UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
Commission file number: 001-41752
Earlyworks Co., Ltd.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Japan
(Jurisdiction of incorporation or organization)
5-7-11, Ueno, Taito-ku
Tokyo, Japan 110-0005
(Address of principal executive offices)
Satoshi Kobayashi, Chief Executive Officer and
Representative Director
Telephone: +81 03-5614-0978
Email: satoshi-k@e-arly.works
At the address of the Company set forth above
(Name, Telephone, E-mail and/or Facsimile number
and Address of Company Contact Person)
Securities registered or to be registered pursuant
to Section 12(b) of the Act.
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
American depositary shares, each
representing five ordinary shares | | ELWS | | The Nasdaq Stock Market LLC |
Ordinary shares* | | | | The Nasdaq Stock Market LLC |
* | Not
for trading, but only in connection with the registration of the American depositary shares on the NASDAQ Stock Market LLC. Each
American depositary share represents five ordinary shares. |
Securities registered or to be registered pursuant
to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each
of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 15,076,900 ordinary
shares.
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report,
indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large
accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer | ☐ | | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | | Emerging growth company | ☒ |
If an emerging growth company that prepares its
financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of
the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an
error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other ☐ |
If “Other” has been checked in response
to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐
Item 18 ☐
If this is an annual report, indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
TABLE OF CONTENTS
INTRODUCTION
In this annual report on Form 20-F, unless
the context otherwise requires, references to:
| ● | “ADRs”
are to the American Depositary Receipts that may evidence the ADSs (defined below); |
| ● | “ADSs”
are to the American Depositary Shares of Earlyworks Co., Ltd., each of which represents five Ordinary Shares (defined below); |
| ● | “Exchange
Act” are to the Securities Exchange Act of 1934, as amended; |
| ● | “Japanese
yen” or “JPY” are to the legal currency of Japan; |
| ● | “Nasdaq”
are to the Nasdaq Stock Market LLC; |
| ● | “Ordinary
Shares” are to the ordinary shares of Earlyworks Co., Ltd.; |
| ● | “SEC”
are to the United States Securities and Exchange Commission; |
| ● | “Securities
Act” are to the Securities Act of 1933, as amended; |
| ● | “U.S.”,
“US” or “United States” are to United States of America, its territories, its possessions and all areas subject
to its jurisdiction; |
| ● | “US$,”
“$,” “USD” or “U.S. dollars” are to the legal currency of the United States; and |
| ● | “we,”
“us,” “our,” “our Company,” or the “Company” are to Earlyworks Co., Ltd. |
This annual report on Form 20-F includes
our audited financial statements for the fiscal years ended April 30, 2024, 2023, and 2022. Our functional currency and reporting
currency is the Japanese yen. Convenience translations included in this annual report of Japanese yen into U.S. dollars have been made
at the exchange rate of JPY157.54= $1.00, which was the foreign exchange rate on April 30, 2024 as reported by the Board of Governors
of the Federal Reserve System (the “U.S. Federal Reserve”) in its weekly release on April 30, 2024. Historical and current
exchange rate information may be found at https://www.federalreserve.gov/releases/h10/hist/dat00_ja.htm.
We have made rounding adjustments to some of the
figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation
of the figures that precede them.
FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements
that reflect our current expectations and views of future events, all of which are subject to risks and uncertainties. Forward-looking
statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not
relate strictly to historical or current facts. You can find many (but not all) of these statements by the use of words such as “approximates,”
“believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,”
“intends,” “plans,” “will,” “would,” “should,” “could,” “may,”
or other similar expressions in this annual report. These statements are likely to address our growth strategy, financial results, and
future development programs. You must carefully consider any such statements and should understand that many factors could cause actual
results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks
and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future
results may vary materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements
include, but are not limited to:
| ● | assumptions about our future financial and operating results,
including revenue, income, expenditures, cash balances, and other financial items; |
| ● | our ability to execute our growth and expansion plan, including
our ability to meet our goals; |
| ● | current and future economic and political conditions; |
| ● | our ability to compete in our industry; |
| ● | our capital requirements and our ability to raise any additional financing which we may require; |
| ● | our ability to attract customers and further enhance our brand awareness; |
| ● | our ability to hire and retain qualified management personnel and key employees in order to enable us
to develop our business; |
| ● | trends in our industry; and |
| ● | other assumptions described in this annual report underlying or relating to any forward-looking statements. |
We describe certain material risks, uncertainties
and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.”
