NASDAQ:HTCR
READ THE FULL HTCR RESEARCH REPORT
On August 14, 2024, HeartCore (NASDAQ:HTCR) reported 2nd quarter 2024 financial results which showed revenues below expectations despite 20% organic growth in the core software business. Revenues in the quarter were $4.1 million compared to $5.1 million in the 2nd quarter of 2023. The decrease was primarily due to a roughly 10% depreciation on the Japanese yen and a decrease in maintenance and support services as the company entered into a large maintenance service contract with a key customer in 2023. Also, the organic software business grew by more than 20%, the Sigmaways subsidiary recognized losses within its business. In addition, a Go IPO client returned its fees after discovering that it could not go public in the U.S markets.
Gross profit decreased to $0.8 million (19.8% gross margin) compared to $1.5 million (29.6% gross margin) in the prior year period. Operating expenses decreased to $2.3 million compared to $2.9 million in the same period last year. The decrease was primarily due to lower selling expenses and general and administrative expenses. Net loss was approximately ($1.9) million or $(0.09) per diluted share compared to a net income of ($0.9) million or ($0.04) per share in the prior year period.
During the 1st half of 2024, the company sold $9.0 million in warrants to a 3rd party. The warrants were related to Go IPO client SBC Medical Group. During the 2nd quarter of 2024, the $9.0 in proceeds were received which resulted in a net cash flow gain of $5.64 million after deducting referral fees of $3.36 million. Due to the specific accounting treatments and stipulations in the warrant agreement, HeartCore will not recognize the $9.0 million as revenue until the client becomes a publicly listed company, which is expected to occur in the 2nd half of 2024.
As of June 30, 2024, the company had a cash balance of $3.8 million compared to $1.0 million on December 31, 2023. Total value of equity and warrants was $1.3 million and total debt was $1.9 million.
HeartCore CEO Sumitaka Kanno Yamamoto stated, “We achieved significant strides in our Go IPO business, highlighted by the successful listing of one of our clients on the Nasdaq, which is the first Japanese IPO since September 2023 and the third IPO since the inception of this business. We are hopeful that this milestone marks the genesis of a second wave of Japanese IPOs, as the Go IPO pipeline continues to show promising developments. Currently, we have three to four clients scheduled to go public by the end of the year. These Go IPO deals are expected to be instrumental in our second-half performance, and with an optimistic outlook on the resurgence of Japanese IPOs, we anticipate that our Go IPO business will play a key role in driving profitable returns in the upcoming quarter.”
HeartCore’s Go IPO pipeline continues to remain strong, with three new client wins announced in 2024 which brings total client wins since the inception of this offering to 14. The company has received approximately $1.7 million in initial fees and received warrants between 2% and 3% from these new contract wins.
Recent News
➢ On July 24th, the company announced that one of its Go IPO client, BloomZ, had successfully commenced trading under the symbol “BLMZ” on the Nasdaq exchange. HeartCore was paid through an aggregate $500,000 in initial fees and warrants to acquire 4% of BloomZ’s common stock on a fully diluted basis, which total could total up to $2.08 million.
➢ On April 11, 2024, the company announced that it had signed an agreement with Koei Shoji Co., Ltd. for its 14th Go IPO consulting service win. As compensation for its services, HeartCore expects to generate an aggregate of $500,000 in initial fees. Also, HeartCore has received a warrant to acquire 3% of Koei Shoji’s common stock, on a fully diluted basis.
HeartCore CEO stated, “I am pleased to announce our 14th Go IPO contract win and third engagement of the year, a reflection of our effective marketing strategies to expand our consulting business across the Japanese markets. Despite a challenging 2023 IPO market, characterized by various uncontrollable macroeconomic and external headwinds that limited the potential of this business segment to fully blossom into our balance sheet, demand continues to remain lofty. Along with our marketing efforts, the depreciated yen against the dollar continues to attract many Japanese companies to pursue the U.S. equity markets. With a promising pipeline of Go IPO clients and deals, we look forward to reaping the financial rewards to bolster our revenue streams and facilitate further M&A opportunities within our software business.”
