Healthcare Triangle(HCTI) - 2023 Q4 - Annual Report

Part I Business The company provides specialized IT solutions including cloud, data, and managed services for the Healthcare and Life Sciences industry - HTI provides IT solutions for the Healthcare and Life Sciences industry, focusing on cloud transformation, data analytics, and EHR services[29][30] - The company's core offerings include proprietary technology platforms: CloudEz for multi-cloud management, DataEz for data analytics, and Readabl.ai for extracting information from unstructured documents using AI/ML[33][52] - HTI's primary revenue is generated from software services and managed services, with a strategic shift towards a SaaS subscription model for recurring revenue[35] - As of December 31, 2023, SecureKloud Technologies, Inc. owns approximately 59.18% of the company, making HTI a "controlled company"[36] - The company has premier partnerships with major public cloud providers including Amazon Web Services (AWS), Google Cloud, and Microsoft Azure, as well as EHR vendors[38] Risk Factors The company faces significant risks from intense competition, dependency on third-party providers, cybersecurity threats, and complex regulations - The company faces intense competition from firms with greater financial, technical, and marketing resources, which could lead to loss of clients[73] - Operations are heavily dependent on third-party data centers (AWS, Google Cloud, Microsoft Azure), and any service interruption could significantly harm the business[74] - As a "controlled company" with its parent owning 59.18% of common stock, there is a risk of influence over business affairs and exemption from certain Nasdaq governance requirements[77][154] - The business is subject to significant cybersecurity risks, including data breaches of confidential healthcare information, which could result in litigation and fines[78][80] - The company operates in a highly regulated healthcare industry and is subject to complex laws like HIPAA, HITECH, and GDPR, with non-compliance leading to severe penalties[110][113][114] - Revenue is highly concentrated, with the top five customers accounting for 77% of revenue in fiscal year 2023, making the loss of any of these customers a material risk[95] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[165] Cybersecurity The company employs a multi-layered cybersecurity strategy based on the NIST framework, with oversight from the Audit Committee - HCTI utilizes a multi-layer cybersecurity approach based on the National Institute of Standards and Technology (NIST) framework, involving a dedicated team and external assessments[165] - The Audit Committee provides board-level oversight, reviewing the cybersecurity program annually and receiving quarterly updates on risks[167] - The company manages third-party service provider risks by performing risk assessments, requesting SOC 2 reports, and incorporating risk assurance into contracts[169] - Although cybersecurity risks exist, threats such as malware and phishing have not materially affected the business to date[171] Properties The company does not own any real estate and leases its primary office in California and a satellite office in New Jersey - The company's principal executive office is leased at 7901 Stoneridge Drive, Suite 220, Pleasanton, CA 94588[172] - A satellite office is leased at 666 Plainsboro Road, Suite 448, Plainsboro, NJ 08536[172] - The company does not currently own any real estate[172] Legal Proceedings As of the report date, the company is not aware of any actual, pending, or threatened litigation - The company has not been made aware of any actual, pending, or threatened litigation[173] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[174] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq (HCTI), with no history of dividend payments and plans to retain future earnings - The company's common stock is traded on the Nasdaq Capital Market under the symbol "HCTI"[176] - The company has never declared or paid a cash dividend and intends to retain future earnings to finance operations[177] Equity Compensation Plan Activity | Plan category: | Number of Securities to be issued Upon Exercise of Outstanding Options, Warrants, and Rights (a) | Weighted Average Exercise Price of Outstanding Options (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 276,500 | $ 3.7 | 1,023,050 | Management's Discussion and Analysis of Financial Condition and Results of Operations FY2023 revenue decreased 28% to $33.2 million, net loss widened to $12.3 million, and the company's liquidity position weakened Key Financial Results | | 2023 (In thousands) | 2022 (In thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $ 33,203 | $ 45,886 | (28)% | | Cost of revenue | $ 26,426 | $ 34,591 | (24)% | | Net (loss) | $ (12,339) | $ (9,610) | (28)% | - Revenue from the top 5 customers accounted for 77% of total revenue in 2023, an increase in concentration from 72% in 2022[222] - Research and development expenses saw a significant decrease of 87% to $0.8 million in 2023 from $5.9 million in 2022[226] - Depreciation and amortization expenses increased by 114% to $7.2 million in 2023, compared to $3.4 million in 2022[230] - The company's liquidity position has tightened, with the current ratio decreasing from 1.3 in 2022 to 0.7 in 2023[241] Results of Operations Total revenue fell 28% to $33.2 million in 2023, driven by declines across all service segments and widening the net loss Revenue by Segment | Revenue by Segment | 2023 (In thousands) | 2022 (In thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Software Services | $ 21,132 | $ 25,883 | (18)% | | Managed Services and Support | $ 10,452 | $ 15,178 | (31)% | | Platform Services | $ 1,619 | $ 4,825 | (66)% | | Total Revenue | $ 33,203 | $ 45,886 | (28)% | Operating Profit (Loss) by Segment | Operating Profit (Loss) by Segment | 2023 (In thousands) | 2022 (In thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Software