Hearte Enterprises(HTCR) - 2025 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company's financial health significantly declined in Q1 2025, marked by substantial decreases in total assets and shareholders' equity, a 28.9% revenue drop, increased operating and net losses, and significant cash outflow from operations Consolidated Balance Sheets As of March 31, 2025, total assets decreased to $10.22 million from $13.97 million at year-end 2024, driven by reduced cash and marketable securities, while total shareholders' equity plummeted to $0.60 million due to an increased accumulated deficit Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $738,984 | $2,121,089 | | Investments in marketable securities | $2,251,276 | $4,495,703 | | Total current assets | $6,064,299 | $9,417,365 | | Total assets | $10,223,007 | $13,965,034 | | Liabilities & Equity | | | | Total current liabilities | $6,695,271 | $7,421,722 | | Total liabilities | $9,622,720 | $10,503,019 | | Accumulated deficit | $(19,331,835) | $(16,244,843) | | Total shareholders' equity | $600,287 | $3,462,015 | Unaudited Consolidated Statements of Operations and Comprehensive Loss For Q1 2025, revenues decreased 28.9% to $3.59 million, leading to a widened operating loss of $1.24 million and a net loss of $3.14 million, more than double the prior-year quarter, worsening net loss per share to $(0.14) Statement of Operations Summary (For the Three Months Ended March 31) | Metric | 2025 | 2024 | | :--- | :--- | :--- | | Revenues | $3,587,026 | $5,046,732 | | Gross Profit | $1,100,284 | $2,032,189 | | Loss from Operations | $(1,244,157) | $(682,955) | | Net Loss | $(3,137,381) | $(1,478,002) | | Net Loss Attributable to HeartCore | $(3,086,992) | $(1,333,350) | | Basic and Diluted Net Loss per Share | $(0.14) | $(0.06) | Unaudited Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased from $3.46 million at year-end 2024 to $0.60 million by March 31, 2025, primarily due to a $3.14 million net loss for the quarter, partially offset by common share issuances and option exercises - Total shareholders' equity decreased by $2.86 million during the first quarter of 2025[14] - The decrease was primarily driven by a net loss of $3.14 million[14] Unaudited Consolidated Statements of Cash Flows Net cash used in operating activities significantly increased to $2.0 million in Q1 2025 due to a higher net loss, leading to an overall $1.38 million decrease in cash and cash equivalents despite a net inflow from financing activities Consolidated Cash Flow Summary (For the Three Months Ended March 31) | Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash flows used in operating activities | $(2,000,791) | $(898,619) | | Net cash flows provided by investing activities | $473,061 | $1,650,814 | | Net cash flows provided by (used in) financing activities | $142,940 | $(474,752) | | Net change in cash and cash equivalents | $(1,382,105) | $206,772 | Notes to Unaudited Consolidated Financial Statements The notes detail the company's organizational structure, accounting policies, revenue disaggregation showing declines in on-premise software and consulting, customer credit risk concentrations, related party transactions, investment value changes, debt obligations, and stock-based compensation plans - The company operates through its primary subsidiary HeartCore Japan, its 51% owned subsidiary Sigmaways, and newly formed entities HeartCore Financial and HeartCore Luvina in Vietnam[21][22][24] Disaggregation of Revenues (For the Three Months Ended March 31) | Revenue Source | 2025 | 2024 | | :--- | :--- | :--- | | Revenues from on-premise software | $334,882 | $1,078,736 | | Revenues from maintenance and support services | $567,619 | $627,764 | | Revenues from SaaS | $172,844 | $139,700 | | Revenues from customized software development | $1,840,781 | $2,177,593 | | Revenues from consulting services | $245,543 | $575,481 | | Total revenues | $3,587,026 | $5,046,732 | - For Q1 2025, one customer (Customer B) represented 18.7% of total revenues[50] - As of March 31, 2025, another customer (Customer A) represented 17.9% of total accounts receivable[50] - The company determines its operations constitute a single operating segment[112] - Geographically, revenues are split between Japan ($1.74M) and the United States ($1.74M), with a smaller portion from international markets[114] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 28.9% Q1 2025 revenue decline to reduced software sales and consulting, leading to a 45.9% gross profit drop, wider operating loss, and a 112.3% increase in net loss, further weakening liquidity and resulting in a Nasdaq minimum bid price deficiency notice Business Overview The company operates two main software development business units, Customer Experience (CX) and Digital Transformation (DX), and since 2022, a 'GO IPO' consulting business assisting Japanese companies with U.S. listings - The company has two primary business units: the CX division (CXM Platform) and the DX division (digital transformation and automation)[119][120] - The 'GO IPO' business, started in 2022, assists Japanese companies with U.S. listings and has secured agreements with 14 companies as of March 31, 2025[122] - The company expanded through the acquisition of a 51% stake in Sigmaways, Inc. in 2023 and the formation of HeartCore Luvina in Vietnam and HeartCore Financial in the U.S.