; use of resources that are needed
in other parts of our business and diversion of management and employee resources; the inability to recognize acquired deferred revenue
in accordance with our revenue recognition policies; and use of substantial portions of our available cash or the incurrence of debt
to consummate the acquisition. Acquisitions also increase the risk of unforeseen legal liability, including for potential violations
of applicable law or industry rules and regulations, arising from prior or ongoing acts or omissions by the acquired businesses which
are not discovered by due diligence during the acquisition process. Generally, if an acquired business fails to meet our expectations,
our operating results, business and financial condition may suffer. Acquisitions could also result in dilutive issuances of equity securities
or the incurrence of debt, which could adversely affect our business, results of operations or financial condition.
In
addition, a significant portion of the purchase price of companies we acquire may be allocated to goodwill and other intangible assets,
which must be assessed for impairment at least annually. If our acquisitions do not ultimately yield expected returns, we may be required
to make charges to our operating results based on our impairment assessment process, which could harm our results of operations.
Because
our long-term growth strategy involves further expansion of our sales to customers outside Japan, our business will be susceptible to
risks associated with international operations.
A
component of our growth strategy involves the further expansion of our operations and customer base worldwide. We plan to open international
offices in the future. These international offices will focus primarily on sales, professional services and support. Our future international
operations and future initiatives will involve a variety of risks, including:
| ● | difficulties
in maintaining our company culture with a dispersed and distant workforce; |
| ● | more
stringent regulations relating to data security and the unauthorized use of, or access to,
commercial and personal information; |
| ● | the
timing of our sales with our international clients and related revenue recognition is difficult
to predict because of the length and unpredictability of the sales cycle for these clients; |
| ● | unexpected
changes in regulatory requirements, taxes or trade laws; |
| ● | differing
labor regulations where labor laws are generally more advantageous to employees as compared
to Japan, including deemed hourly wage and overtime regulations in these locations; |
| ● | challenges
inherent in efficiently managing an increased number of employees, including remote employees,
over large geographic distances, including the need to implement appropriate systems, policies,
benefits and compliance programs; |
| ● | difficulties
in managing a business in new markets with diverse cultures, languages, customs, legal systems,
alternative dispute systems and regulatory systems; |
| ● | currency
exchange rate fluctuations and the resulting effect on our revenue and expenses, and the
cost and risk of entering into hedging transactions if we chose to do so in the future; |
| ● | global
economic uncertainty caused by global political events; |
| ● | limitations
on our ability to reinvest earnings from operations in one country to fund the capital needs
of our operations in other countries; |
| ● | limited
or insufficient intellectual property protection; |
| ● | political
instability or terrorist activities; |
| ● | likelihood
of potential or actual violations of domestic and international anticorruption laws, such
as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, or of U.S. and international
export control and sanctions regulations, which likelihood may increase with an increase
of sales or operations in foreign jurisdictions and operations in certain industries; and |
| ● | adverse
tax burdens and foreign exchange controls that could make it difficult to repatriate earnings
and cash. |
Our
inexperience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake
will not be successful. If we invest substantial time and resources to establish our international operations and are unable to do so
successfully and in a timely manner, our business and operating results will suffer. We continue to implement policies and procedures
to facilitate our compliance with U.S. laws and regulations applicable to or arising from our international business. Inadequacies in
our past or current compliance practices may increase the risk of inadvertent violations of such laws and regulations, which could lead
to financial and other penalties that could damage our reputation and impose costs on us.
Our
customers may fail to pay us in accordance with the terms of their agreements, at times necessitating action by us to attempt to compel
payment.
If
our customers fail to pay us in accordance with the terms of our agreements, we may be adversely affected both from the inability to
collect amounts due and the cost of enforcing the terms of our agreements, including litigation and arbitration costs. The risk of these
issues increases with the term length of our customer arrangements. Furthermore, some of our customers may seek bankruptcy protection
or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our
results of operations, financial condition and cash flow.
We
believe our success depends on continuing to invest in the growth of our worldwide operations by entering new geographic markets. If
our investments in these markets are greater than anticipated, or if our customer growth or sales in these markets do not meet our expectations,
our results of operations and financial condition may be adversely affected.
We
believe our success depends on expanding our business into new geographic markets and attracting customers in countries other than the
United States. We anticipate continuing to expand our operations worldwide and have made, and will continue to make, substantial investments
and incur substantial costs as we enter new geographic markets. This includes investments in facilities, information technology investments,
sales, marketing and administrative personnel and facilities. Often we must make these investments when it is still unclear whether future
sales in the new market will justify the costs of these investments. In addition, these investments may be more expensive than we initially
anticipate. If our investments are greater than we initially anticipate or if our customer growth or sales in these markets do not meet
our expectations or justify the cost of the initial investments, our results of operations and financial condition may be adverse affected.
General
Risks
Failure
to comply with laws and regulations could harm our business.
Our
business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible
for monitoring and enforcing employment and labor laws, workplace safety, environmental laws, consumer protection laws, anti-bribery
laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements
may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to
investigations, sanctions, mandatory recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties
or injunctions.
We
are exposed to fluctuations in currency exchange rates.
We
face exposure to movements in currency exchange rates, which may cause our revenue and operating results to differ materially from expectations.
As we have expanded our international operations, our exposure to exchange rate fluctuations has increased, in particular
with respect to the British Pound Sterling and Japanese Yen. As exchange rates vary, revenue, cost of revenue, operating expenses and
other operating results, when re-measured, may differ materially from expectations. In addition, our operating results are subject to
fluctuation if our mix of U.S. and foreign currency denominated transactions and expenses changes in the future. Furthermore, global
political events, including Brexit and similar geopolitical developments, fluctuating commodity prices and trade tariff developments,
have caused global economic uncertainty, which could amplify the volatility of currency fluctuations. Such volatility, even when it increases
our revenues or decreases our expenses, impacts our ability to predict our future results and earnings accurately. Although we may apply
certain strategies to mitigate foreign currency risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations
and would involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategies
and potential accounting implications. Additionally, as we anticipate growing our business further outside of the United States, the
effects of movements in currency exchange rates will increase as our transaction volume outside of the United States increases.
Weakened
global economic conditions may harm our industry, business and results of operations.
Our
overall performance depends in part on worldwide economic conditions. Global financial developments and downturns seemingly unrelated
to us or the software industry may harm us. The United States and other key international economies have been affected from time to time
by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility
in credit, equity and foreign exchange markets, bankruptcies, and overall uncertainty with respect to the economy, including with respect
to tariff and trade issues. In particular, the economies of countries in Europe have been experiencing weakness associated with high
sovereign debt levels, weakness in the banking sector, uncertainty over the future of the Euro zone and volatility in the value of the
pound sterling and the Euro, including instability surrounding Brexit. We have operations, as well as current and potential new customers,
throughout most of Europe. If economic conditions in Europe and other key markets for our software continue to remain uncertain or deteriorate
further, it could adversely affect our customers’ ability or willingness to subscribe to our software, delay prospective customers’
purchasing decisions, reduce the value or duration of their subscriptions or affect renewal rates, all of which could harm our operating
results.
Our
ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.
Our
business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds to invest
in future growth opportunities. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available
on acceptable terms, we may be unable to invest in future growth opportunities, which could seriously harm our business and operating
results. If we incur debt, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms
of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue equity
securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock.
Any additional equity or equity-linked financings would be dilutive to our stockholders. Because our decision to issue securities in
any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount,
timing or nature of our future offerings. As a result, our stockholders bear the risk of our future securities offerings reducing the
market price of our common stock and diluting their interest.
The
certificate of incorporation and bylaws provides that state or federal court located within the state of Delaware will be the sole and
exclusive forum for substantially all disputes between us and our shareholders, which could limit its stockholders’ ability to
obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Section
21 of our certificate of incorporation and Section 7.4 of our bylaws provides that “[u]nless the corporation consents in writing
to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf
of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of
the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any
provision of the DGCL, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court
located in the county in which the principal office of the corporation in the State of Delaware is established, in all cases subject
to the court’s having personal jurisdiction over the indispensable parties named as defendants. Notwithstanding the foregoing,
the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange of 1934, as amended,
the Securities Act of 1933, as amended, or any claim for which the federal courts have exclusive or concurrent jurisdiction.” Therefore,
the exclusive forum provision in our certificate of incorporation and our bylaws will not relieve us of our duty to comply with the federal
securities laws and the rules and regulations thereunder, and shareholders will not be deemed to have waived our compliance with these
laws, rules and regulations.