We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management
at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what
is expressed, implied, or forecast by our forward-looking statements. Accordingly, you should be careful about relying on any forward-looking
statements. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking
statements after the distribution of this annual report, whether as a result of new information, future events, changes in assumptions,
or otherwise.
Part I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
Item 3. KEY INFORMATION
A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Related to Our Business
Blockchain is a nascent and rapidly changing
technology and the use of blockchain technology in the commercial marketplace remains relatively small. The slowing or stopping of the
development or acceptance of blockchain technology may adversely affect our business.
Blockchain is an emerging technology that offers
new capabilities. The development of blockchain technology is a new and rapidly evolving industry that is subject to a high degree of
uncertainty. The capabilities of blockchain technology have not been fully confirmed. The utilization of blockchain technology may face
opposition by certain participants in the market, who may criticize blockchain technology for its slow processing speed, poor real-time
data processing capacity and burdensome learning costs, among other things. In addition, blockchain technology is subject to technical
risks such as forking. Most blockchain networks operate based on some form of open-source software. An open-source project is not represented,
maintained or monitored by an official organization or authority. Because of the nature of open-source software projects, it may be easier
for third parties not affiliated with the issuer to introduce weaknesses or bugs into the core infrastructure elements of the blockchain
network. This could result in the corruption of the open-source code which may result in the loss or theft of blockchain assets.
Factors affecting the further development of blockchain
industry include, without limitation:
| ● | continued
worldwide growth in the adoption and use of blockchain technology; |
| ● | the
maintenance and development of the open-source software protocol of blockchain networks; |
| ● | changes
in consumer demographics; |
| ● | changes
in public tastes and preferences; |
| ● | the
popularity or acceptance of blockchain networks and assets; and |
| ● | government
and quasi-government regulation of blockchain networks and assets, including any restrictions on access, operation and use of blockchain
networks and assets. |
Our business model is dependent on continued investment
in and development of the blockchain industry and related technologies. If investments in the blockchain industry become less attractive
to investors, innovators, and developers, or if blockchain networks and assets do not gain public acceptance or are not adopted and used
by a substantial number of individuals, companies and other entities, it could have a material adverse impact on our prospects and operations.
If we are unable to apply technology effectively
in driving value for our customers through blockchain-based solutions, our business could be adversely affected.
Our success depends on our ability to apply our
proprietary blockchain technology, Grid Ledger System (“GLS”), develop new services, and improve the performance and cost-effectiveness
of the existing services, in each case in ways that address current and anticipated customer requirements, industry needs and future trends.
Such success is dependent upon several factors, including technology effectiveness, functionality, competitive pricing, licensing and
integration with existing and emerging technologies. The blockchain industry is characterized by rapid technological changes. If we fail
to develop and implement technology solutions and technical expertise that keep pace with changes in technology, industry standards, and
customer preferences, our value proposition could be adversely affected. We may not be successful in anticipating or responding to these
developments on a timely and cost-effective basis and our ideas may not be accepted in the marketplace. The effort to gain technological
expertise and develop new technologies in our business may require us to incur significant expenses. In addition, GLS may not gain acceptance
or recognition in the market which is dominated by more established and conventional technologies, even though we believe GLS is superior
to the conventional blockchains. Our unique advantage created by GLS may be threatened by intensified competition in the market if our
competitors invent similar technologies in the future. Any of these events could result in a material adverse effect on our operating
results, customer relationships, and business.
We may not be able to adequately evaluate
the risks associated with the NFT platforms developed by us.
NFTs, or non-fungible tokens, are cryptographic
assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Similar to cryptocurrency,
NFTs are issued, stored, and traded on a blockchain network. Different from cryptocurrency, NFTs are unique and cannot be replaced with
other like-kind assets. Traditional digital products can be easily duplicated and distributed without the ability to determine their authenticity.
