HeartCore Enterprises, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995, 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 Quarterly Report on Form 10-Q 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, 2025, 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 Quarterly Report on Form 10-Q 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. Unless the context otherwise requires, references herein to “we,” “us” or the “Company” refer to HeartCore Enterprises, Inc. (“HeartCore USA”) and its consolidated subsidiaries, including HeartCore Financial, Inc. and its branch office in Japan, Higgs Field Co., Ltd., HeartCore Luvina Vietnam Company Limited (“HeartCore Luvina”), and Sigmaways, Inc. (“Sigmaways”) and its subsidiaries. Business Overview In 2022, HeartCore USA started the Go IPO business, which supports Japanese companies listing on The Nasdaq Stock Market (“Nasdaq”) and the New York Stock Exchange (“NYSE”) in the United States. As of March 31, 2026, we have entered into consulting agreements with 16 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. Prior to November 2025, we were also a leading software development company based in Tokyo, Japan. We provided software through two business units. The first business unit, our CX division, included a customer experience management business (the “CXM Platform”). The second business unit, our DX division, was a digital transformation business which provided customers with robotics process automation, process mining and task mining to accelerate the digital transformation of enterprises. In 2025, we made the strategic decision to sell our software business assets in Japan and to concentrate our efforts on our Go IPO consulting business. On October 31, 2025, the Company entered into a Purchase Agreement (the “HeartCore Japan Agreement”) with Smith Japan Holdings KK (“Smith Japan”), pursuant to which the Company agreed to sell to Smith Japan, and Smith Japan agreed to purchase (the “HeartCore Japan Sale”), all of the outstanding equity interests of HeartCore Co., Ltd., a then-wholly owned subsidiary of the Company (“HeartCore Japan”). The HeartCore Japan Sale closed on October 31, 2025. Go IPO Consulting Services Since February 2022, we have been offering Go IPO consulting services, which include the following (collectively, the “Services”): ● Assisting with introductions to law firms, underwriters and auditing firms, in order that clients can make their selections, at their sole discretion; ● Assisting in the preparation of documentation for internal controls required for an initial public offering and simultaneous listing on the Nasdaq, the NYSE or the NYSE American; ● Providing support services to remove problematic accounting accounts upon listing support; ● Translation of requested documents into English; ● Attend and, if requested by the other party, lead, meetings of management and employees; ● Provide support services related to the Nasdaq, the NYSE or the NYSE American listing; ● Conversion of accounting data from Japanese standards to accounting principles generally accepted in the U.S. (“U.S. GAAP”); ● Assist in the preparation of S-1 or F-1 filings; ● Creation of English web page; and ● Preparing an investor presentation/deck and executive summary of the operations. In providing the Services, we do not provide investment advice regarding the value of securities, nor do we engage in the solicitation of investors or the negotiation of securities transactions. We do not provide accounting or legal advice, and we do not act as an investment advisor or broker-dealer. Pursuant to the terms of the consulting agreements with our clients, the parties agree that we will not provide the following services, among others: negotiation of the sale of the issuers’ securities; participation in discussions between the issuers and potential investors; assisting in structuring any transactions involving the sale of the issuers’ securities; pre-screening of potential investors; due diligence activities; and providing advice relating to valuation of or financial advisability of any investments in the issuers. Additionally, we do not take part in the selection of, or negotiation of terms with, law firms, underwriters or audit firms. Such selection and negotiation is the sole responsibility of the client. 1 Pursuant to the terms of the consulting agreements with the issuers, the issuers agree to compensate us as follows in return for the provision of Services during the initial term of the consulting agreements: ● A cash fee payable in installment payments; and ● Issuance by issuers to us of warrants or stock acquisition rights to acquire a number of shares of capital stock of the issuer, to initially be equal to a designated percentage of the fully diluted share capital of the issuer, subject to adjustment as set forth in the warrants or stock acquisition rights. Recent Developments Share Repurchase Program During the first quarter of 2026, the Company’s Board of Directors (the “Board”) authorized a share repurchase program, pursuant to which the Company may repurchase up to $2.0 million of its outstanding shares of common stock. The Board authorized the Company to purchase its common stock from time to time on a discretionary basis through open market purchases, privately negotiated transactions or other means, including trading plans intended to qualify under Rule 10b5-1 of the Exchange Act, in accordance with applicable federal securities laws and other applicable