This
exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum of its choosing for disputes with
us or our directors, officers or other employees, which may discourage lawsuits against us or our directors, officers or other employees.
In addition, shareholders who do bring a claim in the state or federal court in the State of Delaware could face additional litigation
costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The state or federal court of the State of
Delaware may also reach different judgments or results than would other courts, including courts where a shareholder would otherwise
choose to bring the action, and such judgments or results may be more favorable to us than to our shareholders. However, the enforceability
of similar exclusive forum provisions in other companies’ certificates of incorporation have been challenged in legal proceedings,
and it is possible that a court could find this type of provision to be inapplicable to, or unenforceable in respect of, one or more
of the specified types of actions or proceedings. If a court were to find the exclusive forum provision contained in our certificate
of incorporation and our bylaws to be inapplicable or unenforceable in an action, we might incur additional costs associated with resolving
such action in other jurisdictions.
You
are bound by the fee-shifting provision contained in our bylaws, which may discourage you to pursue actions against us and could discourage
shareholder lawsuits that might otherwise benefit the Company and its shareholders.
Section
7.4 of our bylaws provides that “[i]f any action is brought by any party against another party, relating to or arising out of these
Bylaws, or the enforcement hereof, the prevailing party shall be entitled to recover from the other party reasonable attorneys’
fees, costs and expenses incurred in connection with the prosecution or defense of such action.”
Our
bylaws provide that for this section, the term “attorneys’ fees” or “attorneys’ fees and costs” means
the fees and expenses of counsel to the Company and any other parties asserting a claim subject to Section 7.4 of the bylaws, which may
include printing, photocopying, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals and other
persons not admitted to the bar but performing services under the supervision of an attorney, and the costs and fees incurred in connection
with the enforcement or collection of any judgment obtained in any such proceeding.
We
adopted the fee-shifting provision to eliminate or decrease nuisance and frivolous litigation. We intend to apply the fee-shifting provision
broadly to all actions except for claims brought under
the Exchange Act and Securities Act.
There
is no set level of recovery required to be met by a plaintiff to avoid payment under this provision. Instead, whoever is the prevailing
party is entitled to recover the reasonable attorneys’ fees, costs and expenses incurred in connection with the prosecution or
defense of such action. Any party who brings an action, and the party against whom such action is brought under Section 7.4 of our bylaws,
which could include, but is not limited to former and current shareholders, Company directors, officers, affiliates, legal counsel, expert
witnesses and other parties, are subject to this provision. Additionally, any party who brings an action, and the party against whom
such action is brought under Section 7.4 of our bylaws, which could include, but is not limited to former and current shareholders, Company
directors, officers, affiliates, legal counsel, expert witnesses and other parties, would be able to recover fees under this provision.
In
the event you initiate or assert a claim against us, in accordance with the dispute resolution provisions contained in our Bylaws, and
you do not, in a judgment prevail, you will be obligated to reimburse us for all reasonable costs and expenses incurred in connection
with such claim, including, but not limited to, reasonable attorney’s fees and expenses and costs of appeal, if any. Additionally,
this provision in Section 7.4 of our bylaws could discourage shareholder lawsuits that might otherwise benefit the Company and its shareholders.
THE
FEE SHIFTING PROVISION CONTAINED IN THE BYLAWS IS NOT INTENDED TO BE DEEMED A WAIVER BY ANY HOLDER OF COMMON STOCK OF THE COMPANY’S
COMPLIANCE WITH THE U.S. FEDERAL SECURITIES LAWS AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. THE FEE SHIFTING PROVISION CONTAINED
IN THE BYLAWS DO NOT APPLY TO CLAIMS BROUGHT UNDER THE EXCHANGE ACT AND SECURITIES ACT.
Risks
Related to Employee Matters
If
we cannot maintain our company culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe
contribute to our success and our business may be harmed.
We
believe that a critical component to our success has been our company culture, which is based on transparency and personal autonomy.
We have invested substantial time and resources in building our team within this company culture. Any failure to preserve our culture
could negatively affect our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.
As we grow as and continue to develop the infrastructure of a public company, we may find it difficult to maintain these important aspects
of our company culture. If we fail to maintain our company culture, our business may be adversely impacted.
We
rely on our management team and other key employees, and the loss of one or more key employees could harm our business.
Our
success and future growth depend upon the continued services of our management team, including our Chief Executive Officer, Sumitaka
Yamamoto, and other key employees in the areas of research and development, marketing, sales, services, content management, and general
and administrative functions. From time to time, there may be changes in our management team resulting from the hiring or departure of
executives, which could disrupt our business. We also are dependent on the continued service of our existing software engineers and information
technology personnel because of the complexity of our software, technologies and infrastructure. We may terminate any employee’s
employment at any time, with or without cause, and any employee may resign at any time, with or without cause (In Japan, termination
of employee can only be justified for material cause). The loss of one or more of our key employees could harm our business.
The
failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.
To
execute our business strategy, we must attract and retain highly qualified personnel. In particular, we compete with many other companies
for software developers with high levels of experience in designing, developing and managing cloud-based software, as well as for skilled
information technology, marketing, sales and operations professionals, and we may not be successful in attracting and retaining the professionals
we need. Also, inbound sales, marketing, services, and content management domain experts are very important to our success and are difficult
to replace. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring
and difficulty in retaining highly skilled employees with appropriate qualifications. In particular, we have experienced a competitive
hiring environment in Japan, where we are headquartered and will continue to experience a competitive hiring environment as we recruit
for remote talent worldwide. Many of the companies with which we compete for experienced personnel have greater resources than we do.
In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock
options or other equity incentives they are to receive in connection with their employment. If the price of our stock declines, or experiences
significant volatility, our ability to attract or retain key employees will be adversely affected. If we fail to attract new personnel
or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.
Risks
Related to Our Technical Operations Infrastructure and Dependence on Third Parties
Interruptions
or delays in service from our third-party data center providers could impair our ability to deliver our software to our customers, resulting
in customer dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenue.
We
currently serve some parts of our software functions from third-party data center hosting facilities operated by Amazon and IBM. In addition,
we serve ancillary functions for our customers from third-party data center hosting facilities operated by Amazon, with a backup facility
in Amazon. Our operations depend, in part, on our third-party facility providers’ abilities to protect these facilities against
damage or interruption from natural disasters, such as earthquakes and hurricanes, actual or threatened public health emergency (e.g.,
COVID-19), power or telecommunications failures, criminal acts and similar events. In the event that any of our third-party facilities
arrangements is terminated, or if there is a lapse of service or damage to a facility, we could experience interruptions in our software
as well as delays and additional expenses in arranging new facilities and services.
Any
damage to, or failure of, the systems of our third-party providers could result in interruptions to our software. Despite precautions
taken at our data centers, the occurrence of spikes in usage volume, a natural disaster, such as earthquakes or hurricane, an act of
terrorism, vandalism or sabotage, a decision to close a facility without adequate notice, or other unanticipated problems at a facility
could result in lengthy interruptions in the availability of our on-demand software. Even with current and planned disaster recovery
arrangements, our business could be harmed. Also, in the event of damage or interruption, our insurance policies may not adequately compensate
us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability and cause us to
issue credits or cause customers to fail to renew their subscriptions, any of which could materially adversely affect our business.
If
our software has outages or fails due to defects or similar problems, and if we fail to correct any defect or other software problems,
we could lose customers, become subject to service performance or warranty claims or incur significant costs.
Our
software and its underlying infrastructure are inherently complex and may contain material defects or errors. We release modifications,
updates, bug fixes and other changes to our software several times per day, without traditional human-performed quality control reviews
for each release. We have from time to time found defects in our software and may discover additional defects in the future. We may not
be able to detect and correct defects or errors before customers begin to use our software or its applications. Consequently, we or our
customers may discover defects or errors after our software has been implemented.
