HeartCore Enterprises, Inc.: Form 10-Q for the period ended Mar 31, 2025

The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for forward-looking statements made by us or on our behalf. We and our representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”) and in our reports and presentations to stockholders or potential stockholders. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue” or similar expressions. Such forward-looking statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, as the same may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q.

Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances.

Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

Business Overview

We are a leading software development company based in Tokyo, Japan. We provide software through two business units. The first business unit, our CX division, includes a customer experience management business (the “CXM Platform”) that has been in existence for over 15 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, our DX division, 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.

During 2022, we started the GO IPO business, which supports Japanese companies listing on Nasdaq and NYSE in the United States. As of March 31, 2025, we have entered into consulting agreements with 14 companies to assist them in their IPO process, whereby we are entitled to receive from each company a consulting fee that ranges from $380,000 to $900,000 and warrants or stock acquisition rights to purchase 1% to 4% of the fully-diluted share capital of such companies that is exercisable on certain dates at an exercise price of $0.01 or JPY1 per share.

We were incorporated in the State of Delaware on May 18, 2021. We conduct business activities principally through our wholly owned subsidiary, HeartCore Co. Ltd. (“HeartCore Japan”), which was established in Japan by Sumitaka Yamamoto, our Chairman of Board, Chief Executive Officer and President and a significant stockholder of the Company, in 2009.

On September 6, 2022, the Company entered into a share exchange and purchase agreement to acquire 51% of the outstanding shares of Sigmaways, Inc. (“Sigmaways”), a company incorporated under the laws of the State of California, and its wholly owned subsidiaries. Sigmaways and its wholly owned subsidiaries are engaged in the business of developing and sales of software in the United States. The acquisition closed on February 1, 2023.

In the first quarter of 2023, we formed HeartCore Financial, Inc. (“HeartCore Financial”) in the U.S. as part of our Go IPO consulting business. In the fourth quarter of 2023, we formed HeartCore Luvina Vietnam Company (“HeartCore Luvina”) in Vietnam, which is engaged in the business of software development.

In April 2024, HeartCore Financial incorporated a branch office, HeartCore Financial, Inc. – Japan Branch Office, in Japan.

Recent Developments

Change in Controlled Company Status and Board Committee Formation

In the first quarter of 2025, the Company announced that its Board of Directors (the “Board”) had formed a Compensation Committee and a Nominating and Corporate Governance Committee. The Compensation Committee is comprised of three independent directors: Ferdinand Groenewald, Heather Neville (Chair) and Koji Sato. The Nominating and Corporate Governance Committee is comprised of three independent directors: Ferdinand Groenewald, Heather Neville and Koji Sato (Chair).

In exchange for their service on the Compensation Committee, the Chair of the Compensation Committee will receive an additional $7,000 annually, and the other Compensation Committee members will receive an additional $4,000 annually.

In exchange for their service on the Nominating and Corporate Governance Committee, the Chair of the Nominating and Corporate Governance Committee will receive an additional $6,000 annually, and the other Nominating and Corporate Governance Committee members will receive an additional $3,000 annually.

Upon initially listing with the Nasdaq Capital Market, the Company qualified as a “controlled company” because more than 50% of the voting power for the election of directors was held by Mr. Yamamoto. As a result of certain sales under the Company’s previously announced at-the-market offering, Mr. Yamamoto no longer holds more than 50% of the voting power for the election of directors and therefore, the Company no longer qualifies as a controlled company. As a result, the Company is required, subject to phase-in rules, to comply with Nasdaq requirements that:

• a majority of the Board consist of independent directors as defined by Nasdaq’s applicable rules and regulations;
• the compensation of the Company’s executive officers be determined, or recommended to the Board for determination, by independent directors constituting a majority of the independent directors of the Board in a vote in which only independent directors participate or by a compensation committee comprised solely of independent directors; and
• director nominees be selected, or recommended to the Board for selection, by independent directors constituting a majority of the independent directors of the Board in a vote in which only independent directors participate or by a nomination committee comprised solely of independent directors.

The Company previously availed itself of certain of the controlled company exemptions. More specifically, the Company did not have a compensation committee or a nominating and corporate governance committee.

We no longer qualify as a controlled company and accordingly, we have formed a Compensation Committee and a Nominating and Corporate Governance Committee; however, we currently utilize and presently intend to continue to utilize, the exemption relating to a majority independent Board. Pursuant to Nasdaq’s phase-in rules, we have a period of one year from the date on which we ceased to be a controlled company to comply with the majority independent Board requirement.

Three of six members of the Company’s Board are independent directors within the meaning of Nasdaq Capital Market rules: Ferdinand Groenewald, Heather Neville, and Koji Sato.

Nasdaq Notice Regarding Minimum Bid Price Requirement

On May 6, 2025, the Company received written notice (the “Bid Price Notice”) from the Nasdaq Listing Qualification Department (the “Nasdaq Staff”) indicating that the Company is not in compliance with the $1.00 minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) for continued listing on the Nasdaq Capital Market. The notification of noncompliance has no immediate effect on the listing or trading of the Company’s common stock on the Nasdaq Capital Market under the symbol “HTCR,” and the Company is currently monitoring the closing bid price of its common stock and evaluating its alternatives, if appropriate, to resolve the deficiency and regain compliance with this rule.