Services | $ (2,507) | $ (1,381) | (82)% | | Managed Services and Support | $ 2,755 | $ 4,481 | (39)% | | Platform Services | $ (649) | $ (4,489) | 86% | | Total segment operating profit (loss) | $ (401) | $ (1,389) | (71)% | Liquidity and Capital Resources The company's liquidity weakened with a current ratio of 0.7, financing operations through operating cash flows and new debt Liquidity Metrics | Liquidity Metrics | As of Dec 31, 2023 | As of Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $1.2 million | $1.3 million | | Current Ratio | 0.7 | 1.3 | | Debt to Equity Ratio | 9.8 | 0.2 | Cash Flow Summary (In thousands) | Cash Flow Summary (In thousands) | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Cash flows used in operating activities | $ (1,612) | $ (2,600) | | Cash flows used in investing activities | $ (13) | $ (3,319) | | Cash flows provided by financing activities | $ 1,518 | $ 5,490 | - In 2023, the company raised funds through a Senior Secured 15% Original Issue Discount Convertible Promissory Note, receiving the first tranche of $2 million[247] Financial Statements and Supplementary Data The auditor's report includes a "going concern" warning due to operating losses, alongside the consolidated financial statements - The independent auditor's report includes a "going concern" paragraph, citing the company's operating losses as raising substantial doubt about its ability to continue operations[256] Consolidated Balance Sheet (In thousands) | Consolidated Balance Sheet (In thousands) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $ 5,729 | $ 7,749 | | Total Assets | $ 10,049 | $ 20,763 | | Total Current Liabilities | $ 8,123 | $ 6,148 | | Total Liabilities | $ 9,511 | $ 8,375 | | Total Stockholders' Equity | $ 538 | $ 12,388 | Consolidated Statement of Operations (In thousands) | Consolidated Statement of Operations (In thousands) | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net Revenue | $ 33,203 | $ 45,886 | | Loss from Operation | $ (11,348) | $ (10,416) | | Net Loss | $ (12,339) | $ (9,610) | | Net loss per share—basic and diluted | $ (2.92) | $ (2.63) | - Subsequent to year-end, the loss of a major customer led to a non-recurring impairment loss of $3.025 million on customer relationships and $1.17 million on goodwill[308][311][405] - In December 2023, the company entered into a securities purchase agreement for up to $5.2 million in Senior Secured Convertible Promissory Notes and received the first tranche of $2.0 million[359][362] Controls and Procedures Management concluded that both disclosure controls and internal controls over financial reporting were effective as of year-end 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[407] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[408] Part III Directors, Executive Officers and Corporate Governance The board comprises four directors, three of whom are independent, with established Audit, Compensation, and Governance committees - The board of directors consists of four members, with Dave Rosa as Chairman, and three of the four directors are determined to be independent[414][428][433] - Anand Kumar was appointed Interim Chief Executive Officer, effective March 15, 2024[414][418] - The board has three standing committees: Audit, Compensation, and Nominating and Corporate Governance, each composed of independent directors[434] Executive Compensation This section details compensation for named executive officers, including salary, bonuses, and outstanding equity awards for 2022 and 2023 Summary Compensation Table | Name and Principal Position | Year | Total ($) | | :--- | :--- | :--- | | Thyagarajan Ramachandran (CFO) | 2023 | 295,303 | | | 2022 | 145,317 | | Lakshmanan Kannappan (Head of Strategic Partnership) | 2023 | 216,484 | | | 2022 | 200,008 | | Shibu Kizhakevilayil (Head of M&A) | 2023 | 238,368 | | | 2022 | 256,892 | - The report details outstanding stock option awards for named executive officers as of December 31, 2023, with various exercise prices and expiration dates[447] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters SecureKloud Technologies, Inc. is the controlling stockholder with 59.2% beneficial ownership of the company's common stock Beneficial Ownership | Name of Beneficial Owner | Title | Common Stock | Percent of Common Stock | | :--- | :--- | :--- | :--- | | Officers and Directors as a Group | | 108,835 | 2.5% | | SecureKloud Technologies, Inc. | 5% Stockholder | 2,550,000 | 59.2% | - SecureKloud Technologies, Inc. is the majority owner with 59.2% of common stock, and is itself 60.7% owned by SecureKloud Technologies Limited, a public company in India[454] Certain Relationships and Related Party Transactions, and Director Independence The company engages in significant related party transactions with its parent for services and office space, all charged at cost Transactions with Parent Company | Transaction with Parent (SecureKloud Technologies, Inc.) | 2023 (In thousands) | 2022 (In thousands) | | :--- | :--- | :--- | | Services received under Master Service Agreement | $5,445 | $14,063 | | Services received under Shared Services Agreement | $377 | $197 | | Rent paid under Sublease Agreement | $235 | $180 | - The company also entered into a Master Services Agreement with its Ultimate Parent, receiving services amounting to $650,000 in 2023[460] - The balance receivable from related parties was $304,000 as of December 31, 2023, down from $1,075,000 in 2022[461] Principal Accountant Fees and Services Total fees paid to the independent auditor, BF Borgers CPA PC, increased to $313,500 in 2023 from $165,875 in 2022 Accountant Fees | Fee Type | 2023 | 2022 | | :--- | :--- | :--- | | Audit fees | $ 285,000 | $ 165,875 | | Administrative fees | $ 28,500 | $ - | | Total fees | $ 313,500 | $ 165,875 | Part IV Exhibits, Financial Statement Schedules This section lists all documents filed with the Form 10-K, including financial statements and various corporate agreements