In
the past, we have experienced software outages caused by power supply failures. Although no data
was lost due to the outages, our customers experienced disruptions in using our software as our website stopped operating as well as
our marketing campaigns, e-mail newsletters and other functions were shut down. Notwithstanding, the outages were short in duration and
we are not aware of any negative customer reviews and negative press as a result of the outages. We believe there was no significant
damage to our customer relationships, reputation and brand due to these outages. We believe the outage did not compromise our ability
to meet customer expectations, manage our software, or meet our operating efficiency and profitability goals.
Defects
or errors could result in product outages and could also cause inaccuracies in the data we collect and process for our customers, or
even the loss, damage or inadvertent release of such confidential data. We implement bug fixes and upgrades as part of our regular system
maintenance, which may lead to system downtime. Even if we are able to implement the bug fixes and upgrades in a timely manner, any history
of product outages, defects or inaccuracies in the data we collect for our customers, or the loss, damage or inadvertent release of confidential
data could cause our reputation to be harmed, and customers may elect not to purchase or renew their agreements with us. Furthermore,
these issues could subject us to service performance credits (whether offered by us or required by contract), warranty claims or increased
insurance costs. The costs associated with product outages, any material defects or errors in our software or other performance problems
may be substantial and could materially adversely affect our operating results.
In
addition, third-party apps and features on our software may not meet the same quality standards that we apply to our own development
efforts and, to the extent they contain bugs, vulnerabilities or defects, they may create disruptions in our customers’ use of
our products, lead to data loss, unauthorized access to customer data, damage our brand and reputation and affect the continued use of
our products, any of which could harm our business, results of operations and financial condition.
We
are dependent on the continued availability of third-party data hosting and transmission services.
A
significant portion of our operating cost is from our third-party data hosting and transmission services. If the costs for such services
increase due to vendor consolidation, regulation, contract renegotiation, or otherwise, we may not be able to increase the fees for our
software or services to cover the changes. As a result, our operating results may be significantly worse than forecasted.
If
we do not or cannot maintain the compatibility of our software with third-party applications that our customers use in their businesses,
our revenue will decline.
A
significant percentage of our customers choose to integrate our software with certain capabilities provided by third-party application
providers using APIs published by these providers. The functionality and popularity of our software depends, in part, on our ability
to integrate our software with third-party applications and software, including content management systems, customer experience management
systems, e-commerce, call center, analytics and social media sites that our customers use and from which they obtain data. Third-party
providers of applications and APIs may change the features of their applications and software, restrict our access to their applications
and software, or alter the terms governing use of their applications and APIs and access to those applications and software in an adverse
manner. Such changes could functionally limit or terminate our ability to use these third-party applications and software in conjunction
with our software, which could negatively impact our offerings and harm our business. If we fail to integrate our software with new third-party
applications and software that our customers use for marketing, content management, customer experience management, or robotic process
automation purposes, or fail to renew existing relationships pursuant to which we currently provide such integration, we may not be able
to offer the functionality that our customers need, which would negatively impact our ability to generate new revenue or maintain existing
revenue and adversely impact our business.
We
rely on data provided by third parties, the loss of which could limit the functionality of our software and disrupt our business.
Select
functionality of our software depends on our ability to deliver data, including search engine results and social media updates, provided
by unaffiliated third parties, such as Facebook, Google, LinkedIn and Twitter. Some of this data is provided to us pursuant to third-party
data sharing policies and terms of use, under data sharing agreements by third-party providers or by customer consent. In the future,
any of these third parties could change its data sharing policies, including making them more restrictive, or alter its algorithms that
determine the placement, display, and accessibility of search results and social media updates, any of which could result in the loss
of, or significant impairment to, our ability to collect and provide useful data to our customers. These third parties could also interpret
our, or our service providers’, data collection policies or practices as being inconsistent with their policies, which could result
in the loss of our ability to collect this data for our customers. Any such changes could impair our ability to deliver data to our customers
and could adversely impact select functionality of our software, impairing the return on investment that our customers derive from using
our solution, as well as adversely affecting our business and our ability to generate revenue. We also rely on the availability and accuracy
of this data, and any changes in the availability or accuracy of such data could adversely impact our business and results of operations
and harm our reputation and brand.
Privacy
concerns and end users’ acceptance of Internet behavior tracking may limit the applicability, use and adoption of our software.
Privacy
concerns may cause end users to resist providing the personal data necessary to allow our customers to use our software effectively.
We have implemented various features intended to enable our customers to better protect end user privacy, but these measures may not
alleviate all potential privacy concerns and threats. Even the perception of privacy concerns, whether or not valid, may inhibit market
adoption of our software, especially in certain industries that rely on sensitive personal information. Privacy advocacy groups and the
technology and other industries are considering various new, additional or different self-regulatory standards that may place additional
burdens on us. The costs of compliance with, and other burdens imposed by these groups’ policies and actions may limit the use
and adoption of our software and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance
or loss of any such action.
If
our or our customers’ security measures are compromised or unauthorized access to data of our customers or their customers is otherwise
obtained, our software may be perceived as not being secure, our customers may be harmed and may curtail or cease their use of our software,
our reputation may be damaged and we may incur significant liabilities.
Our
operations involve the storage and transmission of data of our customers and their customers, including personally identifiable information.
Our storage is typically the sole source of record for portions of our customers’ businesses and end user data, such as initial
contact information and online interactions. Security incidents could result in unauthorized access to, loss of or unauthorized disclosure
of this information, litigation, indemnity obligations and other possible liabilities, as well as negative publicity, which could damage
our reputation, impair our sales and harm our customers and our business. Cyber-attacks and other malicious Internet-based activity continue
to increase generally, and cloud-based software providers of marketing services have been targeted. If our security measures are compromised
as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise,
our reputation could be damaged, our business may be harmed and we could incur significant liability. If third parties with whom we work,
such as vendors or developers, violate applicable laws, our security policies or our acceptable use policy, such violations may also
put our customers’ information at risk and could in turn have an adverse effect on our business. In addition, if the security measures
of our customers are compromised, even without any actual compromise of our own systems, we may face negative publicity or reputational
harm if our customers or anyone else incorrectly attributes the blame for such security breaches to us or our systems. We may be unable
to anticipate or prevent techniques used to obtain unauthorized access or to sabotage systems because they change frequently and generally
are not detected until after an incident has occurred. As we increase our customer base and our brand becomes more widely known and recognized,
we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’
data. Additionally, we provide extensive access to our database, which stores our customer data, to our development team to facilitate
our rapid pace of product development. If such access or our own operations cause the loss, damage or destruction of our customers’
business data, their sales, lead generation, support and other business operations may be permanently harmed. As a result, our customers
may bring claims against us for lost profits and other damages.
Our
internal computer systems and those of our current and any future strategic collaborators, vendors, and other contractors or consultants
are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, cybersecurity threats, terrorism,
war and telecommunication and electrical failures. Cyber incidents have been increasing in sophistication and frequency and can include
third parties gaining access to employee or customer data using stolen or inferred credentials, computer malware, viruses, spamming,
phishing attacks, ransomware, card skimming code, and other deliberate attacks and attempts to gain unauthorized access. Because the
techniques used by computer programmers who may attempt to penetrate and sabotage our network security or our website change frequently
and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Additionally, during the
ongoing pandemic, and potentially beyond as remote work and resource access expand, there is an increased risk that we may experience
cybersecurity-related events such as COVID-19 themed phishing attacks, exploitation of any cybersecurity flaws that may exist, an increase
in the number cybersecurity threats or attacks, and other security challenges as a result of most of our employees and our service providers
continuing to work remotely from non-corporate managed networks.
If
we were to experience a cyberattack and suffer interruptions in our operations, it could result in a material disruption of our development
programs and our business operations, whether due to a loss of our trade secrets or other proprietary information or other disruptions.
These cyber-attacks could be carried out by threat actors of all types (including but not limited to nation states, organized crime,
other criminal enterprises, individual actors and/or advanced persistent threat groups). In addition, we may experience intrusions on
our physical premises by any of these threat actors. To the extent that any disruption or security breach were to result in a loss of,
or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability
and our competitive position could be harmed. Any breach, loss, or compromise of personal data may also subject us to civil fines and
penalties, or claims for damages either under foreign laws, and other relevant state and federal privacy laws.