The Nasdaq Listing Rules require listed securities to maintain a minimum bid price of $1.00 per share and, based upon the closing bid price for the last 30 consecutive business days, the Company no longer meets this requirement. The Bid Price Notice indicated that the Company will be provided 180 calendar days, or until November 3, 2025, in which to regain compliance. If at any time during this period the closing bid price of the Company’s common stock is at least $1.00 per share for a minimum of 10 consecutive business days, the Nasdaq Staff will provide the Company with written confirmation of compliance and the matter will be closed.

Alternatively, if the Company fails to regain compliance with Rule 5550(a)(2) prior to the expiration of the 180 calendar day period, but meets the continued listing requirement for market value of publicly held shares and all of the other applicable standards for initial listing on the Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and provides written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary, then the Company may be granted an additional 180 calendar days to regain compliance with Rule 5550(a)(2).

There can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement, even if it maintains compliance with the other listing requirements. The Company is considering actions that it may take in response to the Bid Price Notice in order to regain compliance with the continued listing requirements, but no decisions regarding a response have been made at this time.

Financial Overview

For the three months ended March 31, 2025 and 2024, we generated revenues of $3,587,026 and $5,046,732, respectively, and reported net loss of $3,137,381 and $1,478,002, respectively, and cash flows used in operating activities of $2,000,791 and $898,619, respectively. As noted in our unaudited consolidated financial statements, as of March 31, 2025, we had an accumulated deficit of $19,331,835.

Results of Operations

Comparison of Results of Operations for the Three Months Ended March 31, 2025 and 2024

The following table summarizes our operating results as reflected in our unaudited statements of operations for the three months ended March 31, 2025 and 2024, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods.

Revenues

Our total revenues decreased by $1,459,706, or 28.9%, to $3,587,026 for the three months ended March 31, 2025 from $5,046,732 for the three months ended March 31, 2024, primarily attributable to (i) a decreased revenue of $743,854 from sale on-premise software, mainly because the Company obtained several large orders of CMS license during the first quarter of 2024, while only one such comparable large order was obtained in the current period; (ii) a decreased revenue of $336,812 from customized software development and services in connection with the intense competition of the software market in the U.S.; and (iii) a decreased revenue of $329,938 from GO IPO consulting services, as no new IPO consulting orders were entered this quarter mainly as heightened uncertainty in the U.S. stock market caused by rising tariffs.

Cost of Revenues

Our total cost of revenues decreased by $527,801, or 17.5%, to $2,486,742 for the three months ended March 31, 2025 from $3,014,543 for the three months ended March 31, 2024, mainly attributable to the decrease of $374,939 and $226,468 in the cost of customized software development and services and GO IPO consulting services, respectively, in light of the decreases in sales.

Gross Profit

Our total gross profit decreased by $931,905, or 45.9%, to $1,100,284 for the three months ended March 31, 2025 from $2,032,189 for the three months ended March 31, 2024, mainly attributable to (i) a decrease of $751,215 in gross profit from sale of on-premises software, as the sale decreased dramatically while there was not much change in the corresponding costs as the product was developed independently and fixed, which were not proportional to sales, and (ii) a decrease of $103,470 in gross profit from GO IPO consulting services, in light of the decrease in sale.

For the reasons discussed above, our overall gross profit margin decreased by 9.6% to 30.7% for the three months ended March 31, 2025 from 40.3% for the three months ended March 31, 2024.

Selling Expenses

Our selling expenses increased by $71,453, or 32.5%, to $291,160 for the three months ended March 31, 2025 from $219,707 in the three months ended March 31, 2024, primarily attributable to an increase of $97,622 in sales salaries, commissions and welfare, resulting from the employee restructuring in late 2024 by transferring certain administrative and management department employees to sales department to promote selling activities for software business in Japan.

As a percentage of revenues, our selling expenses accounted for 8.1% and 4.4% of our total revenues for the three months ended March 31, 2025 and 2024, respectively.

General and Administrative Expenses

Our general and administrative expenses decreased by $476,915 or 19.8%, to $1,929,388 for the three months ended March 31, 2025 from $2,406,303 in the three months ended March 31, 2024, primarily attributable to (i) a decrease of $153,770 in salaries and welfare expenses, mainly resulting from the employee restructuring in late 2024 as mentioned above; (ii) a decrease of $159,874 in depreciation and amortization expenses, primarily because we fully impaired intangible asset arose from acquisition of Sigmaways at the end of last fiscal year, resulting in no amortization expenses were recorded in current quarter; and (iii) a decrease of $113,477 in office, utility and other expenses, reflecting from our continued efforts to save operating expenses.

As a percentage of revenues, general and administrative expenses were 53.8% and 47.6% of our revenues for the three months ended March 31, 2025 and 2024, respectively.

