HeartCore Enterprises, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 14, 2024. HeartCore operates software businesses in Japan and the U.S., including customer experience and digital-transformation software, customized development, and consulting for Japanese companies pursuing U.S. listings. It also owns 51% of Sigmaways and 51% of its Vietnam subsidiary.
Financial results and position
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $5.05 million | $8.73 million |
| Gross profit / margin | $2.03 million / 40.3% | $5.63 million / 64.5% |
| Operating income (loss) | ($0.68 million) | $2.30 million |
| Net income (loss) | ($1.48 million) | $1.81 million |
| Net income (loss) attributable to HeartCore | ($1.33 million), or ($0.06) per share | $1.88 million, or $0.10 per share |
| Operating cash flow | $0.74 million | ($1.05 million) |
At March 31, cash was $1.22 million, accounts receivable $3.09 million, and total assets $22.33 million. Current assets of $9.02 million were below current liabilities of $11.02 million, implying a working-capital deficit of approximately $2.00 million and a current ratio of about 0.82. The balance sheet reported $2.04 million of short- and long-term debt, plus $0.18 million of factoring liability and $0.16 million of insurance-premium financing. Operating and finance lease liabilities totaled approximately $2.41 million. Accumulated deficit was $16.10 million.
Changes and operating drivers
- Revenue fell 42.2% year over year. Management attributed the decline mainly to $4.62 million less GO IPO consulting revenue: two customers completed Nasdaq listings in Q1 2023, producing consulting revenue that included warrants, while no comparable revenue was recognized in Q1 2024.
- On-premise software revenue rose $0.72 million, primarily from two large orders. Customized software development revenue also increased, but did not offset the consulting decline.
- Gross profit fell 63.9%, and gross margin contracted 24.2 percentage points to 40.3%, reflecting the lower contribution from warrant-related consulting revenue.
- Operating expenses declined 18.5% to $2.72 million, but remained 53.8% of revenue. Other expenses were $0.88 million, including $0.91 million of combined fair-value losses on marketable securities and warrants.
Cash flow, liquidity, and unusual items
Cash increased $0.21 million during the quarter. Positive operating cash flow included a $5.00 million advance received for a warrant sale, recorded as a liability because the warrants were not yet transferable. The Company agreed to sell part of customer warrants for $9.00 million; the remaining $4.00 million was received in April 2024. Operating cash flow also reflected a $3.36 million advance referral-fee payment recorded in prepaid expenses. These items are significant to assessing the quality and repeatability of quarterly cash generation.
Financing cash outflow was $0.47 million, primarily from debt and factoring repayments. The filing reports no off-balance-sheet arrangements. No material legal proceedings were reported.
Outlook, developments, and risks
- No quantitative revenue or earnings guidance was provided. Management’s forward-looking statements are subject to risks described in its filings, and it disclaims an obligation to update them.
- As of May 14, the Company said it had consulting agreements with 14 IPO-bound companies, generally involving fees of $380,000–$900,000 and warrants or stock rights. Recognition and value of warrant consideration depend on contractual milestones and valuation assumptions.
- After quarter-end, the Board declared a $0.02-per-share dividend, payable May 3, 2024 to April 26 record-date holders. Further quarterly dividends were described as conditional on financial results, not assured.
- Nasdaq had granted an additional compliance period through October 21, 2024 to regain the $1.00 minimum bid-price requirement. The Company stated it may use a reverse stock split if necessary; continued listing is not assured.
- Management concluded disclosure controls and procedures were not effective as of March 31, 2024, for the reason previously reported in the 2023 Form 10-K. It reported no material changes in internal control during the quarter.
- Warrant values rely on Level 3 inputs and valuation assumptions; changes in those estimates contributed materially to reported losses. Customer concentration also warrants attention: two customers represented 13.4% and 13.0% of Q1 revenue.
Investor verification priorities
- Check whether the $4.00 million warrant-sale balance was received and whether transfer conditions were satisfied; clarify the transaction’s accounting and any remaining obligations.
- Review the $3.36 million prepaid referral fee: recipient, contractual terms, service delivery, and expected expense recognition.
- Assess whether software growth and the newer IPO-consulting pipeline can offset the absence of prior-year listing-related revenue, and whether margins recover.
- Monitor cash conversion, receivable collections, the working-capital deficit, debt and lease maturities, and the need for additional financing.
- Confirm progress on Nasdaq’s bid-price requirement and remediation of ineffective disclosure controls.
- Evaluate warrant valuation sensitivity, potential dilution, dividend sustainability, and subsequent-period results.