Many
governments have enacted laws requiring companies to notify individuals of data security incidents or unauthorized transfers involving
certain types of personal data. In addition, some of our customers contractually require notification of any data security compromise.
Security compromises experienced by our competitors, by our customers or by us may lead to public disclosures, which may lead to widespread
negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence
in the effectiveness of our security measures, negatively impact our ability to attract new customers, cause existing customers to elect
not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially
and adversely affect our business and operating results.
There
can be no assurance that any limitations of liability provisions in our contracts for a security breach would be enforceable or adequate
or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure that
our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms
or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future
claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of
changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could
have a material adverse effect on our business, financial condition and operating results.
Risks
Related to Intellectual Property
Our
business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others.
The
software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual
and proprietary rights. Companies in the software industry, including those in marketing software, are often required to defend against
litigation claims based on allegations of infringement or other violations of intellectual property rights. Many of our competitors and
other industry participants have been issued patents and/or have filed patent applications and may assert patent or other intellectual
property rights within the industry. Moreover, in recent years, individuals and groups that are non-practicing entities, commonly referred
to as “patent trolls,” have purchased patents and other intellectual property assets for the purpose of making claims of
infringement in order to extract settlements. From time to time, we may receive threatening letters or notices or may be the subject
of claims that our services and/or software and underlying technology infringe or violate the intellectual property rights of others.
Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s
attention and resources, damage our reputation and brand and cause us to incur significant expenses. Our technologies may not be able
to withstand any third-party claims or rights against their use. Claims of intellectual property infringement might require us to redesign
our application, delay releases, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary
or permanent injunction prohibiting us from marketing or selling our software. If we cannot or do not license the infringed technology
on reasonable terms or at all, or substitute similar technology from another source, our revenue and operating results could be adversely
impacted. Additionally, our customers may not purchase our software if they are concerned that they may infringe third-party intellectual
property rights. The occurrence of any of these events may have a material adverse effect on our business.
In
our subscription agreements with our customers, we generally do not agree to indemnify our customers against any losses or costs incurred
in connection with claims by a third party alleging that a customer’s use of our services or software infringes the intellectual
property rights of the third party. There can be no assurance, however, that customers will not assert a common law indemnity claim or
that any existing limitations of liability provisions in our contracts would be enforceable or adequate, or would otherwise protect us
from any such liabilities or damages with respect to any particular claim. Our customers who are accused of intellectual property infringement
may in the future seek indemnification from us under common law or other legal theories. If such claims are successful, or if we are
required to indemnify or defend our customers from these or other claims, these matters could be disruptive to our business and management
and have a material adverse effect on our business, operating results and financial condition.
If
we fail to adequately protect our proprietary rights, in Japan and abroad, our competitive position could be impaired and we may lose
valuable assets, experience reduced revenue and incur costly litigation to protect our rights.
Our
success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of copyrights, trademarks, service
marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. However,
the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if
we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Any of our trademarks or other
intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Furthermore, legal
standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Despite our
precautions, it may be possible for unauthorized third parties to copy our technology and use information that we regard as proprietary
to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer
and disclosure of our offerings may be unenforceable under the laws of certain jurisdictions and foreign countries. In addition, the
laws of some countries do not protect proprietary rights to the same extent as the laws of Japan or the United States. To the extent
we expand our international activities, our exposure to unauthorized copying and use of our technology and proprietary information may
increase.
We
enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements
with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will
be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements may not
prevent our competitors from independently developing technologies that are substantially equivalent or superior to our software and
offerings.
We
may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in
the future to enforce our intellectual property rights and to protect our trade secrets. Such litigation could be costly, time consuming
and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts
to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability
of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well
as any costly litigation, could delay further sales or the implementation of our software and offerings, impair the functionality of
our software and offerings, delay introductions of new features or enhancements, result in our substituting inferior or more costly technologies
into our software and offerings, or injure our reputation.
Our
use of “open-source” software could negatively affect our ability to offer our software and subject us to possible litigation.
A
substantial portion of our cloud-based software incorporates so-called “open source” software, and we may incorporate additional
open-source software in the future. Open-source software is generally freely accessible, usable and modifiable. Certain open-source licenses
may, in certain circumstances, require us to offer the components of our software that incorporate the open-source software for no cost,
that we make available source code for modifications or derivative works we create based upon, incorporating or using the open-source
software and that we license such modifications or derivative works under the terms of the particular open source license. If an author
or other third party that distributes open source software we use were to allege that we had not complied with the conditions of one
or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject
to significant damages, including being enjoined from the offering of the components of our software that contained the open source software
and being required to comply with the foregoing conditions, which could disrupt our ability to offer the affected software. We could
also be subject to suits by parties claiming ownership of what we believe to be open-source software. Litigation could be costly for
us to defend, have a negative effect on our operating results and financial condition and require us to devote additional research and
development resources to change our products.
Risks
Related to Government Regulation
We
are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information
security, and our actual or perceived failure to comply with such obligations could harm our business. Compliance with such laws could
also impair our efforts to maintain and expand our customer base, and thereby decrease our revenue.
Our
handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the
Ministry of Internal Affairs and Communications, Personal Information Protection Commission Japan (the “PPCJ”), the U.S.
Federal Trade Commission (the “FTC”), and various state, local and foreign agencies. We collect personally identifiable information
and other data from our customers and leads. We also handle personally identifiable information about our customers’ customers.
We use this information to provide services to our customers, to support, expand and improve our business. We may also share customers’
personally identifiable information with third parties as authorized by the customer or as described in our privacy policy.
The
Japanese and U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution,
use and storage of personal information of individuals. In the United States, the FTC and many state attorneys general are applying federal
and state consumer protection laws, and in Japan, the PPCJ are issuing orders and guidelines based on the Personal Information Protection
Act, as imposing standards for the online collection, use and dissemination of data. However, these obligations may be interpreted and
applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other requirements or our practices.
Any failure or perceived failure by us to comply with privacy or security laws, policies, legal obligations or industry standards or
any security incident that results in the unauthorized release or transfer of personally identifiable information or other customer data
may result in governmental enforcement actions, litigation, fines and penalties and/or adverse publicity, and could cause our customers
to lose trust in us, which could have an adverse effect on our reputation and business.
Laws
and regulations concerning privacy, data protection and information security are evolving, and changes to such laws and regulations could
require us to change features of our software or restrict our customers’ ability to collect and use email addresses, page viewing
data and personal information, which may reduce demand for our software. Our failure to comply with national, federal, state and international
data privacy laws and regulations could harm our ability to successfully operate our business and pursue our business goals. For example,
California recently enacted the California Consumer Privacy Act (the “CCPA”) that, among other things, require covered companies
to provide new disclosures to California consumers and afford such consumers new abilities to opt-out of certain sales of personal information.
The CCPA recently was amended and it is not yet fully clear how the CCPA will be enforced and how certain of its requirements will be
interpreted. We cannot yet predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing
practices and policies and to incur substantial costs and expenses in an effort to comply.
Additionally,
a new California ballot initiative, the California Privacy Rights Act (the “CPRA”) was passed in November 2020. Effective
starting on January 1, 2023, the CPRA imposes additional obligations on companies covered by the legislation and will significantly modify
the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information. The CPRA also creates
a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. The effects of the CCPA and the
CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial
costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation.
Certain
other state laws impose similar privacy obligations and we also expect anticipate that more states to may enact legislation similar to
the CCPA, which provides consumers with new privacy rights and increases the privacy and security obligations of entities handling certain
personal information of such consumers. The CCPA has prompted a number of proposals for new federal and state-level privacy legislation.
Such proposed legislation, if enacted, may add additional complexity, variation in requirements, restrictions and potential legal risk,
require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data and
could result in increased compliance costs and/or changes in business practices and policies.
In
addition, on March 2, 2021, Virginia enacted the Consumer Data Protection Act (the “CDPA”). The CDPA will become effective
January 1, 2023. The CDPA will regulate how businesses (which the CDPA refers to as “controllers”) collect and share personal
information. While the CDPA incorporates many similar concepts of the CCPA and CPRA, there are also several key differences in the scope,
application, and enforcement of the law that will change the operational practices of controllers. The new law will impact how controllers
collect and process personal sensitive data, conduct data protection assessments, transfer personal data to affiliates, and respond to
consumer rights requests.