legal requirements. The Company expects to fund these repurchases through existing cash balances. Decisions regarding the amount and the timing of purchases under the program will be influenced by the Company’s cash on hand, cash flows from operations, general market conditions and other factors, and the program may be modified, suspended or discontinued at any time. The Company is not obligated to acquire any particular amount of its common stock. This program has no set termination date. Bylaws Amendment On March 24, 2026, the Board adopted an amendment (the “Amendment”) to the Company’s bylaws (the “Bylaws”). Prior to adoption of the Amendment, the second sentence of Section 7.4 of the Bylaws provided that “[i]f any action is brought by any party against another party, relating to or arising out of [the] 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”, and Section 7.5 of the Bylaws provided (and continues to provide following adoption of the Amendment) that “[a]ll powers, duties and responsibilities provided for in [the] Bylaws, whether or not explicitly so qualified, are qualified by the provisions of the [Company’s certificate of incorporation] and applicable law.” The Amendment had the effect of amending and restating the second sentence of Section 7.4 of the Bylaws to read as follows: “If 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, provided that the provisions of this sentence shall not apply with respect to “internal corporate claims” as defined in Section 115 of the DGCL or in connection with any other claim that a stockholder, acting in its capacity as a stockholder or in the right of the Corporation, has brought in an action, suit or proceeding.” The Amendment was intended to clarify that, consistent with Section 7.5 of the Bylaws and the provisions of the Delaware General Corporation Law, including Section 109(b) thereof, the Bylaws do not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the Company or any other party in connection with an internal corporate claim, or in connection with any other claim that a stockholder, acting in its capacity as a stockholder or in the right of the Company, has brought in an action, suit or proceeding. Reverse Stock Split As previously disclosed, on June 30, 2025, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation, as amended (the “Certificate of Incorporation”), to effectuate a reverse stock split of the Company’s outstanding shares of common stock, at a ratio of no less than 1-for-2 and no more than 1-for-30, with such ratio to be determined at the sole discretion of the Board. On March 4, 2026, the Board approved a 1-for-20 reverse stock split of the Company’s issued and outstanding common stock (the “Reverse Split”). Subsequently, the Company filed a certificate of amendment (the “Certificate of Amendment”) to its Certificate of Incorporation with the Secretary of State of the State of Delaware to effectuate the Reverse Split. The Certificate of Amendment was effective for state law purposes at 4:00 p.m. Eastern Time on April 2, 2026 (the “Effective Time”), after the close of trading on the Nasdaq Capital Market (“Nasdaq”), such that the Company’s common stock began trading on Nasdaq at market open on April 6, 2026, on a post-Reverse Split basis. As of the Effective Time, issued and outstanding shares of the Company’s common stock were automatically reclassified such that each 20 shares of pre-Reverse Split common stock became one share of common stock, with any fractional shares of common stock resulting being rounded up to the nearest whole share of common stock. The authorized number of shares, and par value per share, of the Company’s common stock were not affected by the Reverse Split. Compliance with Nasdaq Minimum Bid Price Requirement As previously disclosed, on May 6, 2025, the Company received written notice (the “Bid Price Notice”) from the Nasdaq Staff indicating that the Company was not in compliance with the Minimum Bid Price Requirement. The notification of noncompliance had no immediate effect on the listing or trading of the Company’s common stock on the Nasdaq Capital Market. The Bid Price Notice indicated that the Company was provided 180 calendar days, or until November 3, 2025, in which to regain compliance. On November 4, 2025, the Nasdaq Staff notified the Company of its determination that the Company was eligible for an additional 180-day period, or until May 1, 2026, to regain compliance with the Minimum Bid Price Requirement. On April 20, 2026, the Company received written notice from the Nasdaq Staff that the Company has regained compliance with the Minimum Bid Price Requirement and the matter has now been closed. Accordingly, the Company’s common stock continues to be listed and traded on the Nasdaq Capital Market. 