➢ On April 1, 2024, the company announced it had authorized a dividend payment in the amount of $0.02 per share which will total $417,283 to be paid by the company.
After evaluating the Company’s balance sheet and financial profile, HeartCore and its Board of Directors deemed it was in the best interest of the company and stockholders to declare the dividend. The record date for holders to participate in the dividend is April 26, 2024, and the payment date will be May 3, 2024. HeartCore may issue quarterly dividends going forward, contingent upon the financial results.
➢ On February 28, 2024, the company announced the establishment of HeartCore Luvina Vietnam, a joint venture with Luvina Software Joint Stock Company (“Luvina Software”), a Vietnam-based IT outsourcing and software development company.
The establishment of HeartCore Luvina Vietnam should catalyze synergies within HeartCore and its related companies to facilitate seamless sales generation. Luvina Software currently staffs 850 engineers and generates 100% of sales through contracts with Japanese corporations. Joining forces with HeartCore Luvina Vietnam presents an optimized pathway for an increase in sales and opportunities for business expansion beyond Japan. Further, HeartCore’s demand and involvement as a subcontractor for website construction projects continues to grow, increasing overall sales for the company.
HeartCore CEO Sumitaka Kanno Yamamoto stated, “I am pleased to announce our newly established joint venture company, HearrtCore Luvina Vietnam, which will significantly boost our efforts in expanding our global software business. Having worked closely with Luvina Software and its talented team over the past five years across various projects, we view this partnership as a critical next step in advancing and optimizing sales generation within our enterprise software business and group companies, specifically Sigmaways. The establishment of HeartCore Luvina Vietnam marks a pivotal move in our overarching global expansion efforts, presenting fresh avenues for growth abroad, particularly in the United States and Europe. We believe this strategic initiative will not only enhance our presence in key markets but also foster new opportunities for innovation and collaboration on an international scale.”
Go IPO
The Go IPO consulting offering, which was launched in April 2022, has already contributed meaningful value to HeartCore. Go IPO is a service that helps Japanese companies achieve a NASDAQ public listing in the U.S. This consulting service is based on the company’s own go-public experience as well as its general business expertise in navigating cross border issues between Japan and the U.S. From the Japanese market perspective, the company helps with audit attestation, underwriter exams and TSE related information and processes. For the U.S. markets, the company helps with auditor audit attestation for two years, reviews by the underwriter and their attorneys, as well as SEC confirmation. Go IPO performs the difficult task of converting Japanese accounting data to IFRS and U.S. GAAP accounting principles and works with the audit firm.
Since inception, Go IPO has signed 14 companies as clients, three of which have already gone public. The company receives a base consulting fee, often in the range of $500,000 to $900,000, as well as low cost warrants that are converted to shares once the IPO occurs. Revenue is recognized using mark-to-market accounting at the end of each quarter, and the recognized stock price for revenue recognition may be above or below the official IPO price.
The two client IPOs that have occurred created marketable securities for HeartCore that are valued at $300,000 as of June 30, 2024. The warrants that have been issued by remaining Go IPO clients are valued at $0.5 million as of the end of the 2nd quarter. The company has the flexibility to hold these shares and warrants as investments or to sell them as a source of capital.
Valuation and Estimates
We adjust our 2024 revenue estimate to $38.0 million to account for the expectations that certain Go IPO clients will go public in the 2nd half of 2024 which would result in material revenue recognition. Our 2024 EPS estimate is adjusted to $0.39, and our 2025 EPS estimate is now $0.27.
We adjust our target price to $2.75 at this time. The annualized dividend rate is approximately 10.81%.
We believe this to be a conservative estimate as revenue growth rates could greatly exceed our estimates as a result of better than expected client IPO revenues. There is also potential for gross margin improvements above our estimates. Our discount rate also utilizes a high equity risk premium to account for execution risks and possible macroeconomic disruptions.
The markets that HeartCore is focused on are expected to produce above average growth rates for an extended period of time. We expect the company’s revenues to grow at solid double-digit rates over the next 10 years.
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