Executive Summary / Key Takeaways

• Strategic Pivot Underway: HeartCore Enterprises is actively transforming, shifting its core software focus towards higher-margin on-premise and SaaS solutions, while expanding its unique "GO IPO" consulting services for Japanese companies seeking U.S. listings.
• Software-Driven Margin Expansion: The company demonstrated strong Q2 2025 revenue growth in on-premise software (up 72.54% QoQ) and SaaS, driving a significant 175.2% increase in gross profit and a 26.9 percentage point improvement in gross margin, reflecting the inherent operating leverage of its proprietary platforms.
• Major Asset Restructuring: A non-binding letter of intent to sell its wholly-owned operating subsidiary, HeartCore Japan, for approximately $12 million signals a significant portfolio re-alignment, potentially streamlining operations and bolstering liquidity.
• Capital Strengthening & Compliance: Recent agreements with Crom Structured Opportunities Fund I, LP for up to $25 million in equity and a $2 million Series A preferred stock issuance have strengthened the capital structure, enabling HeartCore to regain compliance with Nasdaq's minimum stockholders' equity requirement.
• Niche Player with AI Edge: Operating in a competitive landscape dominated by tech giants, HeartCore leverages its specialized customer experience (CXM) and digital transformation (DX) technologies, including a new AI recommendation engine integration, to carve out a niche, particularly in the Japanese enterprise market.

HeartCore's Dual Engine and Global Ambitions

HeartCore Enterprises, Inc., headquartered in Tokyo, Japan, is a software development and consulting services company that has been undergoing a significant strategic evolution. Founded in 2009 as HeartCore Co., Ltd. (HeartCore Japan), the company initially built its foundation on a comprehensive customer experience management (CXM) platform, a core offering for over 15 years. This platform encompasses marketing, sales, service, and content management systems, designed to help enterprises attract and engage customers. In 2021, HeartCore USA was incorporated in Delaware, acquiring HeartCore Japan in a recapitalization, setting the stage for broader ambitions.

Beyond its established CXM division, HeartCore has developed a digital transformation (DX) business, providing solutions like robotics process automation, process mining, and task mining. These tools are crucial for enterprises seeking to accelerate their digital journeys, tapping into the broader industry trend of increasing automation and data-driven efficiency. In a strategic diversification, HeartCore launched its "GO IPO" consulting business in early 2022, assisting Japanese companies in listing on U.S. exchanges like Nasdaq and NYSE. This unique service leverages HeartCore's understanding of both Japanese business culture and U.S. capital market requirements.

The company's geographic footprint has expanded with the acquisition of Sigmaways, Inc. in the U.S. in 2023, and the establishment of HeartCore Luvina in Vietnam in late 2023 for software development. This global expansion, coupled with a recent strategic pivot in Q2 2025 to prioritize on-premise software and SaaS revenue, underscores HeartCore's intent to capture higher-margin opportunities while streamlining its operational focus.

Technological Edge: The Power Behind HeartCore's Platforms

HeartCore's core technology lies in its proprietary CXM platform, a robust suite of tools that has matured over more than a decade and a half. This platform provides a comprehensive, integrated solution for managing the entire customer lifecycle, from initial engagement through service and support. The company's on-premise software, a key component of this platform, benefits from a development model where the product is independently created with fixed costs. This structure allows for significant operating leverage, meaning that as sales increase, the corresponding costs remain largely unchanged, leading to a dramatic increase in gross profit.

In the digital transformation space, HeartCore's offerings in robotics process automation (RPA), process mining, and task mining provide tangible benefits by automating repetitive tasks, analyzing business workflows for inefficiencies, and identifying areas for process improvement. These technologies aim to enhance operational efficiency and reduce manual errors for enterprise clients.

A significant technological differentiator emerged from HeartCore's partnership with Silver Egg Technology in June 2025. This collaboration integrates Silver Egg's "AI recommendation service, Aigent Recommender," directly into HeartCore's CMS platform. This move is expected to provide a "distinct competitive advantage," positioning HeartCore as an "early adopter in a largely untapped market for automated recommendation solutions." While specific quantifiable performance metrics for this integration are not yet disclosed, the strategic intent is clear: to enhance customer engagement, personalize experiences, and drive greater value for clients, thereby strengthening HeartCore's competitive moat and potentially increasing average selling prices (ASPs) or client retention. Furthermore, HeartCore initiated the development of a new product, "Global CMS," in late 2024, indicating ongoing investment in its core software offerings and a commitment to innovation.