In comparison, NFTs are unique and can be distributed and traded with the ability to prove their authenticity and ownership. For example,
we were selected by Hakuhodo DY Music & Pictures Inc. (“Hakuhodo”) to develop a platform called Animap where Hakuhodo
sells its NFTs. Hakuhodo is the sole owner of Animap and independently manages the daily operation of Animap. Hakuhodo obtains permission
from copyright owners to convert their copyrighted works into NFTs, handles inquiries, complaints, purchase cancellations, refunds and
requests as well as provides other customer support for Animap users. We own certain intellectual property rights in the system used to
develop Animap. We do not own, operate or maintain Animap, nor do we have any custody, ownership interests or intellectual property rights
in the NFTs that are sold on Animap. We also developed another NFT trading platform for a different business partner. Such business partner
operates the platform and we produce the NFTs that are sold on the platform. We own the intellectual property rights in the platform and
the NFTs that we developed and created.
Because the market for NFTs is relatively nascent,
it is difficult to predict how the legal and regulatory framework around NFTs will develop and how such developments will impact us. Further,
market acceptance of NFTs is uncertain because buyers may be unfamiliar or uncomfortable with transacting in digital assets and assessing
the value of NFTs. The trading platforms developed by us are also subject to cybersecurity risks. For example, a perpetrator could seek
to obtain the private key associated with a digital wallet holding an NFT to access and sell the NFT without valid authorization, and
the owner of the NFT may have limited recourse due to the nature of blockchain transactions and of cybercrimes generally. In addition,
an unauthorized party may acquire the necessary credentials to access user accounts. The safeguards we have implemented or may implement
in the future to protect against cybersecurity threats may be insufficient. The occurrence of any of these risks could materially and
adversely affect our reputation and business.
The NFT platforms developed by us may expose
us to legal and regulatory risks.
Recently, the U.S. regulatory authorities have
signaled sanctions could apply to digital transactions and have pursued enforcement actions involving cryptocurrencies and digital asset
accounts. On August 28, 2023, the U.S Securities and Exchange Commission charged Impact Theory, LLC, a media and entertainment company
headquartered in Los Angeles, with conducting an unregistered offering of crypto asset securities in the form of purported NFTs. As a
result, Impact Theory, LLC was ordered to pay a combined total of more than $6.1 million in disgorgement, prejudgment interest, and civil
penalty. The nature of many NFT transactions involves circumstances which present higher risks for potential violations, such as anonymity,
subjective valuation, use of intermediaries, lack of transparency, and decentralization associated with blockchain technology, which have
implications on a wide range of liability issues. NFT transactions may be subject to laws governing virtual currency or money transmission.
NFT transactions also raise issues regarding compliance with laws of foreign jurisdictions, many of which present complex compliance issues
and may conflict with one another. The NFT platforms expose us to the foregoing risks, among others, any of which could materially and
adversely harm our business, financial condition, results of operations, reputation, and prospects.
Our technology is dependent on telecommunications
infrastructure and the performance of devices equipped with blockchain.
The success of our blockchain-based services will
depend on the continued development of a stable telecommunications infrastructure with the necessary speed, data capacity and security,
complementary products such as high-speed networking equipment for providing reliable internet access and services, and other devices
that are equipped with blockchain. There is no assurance that the relevant infrastructure and devices will continue to be able to support
the demands placed on it by the growth of blockchain technology. There is also no assurance that the infrastructure or complementary products
or services necessary to support the blockchain technology will be developed in a timely manner, or that such development will not incur
substantial costs to adapt to changing technologies. The failure of these platforms and devices or their development could materially
and adversely affect our business, financial condition and results of operation.
Cybersecurity incidents may materially and
adversely affect our business.
Security breaches, computer malware and computer
hacking attacks have been a prevalent concern since the launch of blockchain technology. To reduce security concerns, GLS employs intermediate
processing nodes, which are independent of the nodes that make up the blockchain network and process the actual transactions. Even if
the intermediate processing nodes are stopped, the transactions cannot be tampered with. To reduce the impact of attacks on intermediate
processing nodes and any unauthorized access, GLS allows the use of firewalls and other means to prevent cyberattacks, thereby providing
security. However, our security system and operational infrastructure may be breached due to the actions of outside parties, error or
malfeasance of an employee of ours, or otherwise. Techniques used to obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently and may be designed to remain dormant until a predetermined event. Outside parties may also attempt to fraudulently
induce employees of ours to disclose sensitive information in order to gain access to our infrastructure. Any such breach or unauthorized
access could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the services we
provide, which in turn could have an adverse effect on our business.
We may experience operational system failures
or interruptions that could materially harm our ability to conduct our operations.