Research and Development Expenses

Our research and development expenses increased by $34,759 or 39.0%, to $123,893 in the three months ended March 31, 2025 from $89,134 in the three months ended March 31, 2024, primarily attributable to an increase of $79,348 in salaries and welfare expenses for the employees assigned to the development of a new product, Global CMS, which started in late 2024; offset by a decrease of $44,250 in outsourcing costs due to the expiration of certain outsourcing contracts in the current period.

As a percentage of revenues, research and development expenses were 3.5% and 1.8% of our revenues for the three months ended March 31, 2025 and 2024, respectively.

Other Income (Expenses), Net

Our other income (expenses) primarily includes changes in fair value of investments in marketable securities, changes in fair value of investment in warrants, interest income generated from bank deposits, interest expenses for bank loans, other income, and other expenses. Total other expenses, net, of $875,214 for the three months ended March 31, 2024 increased by $961,374 or 109.8% to total other expenses, net, of $1,836,588 for the three months ended March 31, 2025, primarily attributable to an increase of $1,547,582 in loss on fair value changes in investments in marketable securities due to decreased stock price of investees, partially offset by a decrease of $627,266 in loss on fair value changes in investment in warrants.

Income Tax Expense (Benefit)

Income tax expense was $56,636 for the three months ended March 31, 2025, representing a decrease of $136,803, or 170.6% from income tax benefit of $80,167 in the three months ended March 31, 2024, mainly because we recognized deferred income tax benefit in connection with amortization expense for intangible asset raised from acquisition of Sigmaways in the three months ended March 31, 2024, whereas, the intangible asset was fully impaired in the fourth quarter of 2024, and thus no such deferred income tax benefit recorded in current quarter. Meanwhile, the income tax expenses incurred in the current quarter mainly attributable to the decrease of deferred tax assets due to various revenue and expenses adjustments.

Net Loss

As a result of the foregoing, we reported a net loss of $3,137,381 for the three months ended March 31, 2025, representing a $1,659,379 or 112.3% increase from a net loss of $1,478,002 for the three months ended March 31, 2024.

Net Loss Attributable to Non-controlling Interests

We owned 51% equity interest of Sigmaways and its subsidiaries and 51% equity interest of HeartCore Luvina. Accordingly, we recorded net loss attributable to the non-controlling interests of $50,389 and $144,652 in the three months ended March 31, 2025 and 2024, respectively.

Net Loss Attributable to HeartCore Enterprises, Inc.

As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. of $3,086,992 for the three months ended March 31, 2025, representing a $1,753,642 or 131.5% increase from a net loss attributable to HeartCore Enterprises, Inc. of $1,333,350 for the three months ended March 31, 2024.

Liquidity and Capital Resources

As of March 31, 2025, we had $738,984 in cash and cash equivalents as compared to $2,121,089 as of December 31, 2024. We also had $2,114,655 in accounts receivable as of March 31, 2025. Our accounts receivable primarily include balance due from customers for our on-premise software sold and services provided and accepted by customers, as well as amounts billable to the customers for customized software development and services.

The following table sets forth summary of our cash flows for the periods indicated:

Operating Activities

Net cash flows used in operating activities was $2,000,791 for the three months ended March 31, 2025, primarily consisting of the following:

• Net loss of $3,137,381 for the three months ended March 31, 2025.
• A decrease of $496,079 in deferred revenue, due to decreased upfront payment received for sales of on-premise software revenue as we obtained fewer orders.
• A decrease of $219,830 in accounts payable and accrued expenses, as we continuously paid off such liabilities and decreased purchases to save operating expenses.
• A decrease of $178,339 in accrued payroll and other employee costs, resulting from payment for accrued bonus and sales commission during the period.
• Offset by a loss of $1,781,664 on fair value changes in investments in marketable securities.
• Offset by a loss of $117,305 on disposal of property and equipment brought by early termination of an operating lease.
• Offset by non-cash lease expense of $90,508.

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Investing Activities

Net cash flows provided by investing activities amounted to $473,061 for the three months ended March 31, 2025, primarily attributable to the proceeds of $462,763 from sale of marketable securities.

Financing Activities

Net cash flows provided by financing activities amounted to $142,940 for the three months ended March 31, 2025, primarily consisting of (i) proceeds of $134,689 from short-term debt borrowing; (ii) proceeds of $117,000 from exercise of stock options; (iii) collection of subscription receivable of $103,942; and offset by (iv) repayment of $165,165 for long-term debts.

Contractual Obligations

Lease Commitment

The Company has entered into operating leases for office space with terms ranging from two to fifteen years, and a finance lease for vehicle with the term of five years.

As of March 31, 2025, future minimum lease payments under the non-cancelable lease agreements are as follows:

Debts

The Company’s debts included short-term debt and long-term debts borrowed from banks and financial institutions.

As of March 31, 2025, future minimum principal payments for long-term debts are as follows:

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2025.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements. These financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the unaudited consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. We continue to evaluate the estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. We believe there are no critical accounting policies and estimates for the three months ended March 31, 2025.

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2025. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2025, the Company’s disclosure controls and procedures were not effective, for the same reason as previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2024, as filed with the Securities and Exchange Commission on March 31, 2025.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

As a smaller reporting company, the Company is not required to disclose material changes to the risk factors that were contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, as updated from time to time.