Competitive Arena: A Niche Player Among Giants

HeartCore operates in a highly competitive software and consulting landscape, vying for market share against formidable global players such as Salesforce , Adobe , Oracle , and Microsoft . These tech giants boast immense scale, broad product portfolios, extensive ecosystems, and significantly larger R&D budgets. For instance, while HeartCore's TTM Gross Profit Margin stands at 61.80%, its larger competitors like Salesforce (77%), Adobe (89%), Oracle (71%), and Microsoft (69%) generally exhibit higher gross profitability, reflecting their mature, high-margin software businesses. HeartCore's Operating Profit Margin (3.77%) and negative Net Profit Margin (-0.62%) also lag significantly behind these industry leaders, which typically report robust positive margins.

HeartCore's strategic positioning is that of a specialized player, particularly strong in the Japanese enterprise market. Its competitive advantages stem from its ability to offer tailored CXM and DX solutions, with a holistic approach that integrates marketing, sales, and service, alongside specific tools like RPA. This customization and regional focus can provide greater efficiency in localized deployments and specific digital transformation tasks compared to the more generalized, albeit comprehensive, offerings of its larger rivals. The integration of AI-driven recommendation engines, as seen with the Silver Egg partnership, is a strategic move to create a unique value proposition and differentiate itself in a crowded market.

However, HeartCore faces vulnerabilities due to its smaller scale, which can lead to higher operational costs relative to revenue and potentially weaker cash flow compared to the efficiency achieved by giants like Microsoft . Its international visibility is lower, impacting its ability to capture market share globally. The slowdown in customized software development and services, particularly from its Sigmaways subsidiary, is a direct consequence of "intensified competition in the U.S. software market," prompting Sigmaways to "cut down its subcontracting cost... by ending cooperation with certain costly vendors for cost saving purpose." This demonstrates HeartCore's strategic response to competitive pressures through cost optimization. The company's significantly lower Price-to-Sales (P/S) ratio of 0.94, compared to Salesforce (CRM) (8.67), Adobe (ADBE) (10.73), Oracle (ORCL) (8.04), and Microsoft (MSFT) (13.12), reflects this difference in scale, profitability, and market perception.

Financial Performance: A Story of Strategic Re-alignment and Growth Pockets

HeartCore's financial results for the second quarter and six months ended June 30, 2025, reveal a company in transition, demonstrating both the challenges of its strategic pivot and the early successes of its re-alignment efforts. For the three months ended June 30, 2025, total revenues increased by 16.7% year-over-year to $4.74 million. This growth was primarily fueled by a substantial $1.16 million increase in on-premise software sales, driven by "multiple large orders of CMS license," and a $134,571 increase in SaaS revenue, attributed to increased efforts in Japan. This positive momentum was partially offset by a $340,279 decrease in customized software development and services revenue due to intense U.S. market competition and a $319,396 decrease in other software development services as resources were re-allocated.

The strategic shift towards higher-margin software offerings significantly impacted profitability. Gross profit surged by 175.2% to $2.22 million for Q2 2025, with the gross profit margin expanding by 26.9 percentage points to 46.7%. This improvement was largely due to the inherent operating leverage of on-premise software, where fixed development costs mean increased sales translate directly into higher gross profits. Cost of revenues decreased by 22.5% to $2.53 million, aided by Sigmaways' cost-cutting measures and improved operational efficiency in GO IPO consulting.

Operating expenses saw mixed trends. Selling expenses increased by 114.9% to $385,622, a direct result of "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." General and administrative expenses decreased by 22.7% to $1.56 million, primarily due to the full impairment of intangible assets from the Sigmaways acquisition at the end of 2024, eliminating subsequent amortization expenses, and the non-recurrence of certain broker fees. Research and development expenses rose by 45.1% to $161,481, reflecting investment in the new "Global CMS" product.

A notable turnaround occurred in other income/expenses, shifting from a net expense of $(776,077) in Q2 2024 to a net income of $950,479 in Q2 2025, largely due to favorable fair value changes in marketable securities and investment in warrants. Consequently, HeartCore reported a net income of $1.06 million for Q2 2025, a significant improvement from a net loss of $(2.21) million in the prior year period. For the six months ended June 30, 2025, total revenues decreased by 8.6% to $8.33 million, primarily due to fewer GO IPO projects and a slowdown in customized software development. However, the net loss for the six-month period narrowed by 43.7% to $(2.08) million, indicating progress in cost management and operational efficiency.