In
addition, several foreign jurisdictions, including the European Union and Canada, have regulations dealing with the collection and use
of personal information obtained from their residents, which are often more restrictive than those in the U.S. Laws and regulations in
these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personal information that identifies or
may be used to identify an individual. In relevant part, these laws and regulations may affect our ability to engage in lead generation
activities by imposing heightened requirements, such as affirmative opt-ins or consent prior to sending commercial correspondence or
engaging in electronic tracking activities. For example, a recent ruling of the European Court of Justice in Case C-673/17 provides that
a pre-checked opt-in is insufficient to constitute a valid active consumer consent to cookie storage. In order to obtain “the adequate
protection” status under the European Union’s General Data Protection Regulation (the “GDPR”), the Japanese laws
and regulations in this area were amended as much as practically possible by January 23, 2019 and thus the collection, use and transfer
of personal data is similarly restricted.
Within
the European Union, legislators have adopted the GDPR and which became effective in May 2018 which may impose additional obligations
and risk upon our business and which may increase substantially the penalties to which we could be subject in the event of any non-compliance.
In addition, further to the United Kingdom’s exit from the European Union on January 31, 2020, the GDPR ceased to apply in the
United Kingdom at the end of the transition period on December 31, 2020. However, as of January 1, 2021, the United Kingdom’s European
Union (Withdrawal) Act 2018 incorporated the GDPR (as it existed on December 31, 2020 but subject to certain United Kingdom specific
amendments) into United Kingdom law (the “UK GDPR”). The UK GDPR and the UK Data Protection Act 2018 set out the United Kingdom’s
data protection regime, which is independent from but aligned to the European Union’s data protection regime. Non-compliance with
the UK GDPR may result in monetary penalties of up to £17.5 million or 4% of worldwide revenue, whichever is higher. The United
Kingdom, however, is now regarded as a third country under the European Union’s GDPR which means that transfers of personal data
from the European Economic Area to the United Kingdom will be restricted unless an appropriate safeguard, as recognized by the European
Union’s GDPR, has been put in place. However, under the EU-UK Trade Cooperation Agreement it is lawful to transfer personal data
between the United Kingdom and the European Economic Area for a 6 month period following the end of the transition period, with a view
to achieving an adequacy decision from the European Commission during that period. Like the GDPR, the UK GDPR restricts personal data
transfers outside the United Kingdom to countries not regarded by the United Kingdom as providing adequate protection (this means that
personal data transfers from the United Kingdom to the European Economic Area remain free flowing).
On
July 12, 2016, the European Commission adopted the EU-US Privacy Shield, a framework for the transfer of personal data from the European
Union to the United States, as a successor to the Safe Harbor framework that was invalidated by the European Court of Justice in October
2015. On July 16, 2020, the European Court of Justice invalidated the EU–US Privacy Shield ruling that it failed to offer adequate
protections for European Union personal data transferred to the United States. The European Court of Justice, in the same decision, deemed
that the Standard Contractual Clauses (“SCCs”), approved by the European Commission for transfers of personal data between
European Union controllers and non-European Union processors are valid, however the European Court of Justice deemed that transfers made
pursuant to the SCCs need to be analyzed on a case-by-case basis to ensure the European Union’s standards of data protection are
met. Our customer agreements include SCCs. However, as a result of this decision, companies may be required to adopt additional measures
to accomplish transfers of personal data to the United States and other third countries in compliance with the GDPR, and there continue
to be concerns about whether the SCCs will face additional challenges. Until the remaining legal uncertainties regarding how to legally
continue these transfers are settled, we will continue to face uncertainty as to whether our customers will be permitted to transfer
personal data to the United States for processing by us as part of our software services. If such data transfer to the United States
is not permitted, it could have a negative effect on our existing business and on our ability to attract and retain new customers. Our
customers may view alternative data transfer mechanisms as being too costly, too burdensome, too legally uncertain or otherwise objectionable
and therefore decide not to do business with us. For example, some of our customers or potential customers who do business in the European
Union may require their vendors to host all personal data within the European Union and may decide to do business with one of our competitors
who hosts personal data within the European Union instead of doing business with us.
The
regulatory framework governing the collection, processing, storage, use and sharing of certain information, particularly financial and
other personal information, is rapidly evolving and is likely to continue to be subject to uncertainty and varying interpretations. It
is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices
or the features of our services and software capabilities. Any failure or perceived failure by us, or any third parties with which we
do business, to comply with our posted privacy policies, changing consumer expectations, evolving laws, rules and regulations, industry
standards, or contractual obligations to which we or such third parties are or may become subject, may result in actions or other claims
against us by governmental entities or private actors, the expenditure of substantial costs, time and other resources or the incurrence
of significant fines, penalties or other liabilities. In addition, any such action, particularly to the extent we were found to be guilty
of violations or otherwise liable for damages, would damage our reputation and adversely affect our business, financial condition and
results of operations.
We
publicly post documentation regarding our practices concerning the collection, processing, use and disclosure of data. Although we endeavor
to comply with our published policies and documentation, we may at times fail to do so or be alleged to have failed to do so. Any failure
or perceived failure by us to comply with our privacy policies or any applicable privacy, security or data protection, information security
or consumer-protection related laws, regulations, orders or industry standards could expose us to costly litigation, significant awards,
fines or judgments, civil and/or criminal penalties or negative publicity, and could materially and adversely affect our business, financial
condition and results of operations. The publication of our privacy policy and other documentation that provide promises and assurances
about privacy and security can subject us to potential state and federal action if they are found to be deceptive, unfair, or misrepresentative
of our actual practices, which could, individually or in the aggregate, materially and adversely affect our business, financial condition
and results of operations.
If
our privacy or data security measures fail to comply with current or future laws and regulations, we may be subject to claims, legal
proceedings or other actions by individuals or governmental authorities based on privacy or data protection regulations and our commitments
to customers or others, as well as negative publicity and a potential loss of business. Moreover, if future laws and regulations limit
our subscribers’ ability to use and share personal information or our ability to store, process and share personal information,
demand for our solutions could decrease, our costs could increase, and our business, results of operations and financial condition could
be harmed.
We
could face liability, or our reputation might be harmed, as a result of the activities of our customers, the content of their websites
or the data they store on our servers.
As
a provider of a cloud-based inbound marketing, content management, customer experience management, and robotic process automation software,
we may be subject to potential liability for the activities of our customers on or in connection with the data they store on our servers.
Although our customer terms of use prohibit illegal use of our services by our customers and permit us to take down websites or take
other appropriate actions for illegal use, customers may nonetheless engage in prohibited activities or upload or store content with
us in violation of applicable law or the customer’s own policies, which could subject us to liability or harm our reputation. Furthermore,
customers may upload, store, or use content on our software that may violate our policy on acceptable use which prohibits content that
is threatening, abusive, harassing, deceptive, false, misleading, vulgar, obscene, or indecent. While such content may not be illegal,
use of our software for such content could harm our reputation resulting in a loss of business.