2 Financial Overview For the three months ended March 31, 2026 and 2025, we generated revenues of $1,245,844 and $2,093,413, respectively, and reported a net loss from continuing operations of $1,976,715 and $3,070,031, respectively, and had net cash flows used in operating activities of continuing operations of $1,153,590 and $1,691,459, respectively. As noted in our unaudited consolidated financial statements, as of March 31, 2026, we had an accumulated deficit of $15,627,241. Results of Operations Comparison of Results of Operations for the Three Months Ended March 31, 2026 and 2025 The following table summarizes our operating results as reflected in our unaudited consolidated statements of operations and comprehensive loss for the three months ended March 31, 2026 and 2025, respectively, and provides information regarding the dollar and percentage increase (or decrease) during such periods. For the Three Months Ended March 31, 2026 2025 Variance % of % of Amount Revenues Amount Revenues Amount % Revenues $ 1,245,844 100.0 % $ 2,093,413 100.0 % $ (847,569 ) -40.5 % Cost of revenues 1,171,799 94.1 % 1,549,639 74.0 % (377,840 ) -24.4 % Gross profit 74,045 5.9 % 543,774 26.0 % (469,729 ) -86.4 % Operating expenses: Selling expenses 42,812 3.4 % 152,922 7.3 % (110,110 ) -72.0 % General and administrative expenses 1,571,734 126.2 % 1,581,205 75.5 % (9,471 ) -0.6 % Total operating expenses 1,614,546 129.6 % 1,734,127 82.8 % (119,581 ) -6.9 % Loss from continuing operations (1,540,501 ) -123.7 % (1,190,353 ) -56.8 % 350,148 29.4 % Other expenses (418,745 ) -33.6 % (1,840,070 ) -87.9 % (1,421,325 ) -77.2 % Loss from continuing operations before income tax expense (1,959,246 ) -157.3 % (3,030,423 ) -144.7 % (1,071,177 ) -35.3 % Income tax expense 17,469 1.4 % 39,608 1.9 % (22,139 ) -55.9 % Net loss from continuing operations (1,976,715 ) -158.7 % (3,070,031 ) -146.6 % (1,093,316 ) -35.6 % Loss from discontinued operations, net of income tax - 0.0 % (67,350 ) -3.2 % (67,350 ) -100.0 % Net loss (1,976,715 ) -158.7 % (3,137,381 ) -149.8 % (1,160,666 ) -37.0 % Less: net loss attributable to non-controlling interests (105,008 ) -8.4 % (50,389 ) -2.4 % 54,619 108.4 % Net loss attributable to HeartCore Enterprises, Inc. (1,871,707 ) -150.3 % (3,086,992 ) -147.4 % (1,215,285 ) -39.4 % Dividends accrued on Series A convertible preferred shares (27,968 ) -2.2 % - 0.0 % 27,968 100.0 % Net loss attributable to HeartCore Enterprises, Inc. common shareholders $ (1,899,675 ) -152.5 % $ (3,086,992 ) -147.4 % $ (1,187,317 ) -38.5 % Revenues Our revenues decreased by $847,569, or 40.5%, to $1,245,844 for the three months ended March 31, 2026 from $2,093,413 for the three months ended March 31, 2025, mainly attributable to a decreased revenue of $827,435 from customized software development and services in connection with the intense competition in the U.S. software market. Cost of Revenues Our cost of revenues decreased by $377,840, or 24.4%, to $1,171,799 for the three months ended March 31, 2026 from $1,549,639 for the three months ended March 31, 2025, mainly attributable to a decrease of $539,614 in the cost of customized software development and services, which was in light of the decrease in sales of respective revenues. Gross Profit Our gross profit decreased by $469,729, or 86.4%, to $74,045 for the three months ended March 31, 2026 from $543,774 for the three months ended March 31, 2025, mainly attributable to (i) a decrease of $298,720 in gross profit from our Go IPO consulting services, as we as spent more efforts and resources and incurred more outsourcing fees for Go IPO consulting services to enhance our Go IPO consulting customers experience with us, resulted in lower gross profit for our Go IPO consulting services; (ii) a decrease of $287,821 in customized software development and services in light of the decrease in customized software development and services revenues and the increase in respective cost in connection with the increasing subcontracting fees for outsourced software engineers due to the salary level increase in the overall software market; and offset by (iii) an increase of $116,812 in software development and other services provided by HeartCore Luvina due to the increase in software development and other services revenues and decrease in respective cost due to the cost control policy we implemented. For the reasons discussed above, our overall gross profit margin decreased by 20.1% to 5.9% for the three months ended March 31, 2026 from 26.0% for the three months ended March 31, 2025. 3 Selling Expenses Our selling expenses decreased by $110,110, or 72.0%, to $42,812 for the three months ended March 31, 2026 from $152,922 for the three months ended March 31, 2025, primarily attributable to a decrease of $95,668 in advertising and referral expenses, as we reduced certain marketing and referral activities and cancelled promotion campaigns with lower advertising performance. General and Administrative Expenses Our general and administrative expenses were $1,571,734 and $1,581,205 for the three months ended March 31, 2026 and 2025, respectively, and remained stable across periods with minor decrease. Other Expenses, Net Our other income (expenses) includes changes in fair value of investments in marketable securities, changes in fair value of investment in warrants, changes in fair value of derivative liability, interest income generated from bank deposits, interest expenses for loans, other income, and other expenses. Total other expenses, net decreased by $1,421,325, or 77.2%, to $418,745 for the three months ended March 31, 2026, from total other expenses, net of $1,840,070 for the three months ended March 31, 2025, primarily attributable to a decrease of $1,485,667 in changes of fair value of investments in marketable securities due to fair value measurement across periods. Income Tax Expense Our income tax expense were minimal, which were $17,496 and $39,608 for the three months ended March 31, 2026 and 2025, respectively, as we incurred pre-tax loss positions across periods. Loss from Discontinued Operations, Net of Income Tax On July 24, 2025, the Board of Directors of the Company approved to enter into a non-binding