We rely on the capacity, reliability and security
of third-party systems and software to support our operations. We employ Google Drive to process, transmit and store information as of
the date of this annual report. The systems of third-party providers may experience material interruptions or failures due to a variety
of events beyond our control, including but not limited to, natural disasters, telecommunications failures, employee or customer error
or misuse, targeted attacks, unauthorized access, fraud, computer viruses, denial of service attacks, terrorism, firewall or encryption
failures and other security problems. If any of the systems do not operate properly, are compromised or are disabled, we could suffer
an adverse impact on our operations.
If we are not able to successfully compete,
our business will be materially harmed.
We design, upgrade, and maintain technology systems
for our customers. We expect to encounter competition in our business, including from entities having substantially greater capital and
resources and offering a wider range of products and services. Many of our competitors may have greater financial, marketing, technological
and personnel resources than we do, and may offer a wider range of bundled services, have broader name recognition, and have larger customer
bases than we do.
Our ability to develop competitive advantages
will require continued improvement in GLS, enhancements to our services, investment in the development of our services, and additional
marketing activities. There can be no assurance that we will timely implement changes into our technology, that we will have resources
to make sufficient investments in the development of our services, that our competitors will not devote significantly more resources to
competing services, or that we will otherwise be successful in developing market share. If competitors offer superior services, or implement
changes in a timelier and more cost-effective manner, our market share could be affected, and this would adversely impact our business
and results of operations.
Competitors will likely attempt to imitate
our services and technology. If we are unable to protect or preserve our proprietary rights, our business may be harmed.
As our business continues to expand, our competitors
will likely imitate our services and technology. Only a portion of the intellectual property used in the operation of our business lines
is patentable, and therefore we rely on trade and service marks, copyrights, trade secrets, and other forms of intellectual property protection.
We also rely on confidentiality agreements with employees, consultants, third-party service providers, and others to protect our intellectual
property and proprietary rights.
Nevertheless, the steps we take to protect our
intellectual property and proprietary rights against infringement or other violation may be inadequate. There is no assurance that others
will not independently develop technology with the same or similar function to any proprietary technology that we rely on. We may experience
difficulty in effectively limiting the unauthorized use of our intellectual property and proprietary rights. We could incur significant
costs and management distraction in pursuing claims to enforce our intellectual property and proprietary rights through litigation. If
we are unable to protect or preserve the value of our intellectual property and proprietary rights for any reason, our brand and reputation
could be damaged and our business, financial condition, and results of operations could be materially adversely affected.
Negative publicity could damage our business.
Developing and maintaining our reputation is critical
to attracting and retaining customers and investors. Our success depends on our ability to successfully maintain and improve our technology
and systems to meet the functionality, performance, reliability and speed requirements of our customers. Negative publicity regarding
our Company, our technology, our key personnel, or blockchain technology generally, whether based upon fact, allegation or perception
and whether justified or not, could give rise to reputational risk which could significantly harm our business prospects.
If one or more competitors obtain patents
covering technology critical to the operation of our business, we may infringe on the intellectual property rights of others.
If one or more other persons, companies or organizations
has or obtains a valid patent covering technology critical to the operation of our business, there can be no assurance that such entity
would be willing to license such technology at acceptable prices or at all, which could have a material adverse effect on our business,
financial condition and results of operations.
Due to the fundamentally open-source nature of
blockchain technology, we may not always be able to determine that we are using or accessing protected information or software. In addition,
patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in scientific or
patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications
were filed. Because patents can take many years to issue, there may currently be pending applications of which we are unaware that may
later result in issued patents that our products or services infringe.
We could expend significant resources defending
against patent infringement and other intellectual property right claims, which could require us to divert resources away from our operations.
Any damages we are required to pay or injunctions against our continued use of such intellectual property in resolution of such claims
may cause a material adverse effect to our business, financial condition and results of operations.
If we are unable to successfully identify,
hire and retain skilled individuals, our business will be adversely affected.
Our growth is based, in part, on our ability to
attract and retain highly skilled professionals and software engineers. We aim to motivate and retain qualified employees. However, we
may face difficulties in recruiting and retaining employees of a caliber consistent with our business strategy because of competition
from other companies. If our employees are unsatisfied with what we offer, such as remuneration packages or working environment, we may
not be able to retain qualified employees or replace them with personnel of appropriate skill sets and personal attributes at comparable
costs. In such an event, we may need to expend additional resources to retain or replace suitable employees.