Several
U.S. federal statutes may apply to us with respect to various customer activities:
| ● | The
Digital Millennium Copyright Act of 1998 (“DMCA”) provides recourse for owners
of copyrighted material who believe that their rights under U.S. copyright law have been
infringed on the Internet. Under the DMCA, based on our current business activity as an Internet
service provider that does not own or control website content posted by our customers, we
generally are not liable for infringing content posted by our customers or other third parties,
provided that we follow the procedures for handling copyright infringement claims set forth
in the DMCA. Generally, if we receive a proper notice from, or on behalf, of a copyright
owner alleging infringement of copyrighted material located on websites we host, and we fail
to expeditiously remove or disable access to the allegedly infringing material or otherwise
fail to meet the requirements of the safe harbor provided by the DMCA, the copyright owner
may seek to impose liability on us. Technical mistakes in complying with the detailed DMCA
take-down procedures could subject us to liability for copyright infringement. |
| ● | The
Communications Decency Act of 1996 (the “CDA”) generally protects online service
providers, such as us, from liability for certain activities of their customers, such as
the posting of defamatory or obscene content, unless the online service provider is participating
in the unlawful conduct. Under the CDA, we are generally not responsible for the customer-created
content hosted on our servers. Consequently, we do not monitor hosted websites or prescreen
the content placed by our customers on their sites. However, the CDA does not apply in foreign
jurisdictions and we may nonetheless be brought into disputes between our customers and third
parties which would require us to devote management time and resources to resolve such matters
and any publicity from such matters could also have an adverse effect on our reputation and
therefore our business. |
| ● | In
addition to the CDA, the Securing the Protection of our Enduring and Established Constitutional
Heritage Act (the “SPEECH Act”) provides a statutory exception to the enforcement
by a U.S. court of a foreign judgment for defamation under certain circumstances. Generally,
the exception applies if the defamation law applied in the foreign court did not provide
at least as much protection for freedom of speech and press as would be provided by the First
Amendment of the U.S. Constitution or by the constitution and law of the state in which the
U.S. court is located, or if no finding of defamation would be supported under the First
Amendment of the U.S. Constitution or under the constitution and law of the state in which
the U.S. court is located. Although the SPEECH Act may protect us from the enforcement of
foreign judgments in the United States, it does not affect the enforceability of the judgment
in the foreign country that issued the judgment. Given our international presence, we may
therefore, nonetheless, have to defend against or comply with any foreign judgments made
against us, which could take up substantial management time and resources and damage our
reputation. |
| ● | In
Japan, the statute which provides similar protection is the Provide Liability Limitation
Act (the law No, 137 of 2001, as amended). This law provides for the limitation of liability
on Internet service providers and the rights of persons whose copyrights or privacy have
been infringed or who were subject to defamation on the Internet, to request disclosure of
relevant information on the sender of such infringing materials. Under this law, based on
our current business activity as an Internet service provider that does not own or control
website content posted by our customers, we generally are not liable for infringing content
posted by our customers or other third parties, provided that we meet the requirements under
this law. |
Although
these statutes and case law in the United States have generally shielded us from liability for customer activities to date, court rulings
in pending or future litigation may narrow the scope of protection afforded us under these laws. In addition, laws governing these activities
are unsettled in many international jurisdictions, or may prove difficult or impossible for us to comply with in some international jurisdictions.
Also, notwithstanding the exculpatory language of these bodies of law, we may become involved in complaints and lawsuits which, even
if ultimately resolved in our favor, add cost to our doing business and may divert management’s time and attention. Finally, other
existing bodies of law, including the criminal laws of various states, may be deemed to apply or new statutes or regulations may be adopted
in the future, any of which could expose us to further liability and increase our costs of doing business.
The
standards that private entities use to regulate the use of email have in the past interfered with, and may in the future interfere with,
the effectiveness of our software and our ability to conduct business.
Our
customers rely on email to communicate with their existing or prospective customers. Various private entities attempt to regulate the
use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current
legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities
maintain “blacklists” of companies and individuals, and the websites, internet service providers and internet protocol addresses
associated with those entities or individuals that do not adhere to those standards of conduct or practices for commercial email solicitations
that the blacklisting entity believes are appropriate. If a company’s internet protocol addresses are listed by a blacklisting
entity, emails sent from those addresses may be blocked if they are sent to any internet domain or internet address that subscribes to
the blacklisting entity’s service or purchases its blacklist.
From
time to time, some of our internet protocol addresses may become listed with one or more blacklisting entities due to the messaging practices
of our customers. There can be no guarantee that we will be able to successfully remove ourselves from those lists. Blacklisting of this
type could interfere with our ability to market our software and services and communicate with our customers and, because we fulfill
email delivery on behalf of our customers, could undermine the effectiveness of our customers’ email marketing campaigns, all of
which could have a material negative impact on our business and results of operations.
Existing
federal, state and foreign laws regulate Internet tracking software, the senders of commercial emails and text messages, website owners
and other activities, and could impact the use of our software and potentially subject us to regulatory enforcement or private litigation.
Certain
aspects of how our customers utilize our software are subject to regulations in the United States, European Union and elsewhere. In recent
years, U.S. and European lawmakers and regulators have expressed concern over the use of third-party cookies or web beacons for online
behavioral advertising, and legislation adopted recently in the European Union requires informed consent for the placement of a cookie
on a user’s device. Regulation of cookies and web beacons may lead to restrictions on our activities, such as efforts to understand
users’ Internet usage. New and expanding “Do Not Track” regulations have recently been enacted or proposed that protect
users’ right to choose whether or not to be tracked online. These regulations seek, among other things, to allow end users to have
greater control over the use of private information collected online, to forbid the collection or use of online information, to demand
a business to comply with their choice to opt out of such collection or use, and to place limits upon the disclosure of information to
third party websites. These policies could have a significant impact on the operation of our software and could impair our attractiveness
to customers, which would harm our business.
Many
of our customers and potential customers in the healthcare, financial services and other industries are subject to substantial regulation
regarding their collection, use and protection of data and may be the subject of further regulation in the future. Accordingly, these
laws or significant new laws or regulations or changes in, or repeals of, existing laws, regulations or governmental policy may change
the way these customers do business and may require us to implement additional features or offer additional contractual terms to satisfy
customer and regulatory requirements, or could cause the demand for and sales of our software to decrease and adversely impact our financial
results.
In
addition, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the “CAN-SPAM Act”) establishes
certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are
intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails
to provide recipients with the ability to opt out of receiving future commercial emails from the sender. The ability of our customers’
message recipients to opt out of receiving commercial emails may minimize the effectiveness of the email components of our software.
In addition, certain states and foreign jurisdictions, such as Australia, Canada and the European Union, have enacted laws that regulate
sending email, and some of these laws are more restrictive than U.S. laws. For example, some foreign laws prohibit sending unsolicited
email unless the recipient has provided the sender advance consent to receipt of such email, or in other words has “opted-in”
to receiving it. A requirement that recipients opt into, or the ability of recipients to opt out of, receiving commercial emails may
minimize the effectiveness of our software.
While
these laws and regulations generally govern our customers’ use of our software, we may be subject to certain laws as a data processor
on behalf of, or as a business associate of, our customers. For example, laws and regulations governing the collection, use and disclosure
of personal information include, in the United States, rules and regulations promulgated under the authority of the Federal Trade Commission,
the Health Insurance Portability and Accountability Act of 1996, the Gramm-Leach-Bliley Act of 1999 and state breach notification laws,
and internationally, the Data Protection Directive in the European Union and the Federal Data Protection Act in Germany. If we were found
to be in violation of any of these laws or regulations as a result of government enforcement or private litigation, we could be subjected
to civil and criminal sanctions, including both monetary fines and injunctive action that could force us to change our business practices,
all of which could adversely affect our financial performance and significantly harm our reputation and our business.
We
are subject to governmental export controls and economic sanctions laws that could impair our ability to compete in international markets
and subject us to liability if we are not in full compliance with applicable laws.
Our
business activities are subject to various restrictions under U.S. export controls and trade and economic sanctions laws, including the
U.S. Commerce Department’s Export Administration Regulations and economic and trade sanctions regulations maintained by the U.S.
Treasury Department’s Office of Foreign Assets Control. If we fail to comply with these laws and regulations, we and certain of
our employees could be subject to civil or criminal penalties and reputational harm. Obtaining the necessary authorizations, including
any required license, for a particular transaction may be time-consuming, is not guaranteed, and may result in the delay or loss of sales
opportunities. Furthermore, U.S. export control laws and economic sanctions laws prohibit certain transactions with U.S. embargoed or
sanctioned countries, governments, persons and entities. Although we take precautions to prevent transactions with U.S. sanction targets,
the possibility exists that we could inadvertently provide our solutions to persons prohibited by U.S. sanctions. This could result in
negative consequences to us, including government investigations, penalties and reputational harm.
Risks
Related to Taxation
We
may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past
sales, which could harm our business.