Liquidity and Capital Strategy: Fueling the Transformation

HeartCore's liquidity position saw a modest improvement, with cash and cash equivalents increasing to $2.35 million as of June 30, 2025, from $2.12 million at the end of 2024. Despite this, the company utilized $(2.67) million in net cash from operating activities for the six months ended June 30, 2025, an increase from $(1.74) million in the prior year. This operating cash burn was driven by the net loss, an increase in accounts receivable from higher software sales, and a decrease in accounts payable and deferred revenue.

To bolster its capital, HeartCore engaged in significant financing activities. Net cash provided by financing activities amounted to $1.77 million for the six-month period, largely from $1.80 million in net proceeds from the issuance of Series A convertible preferred stock and common shares. On June 30, 2025, the company entered into an Equity Purchase Agreement with Crom Structured Opportunities Fund I, LP, granting HeartCore the right, but not the obligation, to sell up to $25 million in common shares until June 30, 2027. Concurrently, a Securities Purchase Agreement resulted in the issuance of 2,000 shares of Series A Convertible Preferred Stock for $2 million, along with 750,000 common shares for no additional consideration. These preferred shares carry a 10% annual dividend and are convertible into common stock at 90% of the volume-weighted average price (VWAP). These agreements provide a crucial capital lifeline for the company's ongoing strategic initiatives and operational funding.

Investing activities provided $1.09 million in cash, primarily from the sale of $1.07 million in marketable securities. HeartCore also maintains an At-the-Market (ATM) offering agreement, through which it raised $30,445 during the six months ended June 30, 2025. While Sigmaways utilizes a factoring arrangement for its accounts receivable, this comes with recourse, meaning HeartCore is ultimately responsible for unpaid receivables, a risk personally guaranteed by Sigmaways' CEO.

Key Risks and Strategic Crossroads

HeartCore's investment thesis is not without significant risks, many of which stem from its growth stage and strategic re-alignment. A primary concern has been Nasdaq listing compliance. The company received a notice on May 6, 2025, regarding non-compliance with the $1.00 minimum bid price requirement, with a deadline of November 3, 2025, to regain compliance. Failure to do so could lead to delisting, though a reverse stock split remains an option. Separately, HeartCore received a notice on May 24, 2025, for non-compliance with the $2.5 million minimum stockholders' equity requirement. However, a positive development occurred on August 19, 2025, when HeartCore announced it had regained compliance with this equity requirement, largely due to the capital raised through the Crom Structured agreements.

Operational risks include the previously disclosed ineffectiveness of the company's disclosure controls and procedures as of June 30, 2025, a persistent issue that needs resolution to ensure robust financial reporting. The GO IPO consulting business, while unique, carries inherent volatility; its revenue can fluctuate based on the number of ongoing projects, and the non-cash warrant compensation is subject to fair value changes and the uncertainty of client IPOs. The slowdown in Sigmaways' customized software development revenue due to "intensified competition in the U.S. software market" highlights the challenges of competing against larger, more established players.

Perhaps the most significant strategic crossroads is the non-binding letter of intent to sell 100% of HeartCore Japan for approximately $12 million. While this potential divestiture could provide substantial cash and streamline operations, it introduces execution risk related to the sale's completion and price adjustment. The "One Big Beautiful Bill Act (OBBBA)" enacted in July 2025, with changes to U.S. corporate income tax, also presents an evolving regulatory landscape that HeartCore is currently evaluating for its impact on U.S. operations.

Conclusion

HeartCore Enterprises is in the midst of a profound strategic transformation, moving beyond its traditional Japanese software roots to embrace a more diversified, global, and higher-margin business model. The company's pivot towards on-premise and SaaS software, coupled with its distinctive GO IPO consulting services, is beginning to yield tangible results, as evidenced by the strong gross profit expansion in Q2 2025. The planned divestiture of HeartCore Japan for an estimated $12 million, alongside recent capital infusions, underscores a commitment to strategic re-alignment and financial strengthening.

While the competitive landscape remains challenging, HeartCore's focus on specialized CXM and DX technologies, enhanced by AI integration, positions it to capture niche opportunities. The successful resolution of the Nasdaq stockholders' equity compliance issue is a positive step, though the minimum bid price requirement remains a key watch item. HeartCore's ability to execute its strategic pivot, grow its higher-margin software segments, and realize value from its consulting arm and asset sales will be critical in determining its long-term success. Investors should monitor the progress of the HeartCore Japan sale, the continued growth of its core software and GO IPO businesses, and the effectiveness of its operational efficiency initiatives as the company strives to unlock its full potential.