letter of intent to sell 100% of the outstanding shares of HeartCore Co., Ltd. On October 31, 2025, the Company entered into the HeartCore Japan Agreement with Smith Japan in relation to the sale of HeartCore Co., Ltd. The results of operations of HeartCore Co., Ltd. are reported as discontinued operations for all periods presented, as the sale of HeartCore Co., Ltd. represents a strategic shift that has a major impact on the Company’s operations and financial results. The HeartCore Co., Ltd. sale closed on October 31, 2025. We reported a loss from discontinued operations, net of income tax of $67,350 for the three months ended March 31, 2025. Net Loss Attributable to Non-controlling Interests We owned a 51% equity interest of Sigmaways and its subsidiaries and a 51% equity interest of HeartCore Luvina. Accordingly, we recorded net loss attributable to non-controlling interests of $105,008 and $50,389 for the three months ended March 31, 2026 and 2025, respectively. Dividends Accrued on Series A Convertible Preferred Shares On June 30, 2025, we issued 2,000 shares of Series A convertible preferred shares, which were granted a cumulative dividend of 10% per annum. Accordingly, we recorded dividends accrued on Series A convertible preferred shares of $27,968 and nil for the three months ended March 31, 2026 and 2025, respectively. Net Loss Attributable to HeartCore Enterprises, Inc. Common Shareholders As a result of the foregoing, we reported a net loss attributable to HeartCore Enterprises, Inc. common shareholders of $1,899,675 for the three months ended March 31, 2026, representing a $1,187,317, or 38.5%, decrease from a net loss attributable to HeartCore Enterprises, Inc. common shareholders of $3,086,992 for the three months ended March 31, 2025. 4 Liquidity and Capital Resources As of March 31, 2026, we had $774,033 in cash and cash equivalents, as compared to $1,985,962 as of December 31, 2025. We also had $572,547 in accounts receivable as of March 31, 2026. Our accounts receivable primarily include the balance due from customers for our customized software development and services accepted by customers. As of March 31, 2026, our working capital was $1,010,549. In assessing our liquidity, management monitors and analyzes our cash, our ability to generate sufficient revenues in the future, and our operating and capital expenditure commitments. The following table sets forth a summary of our cash flows for the periods indicated: For the Three Months Ended March 31, 2026 2025 Net cash flows used in operating activities of continuing operations $ (1,153,590 ) $ (1,691,459 ) Net cash flows provided by (used in) investing activities of continuing operations (954 ) 462,763 Net cash flows provided by (used in) financing activities of continuing operations (53,513 ) 162,855 Net cash flows used in discontinued operations - (318,949 ) Effect of exchange rate changes (3,872 ) 2,685 Net change in cash and cash equivalents (1,211,929 ) (1,382,105 ) Cash and cash equivalents, beginning of the period 1,985,962 2,121,089 Cash and cash equivalents, end of the period $ 774,033 $ 738,984 Cash Flows from Operating Activities of Continuing Operations Net cash flows used in operating activities of continuing operations was $1,153,590 for the three months ended March 31, 2026, primarily consisting of the following: ● Net loss from continuing operations of $1,976,715 for the three months ended March 31, 2026. ● Offset by loss of $295,997 on fair value changes in investments in marketable securities due to fair value measurement. ● Offset by a decrease of $135,238 in accounts receivable in line with the decrease in revenues. ● Offset by an increase of $154,736 in accrued payroll and other employee costs, primarily resulting from Sigmaways’s payroll delayed arrangement in response to its sales slowdown. Cash Flows from Investing Activities of Continuing Operations Net cash flows used in investing activities of continuing operations amounted to $954 for the three months ended March 31, 2026, for purchase of property and equipment. Cash Flows from Financing Activities of Continuing Operations Net cash flows used in financing activities of continuing operations amounted to $53,513 for the three months ended March 31, 2026, primarily consisting of $23,657 for repayment of insurance premium financing, $12,382 for repayment of long-term debts, and $11,474 for net repayment of factoring arrangement. 5 Contractual Obligations Lease Commitment The Company has entered into operating leases for office space. As of March 31, 2026, the future maturity of lease liabilities is as follows: Operating Year Ended December 31, Leases Remaining of 2026 $ 238,721 2027 283,420 2028 - 2029 - 2030 - Thereafter - Total lease payments 522,141 Less: imputed interest (2,478 ) Total lease liabilities 519,663 Less: current portion (308,119 ) Non-current lease liabilities $ 211,544 Debts The Company’s debts included long-term debts borrowed from a bank and a financial institution. As of March 31, 2026, future minimum principal payments for long-term debts were as follows: Year Ended December 31, Principal Payment Remaining of 2026 $ 38,216 2027 55,325 2028 60,471 2029 27,857 2030 9,973 Thereafter 294,750 Total $ 486,592 Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of March 31, 2026. 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 unaudited consolidated 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, 2026. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.