State,
local, and non-U.S. jurisdictions have differing rules and regulations governing sales, use, value added, Digital Services Tax, and other
taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability
of such taxes to our software in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus are
complex and vary significantly. As a result, we could face the possibility of tax assessments and audits, and our liability for these
taxes and associated penalties could exceed our original estimates. A successful assertion that we should be collecting additional sales,
use, value added or other taxes in those jurisdictions where we have not historically done so and do not accrue for such taxes could
result in substantial tax liabilities and related penalties for past sales, discourage customers from purchasing our application or otherwise
harm our business and operating results.
Changes
in tax laws or regulations that are applied adversely to us or our customers could increase the costs of our software and adversely impact
our business.
New
income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Any new taxes could adversely
affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes,
rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us or
our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines
and/or penalties and interest for past amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing
and potential future customers may elect not to continue or purchase our software in the future. Additionally, new, changed, modified
or newly interpreted or applied tax laws could increase our customers’ and our compliance, operating and other costs, as well as
the costs of our software. Any or all of these events could adversely impact our business and financial performance. Furthermore, as
our employees continue to work remotely from geographic locations across the United States and internationally due to the pandemic and
other reasons, we may become subject to additional taxes and our compliance burdens with respect to the tax laws of additional jurisdictions
may be increased.
We
are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional
taxes in various jurisdictions.
As a
multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws,
the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result
of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws
and precedents, which could have a material adverse effect on our liquidity and operating results. In addition, the authorities in these
jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various
withholding requirements apply to us or our subsidiary or assert that benefits of tax treaties are not available to us or our
subsidiary, any of which could have a material impact on us and the results of our operations.
Related
to Ownership of Our Common Stock
There
can be no assurance that we will be able to comply with Nasdaq Capital Market’s continued listing standards.
Prior
to our initial public offering that closed on February 14, 2022, there was no public market for shares of our common stock. Our common
stock is listed on Nasdaq Capital Market under the symbol “HTCR.” There can be no assurance any broker will be interested
in trading our stock. Therefore, it may be difficult to sell your shares of common stock if you desire or need to sell them. We cannot
provide any assurance that an active and liquid trading market in our common stock will develop or, if developed, that such market will
continue.
There
is no guarantee that we will be able to maintain a listing on the Nasdaq Capital Market for any period of time by perpetually satisfying
Nasdaq’s continued listing requirements. Our failure to continue to meet these requirements may result in our common stock being
delisted from Nasdaq Capital Market.
The
market price of our common stock may be volatile, and you could lose all or part of your investment.
We
cannot predict the prices at which our common stock will trade. The market price of our common stock depends on a number of factors,
including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to
our operating performance. In addition, the limited public float of our common stock will tend to increase the volatility of the trading
price of our common stock. These fluctuations could cause you to lose all or part of your investment in our common stock, since you might
not be able to sell your shares at or above the price you paid for them. Factors that could cause fluctuations in the market price of
our common stock include, but are not limited to, the following:
| ● | actual
or anticipated changes or fluctuations in our results of operations; |
| ● | the
financial projections we may provide to the public, any changes in these projections, or
our failure to meet these projections; |
| ● | announcements
by us or our competitors of new products or new or terminated significant contracts, commercial
relationships, or capital commitments; |
| ● | industry
or financial analyst or investor reaction to our press releases, other public announcements,
and filings with the SEC; |
| ● | rumors
and market speculation involving us or other companies in our industry; |
| ● | price
and volume fluctuations in the overall stock market from time to time; |
| ● | changes
in operating performance and stock market valuations of other technology companies generally,
or those in our industry in particular; |
| ● | the
expiration of market stand-off or contractual lock-up agreements and sales of shares of our
common stock by us or our stockholders; |
| ● | failure
of industry or financial analysts to maintain coverage of us, changes in financial estimates
by any analysts who follow our company, or our failure to meet these estimates or the expectations
of investors; |
| ● | actual
or anticipated developments in our business, or our competitors’ businesses, or the
competitive landscape generally; |
| ● | litigation
involving us, our industry, or both, or investigations by regulators into our operations
or those of our competitors; |
| ● | developments
or disputes concerning our intellectual property rights, our products, or third-party proprietary
rights; |
| ● | announced
or completed acquisitions of businesses or technologies by us or our competitors; |
| ● | new
laws or regulations or new interpretations of existing laws or regulations applicable to
our business; |
| ● | any
major changes in our management or our board of directors, particularly with respect to Mr.
Lai; |
| ● | general
economic conditions and slow or negative growth of our markets; and |
| ● | other
events or factors, including those resulting from war, incidents of terrorism, or responses
to these events. |
In
addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of companies. Broad market and industry factors may seriously affect the market price of our common stock,
regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the
market prices of a particular company’s securities, securities class action litigation has often been instituted against that company.
Securities litigation, if instituted against us, could result in substantial costs and divert our management’s attention and resources
from our business. This could materially adversely affect our business, financial condition, results of operations, and prospects.
As
a controlled company, we are not subject to all of the corporate governance rules of Nasdaq Capital Market.
The
“controlled company” exception to Nasdaq Capital Market rules provides that a company of which more than 50% of the voting
power is held by an individual, group or another company, a “controlled company,” need not comply with certain requirements
of Nasdaq Capital Market corporate governance rules. As of March 31, 2022, Sumitaka Yamamoto, our Chief Executive Officer, beneficially
owned an aggregate of 10,984,539 shares of our common stock, which represents 58.07% of the voting power of our outstanding common stock.
As a “controlled company” within the meaning of the corporate governance rules of Nasdaq Capital Market, we are exempt from
Nasdaq Capital Market’s corporate governance rules requiring that listed companies have (i) a majority of the board of directors
consist of “independent” directors under the listing standards of Nasdaq Capital Market, (ii) a nominating/corporate governance
committee composed entirely of independent directors and a written nominating/corporate governance committee charter meeting the requirements
of Nasdaq Capital Market, and (iii) a compensation committee composed entirely of independent directors and a written compensation committee
charter meeting the requirements of Nasdaq Capital Market. We currently utilize and presently intend to continue to utilize these exemptions.
Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance
requirements of Nasdaq Capital Market. See “Management—Controlled Company and Director Independence”.
If
the voting power of our capital stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing
significant corporate decisions and may result in conflicts of interest.
Sumitaka
Yamamoto, our Chief Executive Officer, controls approximately 58.07% of the voting power of our outstanding common stock. As a result,
Mr. Yamamoto will have majority voting power over all matters requiring stockholder votes, including the election of directors; mergers,
consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure;
amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution.
This
concentration of voting power may delay, deter or prevent acts that would be favored by our other stockholders. The interests of Mr.
Yamamoto may not always coincide with our interests or the interests of our other stockholders. This concentration of voting power may
also have the effect of delaying, preventing or deterring a change in control of us. Also, Mr. Yamamoto may seek to cause us to take
courses of action that, in his judgment, could enhance his investment in us, but which might involve risks to our other stockholders
or adversely affect us or our other stockholders. As a result, the market price of our common stock could decline or stockholders might
not receive a premium over then-current market price of our common stock upon a change in control. In addition, this concentration of
voting power may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares
in a company with significant stockholders. See “Executive Compensation” and “Description of Securities.”
We
have never paid dividends on our common stock and have no plans to do so in the future.
Holders
of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we have paid
no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future.
We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any return investors in our
common stock may have will be in the form of appreciation, if any, in the market value of their shares of common stock. See “Dividend
Policy.”
Our
common stock may be subject to the “penny stock” rules in the future. It may be more difficult to resell securities classified
as “penny stock.”
Our
common stock may be subject to “penny stock” rules (generally defined as non-exchange traded stock with a per-share price
below $5.00) in the future. While our common stock is not currently considered “penny stock” since it is listed on Nasdaq,
if we are unable to maintain that listing and our common stock is no longer listed on Nasdaq, unless we maintain a per-share price above
$5.00, our common stock will become “penny stock.” These rules impose additional sales practice requirements on broker-dealers
that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or
“accredited investors.” For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments
in penny stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a standardized
risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny stock, disclose the compensation of the broker-dealer and
its salesperson in the transaction, furnish monthly account statements showing the market value of each penny stock held in the customer’s
account, provide a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s
written agreement to the transaction.
Legal
remedies available to an investor in “penny stocks” may include the following:
●
If a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal or states securities
laws, the investor may be able to cancel the purchase and receive a refund of the investment.