[124][125] Recent Developments In Q1 2025, the company lost its 'controlled company' status due to the CEO's reduced voting power, leading to the formation of new board committees, and subsequently received a Nasdaq deficiency notice for failing to meet the $1.00 minimum bid price requirement - The company is no longer a 'controlled company' as the CEO's voting power dropped below 50% due to at-the-market stock sales[131] - As a result, the company formed a Compensation Committee and a Nominating and Corporate Governance Committee composed of independent directors[127][133] - On May 6, 2025, the company received a notice from Nasdaq for failing to meet the $1.00 minimum bid price requirement[135] - The company has 180 calendar days, until November 3, 2025, to regain compliance with the minimum bid price rule[136] Results of Operations In Q1 2025, revenues fell 28.9% to $3.6 million due to reduced software and consulting sales, leading to a 45.9% gross profit decline and an 82.2% increase in operating loss, with a 131.5% rise in net loss attributable to the company due to increased losses on marketable securities Comparison of Operations (Three Months Ended March 31) | Metric | 2025 | 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $3,587,026 | $5,046,732 | -28.9% | | Gross Profit | $1,100,284 | $2,032,189 | -45.9% | | Loss from Operations | $(1,244,157) | $(682,955) | 82.2% | | Net Loss Attributable to HeartCore | $(3,086,992) | $(1,333,350) | 131.5% | - The revenue decrease was primarily driven by a $743,854 drop in on-premise software sales, a $336,812 decline in customized software services, and a $329,938 reduction from GO IPO consulting services[143] - General and administrative expenses decreased by 19.8% ($476,915), mainly due to lower salaries after employee restructuring and reduced amortization expenses[149] - Other expenses increased by 109.8% ($961,374), largely due to a $1,547,582 increase in losses from the change in fair value of marketable securities[153] Liquidity and Capital Resources The company's liquidity significantly weakened in Q1 2025, with cash and cash equivalents falling to $0.74 million from $2.12 million due to a $2.0 million net cash outflow from operating activities, partially offset by investing and financing inflows Cash Flow Summary (Three Months Ended March 31, 2025) | Cash Flow Activity | Amount | | :--- | :--- | | Net cash flows used in operating activities | $(2,000,791) | | Net cash flows provided by investing activities | $473,061 | | Net cash flows provided by financing activities | $142,940 | | Net change in cash and cash equivalents | $(1,382,105) | - Cash and cash equivalents decreased to $738,984 as of March 31, 2025, from $2,121,089 as of December 31, 2024[158] - Net cash used in operating activities of $2.0 million was primarily due to the net loss of $3.1 million, offset by non-cash charges like a $1.8 million loss on marketable securities[160] Contractual Obligations As of March 31, 2025, the company has significant contractual obligations, including $1.94 million in total future lease liabilities ($1.88 million operating, $58,786 finance) and $1.55 million in future minimum principal payments for long-term debt Future Minimum Lease Payments (as of March 31, 2025) | Year Ended Dec 31, | Operating Leases | Finance Lease | | :--- | :--- | :--- | | Remaining of 2025 | $232,733 | $13,199 | | 2026 | $274,468 | $17,599 | | 2027 | $274,468 | $17,599 | | 2028 | $274,468 | $11,733 | | 2029 | $274,468 | - | | Thereafter | $637,857 | - | | Total Lease Payments | $1,968,462 | $60,130 | - As of March 31, 2025, future minimum principal payments for long-term debts total $1,545,983[164] Quantitative and Qualitative Disclosures About Market Risk The company has indicated that this item is not applicable - Not applicable[167] Controls and Procedures As of March 31, 2025, management concluded that the company's disclosure controls and procedures were not effective, consistent with the prior annual report, with no material changes to internal control over financial reporting identified during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2025[168] - There were no changes in the Company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the controls[169] PART II - OTHER INFORMATION Legal Proceedings The company states that it is not currently involved in any legal proceedings that would have a material effect on its business, financial position, or results of operations - To the knowledge of management, there are no pending legal proceedings that would have a material effect on the company[171] Risk Factors As a smaller reporting company, the company is not required to disclose material changes to the risk factors previously reported in its Annual Report on Form 10-K - As a smaller reporting company, disclosure of material changes to risk factors is not required in this report[172] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[173] Other Information The company reports no material changes to procedures for security holders to recommend board nominees, and no director or officer adopted or terminated a Rule 10b5-1 trading plan during the quarter ended March 31, 2025 - There have been no material changes to the procedures by which security holders may recommend nominees to the Company's Board of Directors[176] - During the quarter, no director or officer adopted or terminated a Rule 10b5-1 trading plan[177] Exhibits The report lists the exhibits filed, which include certifications from the Principal Executive Officer and Principal Financial Officer, as well as Inline XBRL documents - Filed exhibits include Rule 13a-14(a) certifications for the CEO and CFO, Section 906 certifications, and various Inline XBRL files[179]