●
If a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and firms
that committed the fraud for damages.
These
requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes
subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers
from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. These requirements
may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.
Many
brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not invest
in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the increased financial
risk generally associated with these investments.
For
these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time, if
ever, our common stock will not be classified as a “penny stock” in the future.
If
the benefits of any proposed acquisition do not meet the expectations of investors, stockholders or financial analysts, the market price
of our common stock may decline.
If
the benefits of any proposed acquisition do not meet the expectations of investors or securities analysts, the market price of our common
stock prior to the closing of the proposed acquisition may decline. The market values of our common stock at the time of the proposed
acquisition may vary significantly from their prices on the date the acquisition target was identified.
In
addition, broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance.
The stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be
predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive
to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations.
A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability
to obtain additional financing in the future.
As
an “emerging growth company” under the JOBS Act, we are permitted to rely on exemptions from certain disclosure requirements.
We
qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions
from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
| ● | have
an auditor report on our internal control over financial reporting pursuant to Section 404(b)
of the Sarbanes-Oxley Act; |
| ● | comply
with any requirement that may be adopted by the Public Company Accounting Oversight Board
regarding mandatory audit firm rotation or a supplement to the auditors’ report providing
additional information about the audit and the consolidated financial statements (i.e., an
auditor discussion and analysis); |
| ● | submit
certain executive compensation matters to stockholder advisory votes, such as “say-on-pay”
and “say-on-frequency”; and |
| ● | disclose
certain executive compensation related items such as the correlation between executive compensation
and performance and comparisons of the chief executive officer’s compensation to median
employee compensation. |
In
addition, Section 102 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging
growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have elected to take advantage of the benefits of this extended transition period. Our consolidated financial statements may therefore
not be comparable to those of companies that comply with such new or revised accounting standards.
We
will remain an emerging growth company until the earliest to occur of: (i) the end of the first fiscal year in which our annual gross
revenue is $1.07 billion or more; (ii) the end of the fiscal year in which the market value of our common shares that are held by non-affiliates
is at least $700.0 million as of the last business day of our most recently completed second fiscal quarter; (iii) the date on which
we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and (iv) the end of the fiscal
year during which the fifth anniversary of our initial public offering (which closed on February 14, 2022) occurs.
Until
such time, however, we cannot predict if investors will find our securities less attractive because we may rely on these exemptions.
If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the
price of our securities may be more volatile.
If
we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence
in the accuracy and completeness of our financial reports and have an adverse effect on the value of our securities.
As
a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such
internal control. Further, we will be required to report any changes in internal controls on a quarterly basis. In addition, we are required
to furnish a report by management on the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley
Act. We will design, implement, and test the internal control over financial reporting required to comply with these obligations. If
we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of
Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered
public accounting firm is unable to express an opinion as to the effectiveness of its internal control over financial reporting when
required, investors may lose confidence in the accuracy and completeness of our financial reports and the value of our securities could
be negatively affected. We also could become subject to investigations by the SEC or other regulatory authorities, which could require
additional financial and management resources.
As
an emerging growth company, our auditor is not required to attest to the effectiveness of our internal controls.
Our
independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting
while we are an emerging growth company. This means that the effectiveness of our financial operations may differ from our peer companies
in that they may be required to obtain independent registered public accounting firm attestations as to the effectiveness of their internal
controls over financial reporting and we are not. While our management will be required to attest to internal control over financial
reporting and we will be required to detail changes to our internal controls on a quarterly basis, we cannot provide assurance that the
independent registered public accounting firm’s review process in assessing the effectiveness of our internal controls over financial
reporting, if obtained, would not find one or more material weaknesses or significant deficiencies. Further, once we cease to be an emerging
growth company and cease to be a smaller reporting company (as described below), we will be subject to independent registered public
accounting firm attestation regarding the effectiveness of our internal controls over financial reporting. Even if management finds such
controls to be effective, our independent registered public accounting firm may decline to attest to the effectiveness of such internal
controls and issue a qualified report.
We
believe we will be considered a smaller reporting company and will be exempt from certain disclosure requirements, which could make our
common stock less attractive to potential investors.
Rule
12b-2 of the Exchange Act defines a “smaller reporting company” as an issuer that is not an investment company, an asset-backed
issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:
| ● | had
a public float of less than $250 million as of the last business day of its most recently
completed second fiscal quarter, computed by multiplying the aggregate worldwide number of
shares of its voting and non-voting common equity held by non-affiliates by the price at
which the common equity was last sold, or the average of the bid and asked prices of common
equity, in the principal market for the common equity; or |
| ● | in
the case of an initial registration statement under the Securities Act or the Exchange Act
for shares of its common equity, had a public float of less than $250 million as of a date
within 30 days of the date of the filing of the registration statement, computed by multiplying
the aggregate worldwide number of such shares held by non-affiliates before the registration
plus, in the case of a Securities Act registration statement, the number of such shares included
in the registration statement by the estimated public offering price of the shares; or |
| ● | in
the case of an issuer whose public float as calculated under paragraph (1) or (2) of this
definition was zero or whose public float was less than $700 million, had annual revenues
of less than $100 million during the most recently completed fiscal year for which audited
financial statements are available. |
As
a smaller reporting company, we are not be required to, and may not, include a Compensation Discussion and Analysis section in our proxy
statements; we will provide only two years of financial statements; and we need not provide the table of selected financial data. We
also will have other “scaled” disclosure requirements that are less comprehensive than issuers that are not smaller reporting
companies which could make our common stock less attractive to potential investors, which could make it more difficult for our stockholders
to sell their shares.
We
incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new
compliance initiatives.
As
a public company, we incur significant legal, accounting and other expenses that we did not previously incur as a private company. In
addition, the Sarbanes-Oxley Act has imposed various requirements on public companies, including requiring establishment and maintenance
of effective disclosure and financial controls. Our management and other personnel need to devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance
costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will
incur as a public company or the timing of such costs.
The
Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure
controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial
reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section
404 of the Sarbanes-Oxley Act. In addition, will be required to have our independent registered public accounting firm attest to the
effectiveness of our internal control over financial reporting the later of our second annual report on Form 10-K or the first annual
report on Form 10-K following the date on which we are no longer an emerging growth company or a smaller reporting company. Our compliance
with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate
public company experience and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a
timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses, the value of our securities could decline and we could be subject to sanctions or
investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
Our
ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate
financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial systems,
procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new
or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control
over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section
404 of the Sarbanes-Oxley Act. This, in turn, could have an adverse impact on value of our securities, and could adversely affect our
ability to access the capital markets.
Anti-takeover
provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
The
Company’s certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes
in control or changes in our management without the consent of our board of directors. These provisions include:
| ● | no
cumulative voting in the election of directors, which limits the ability of minority stockholders
to elect director candidates; |
| ● | the
exclusive right of our board of directors to elect a director to fill a vacancy created by
the expansion of the board of directors or the resignation, death, or removal of a director,
which prevents stockholders from being able to fill vacancies on our board of directors; |
| ● | the
ability of our board of directors to determine whether to issue shares of our preferred stock
and to determine the price and other terms of those shares, including preferences and voting
rights, without stockholder approval, which could be used to significantly dilute the ownership
of a hostile acquirer; |
| ● | limiting
the liability of, and providing indemnification to, our directors and officers; |
| ● | providing
that a special meeting of the stockholders may only be called by a majority of the board
of directors; |
| ● | providing
that directors may be removed prior to the expiration of their terms by the affirmative vote
of the holders of not less than 2/3 of the voting power of the issued and outstanding stock
entitled to vote; and |
| ● | advance
notice procedures that stockholders must comply with in order to nominate candidates to our
board of directors or to propose matters to be acted upon at a stockholders’ meeting,
which may discourage or deter a potential acquirer from conducting a solicitation of proxies
to elect the acquirer’s own slate of directors or otherwise attempting to obtain control
of the Company. |
These
provisions, alone or together, could delay hostile takeovers and changes in control of the Company or changes in our board of directors
and management.
Any
provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control
could limit the opportunity for our security holders to receive a premium for their securities and could also affect the price that some
investors are willing to pay for our securities.