As of the date of this annual report, we are not
subject to any employment-related claims. However, we may be subject to various employment-related claims from time to time, such as individual
actions or government enforcement actions relating to wage-hour, labor standards, or healthcare and benefit issues. Such actions, if brought
against us and successful in whole or in part, may materially and adversely affect our business or results of operations.
The loss of key personnel could have a material
adverse effect on us.
Our success depends solely on the continued services
of key personnel, particularly our management and officers, who have extensive market knowledge and long-standing industry relationships.
Our management team collectively has experience working with corporations of various operating scales across different industries. Our
reputation among and our relationships with key customers are the result of a significant investment of time and effort by our management
to build credibility in a highly specialized industry. The loss of services of any member of management could diminish our business, growth
opportunities, and our relationships with key customers.
We could be the victim of employee misconduct.
There is a risk that our employees or contractors
could engage in fraud, conflicts of interest, unauthorized disclosure of confidential information, or other misconduct that adversely
affects our business. Furthermore, our employees could make errors in recording or executing transactions for customers which would cause
us to enter into transactions that customers may disavow and refuse to settle. It is not always possible to deter misconduct by our employees,
and the precautions we take to prevent and detect misconduct may not be effective in all cases. Our ability to detect and prevent errors
or misconduct by entities with which we do business may be even more limited. Such misconduct could subject us to financial losses and
materially harm our reputation, financial condition and operating results.
If our vendors and third-party service providers
experience difficulties, our business could be adversely affected.
We outsource some operational activities and depend
on relationships with vendors and third-party service providers. For example, we employ external engineers for certain outsourced systems
development and maintenance projects. Our operations could be interrupted or disrupted if our vendors and third-party service providers,
or even the vendors of such vendors and third-party service providers, experience operational or other systems difficulties, terminate
their service, fail to comply with regulations, raise their prices, or dispute key intellectual property rights sold or licensed to or
developed for our Company. If any of these events happen, and we are unable to replace vendors and service providers, on a timely basis
or at all, our operations could be interrupted. If an interruption were to continue for a significant period, our business, financial
condition and results of operations could be adversely affected. Even if we can replace vendors and third-party providers, it may be at
a higher cost, which could also adversely affect our business, financial condition and results of operations.
Our revenues are dependent on a limited
number of major customers, and the loss of any such customer or the inability of any such customer to make payments to us as due, could
have a material adverse effect on our business, results of operations and financial condition.
For the fiscal year ended April 30, 2024, we had
three customers that each contributed to over 10% of our total sales revenue, accounting for approximately 42.6%, 27.2%, and 21.5% of
our total sales revenue, respectively. For the fiscal year ended April 30, 2023, we had three customers that each contributed to
over 10% of our total sales revenue, accounting for approximately 42.9%, 24.1%, and 10.5% of our total sales revenue, respectively. For
the fiscal year ended April 30, 2022, we had two customers that each contributed to over 10% of our total sales revenue, accounting for
approximately 47.4% and 25.9% of our total sales revenue, respectively. Although we do not heavily rely upon any one customer for the
majority of our revenue, our revenue is dependent on a limited number of customers who account for a large percentage of our contractually
committed capacity. If one or more of our significant customers fail to make payments to us or do not honor their contractual commitments,
our revenue and results of operations would be materially and adversely affected.
In addition, our reliance on any significant customers
may give such customers a degree of pricing leverage against us when negotiating contracts and terms of services with us. The loss of
any of our major customers, or a significant decrease in the extent of the services that they outsource to us or the level of prices we
offer, could materially and adversely affect our financial condition and results of operations.
Any of our customers could experience a downturn
in their business, which in turn could result in their inability or failure to make timely payments to us pursuant to their contracts
with us. In the event of any customer default, our liquidity could be adversely impacted. These risks would be particularly significant
if one of our major customers were to experience adverse effects to its business and defaults under their contracts with us.
We may have difficulty executing our growth
strategy and maintaining our growth effectively.
Our growth requires additional investment in personnel,
facilities, information technology infrastructure, and financial and management systems and controls and may place a significant strain
on our management and resources. Our growth strategy also may subject us to increased legal, compliance and regulatory obligations. There
is no assurance that our growth efforts will be successful. We may not be able to implement important strategic initiatives in accordance
with our expectations, including that the strategic initiatives could result in additional unanticipated costs, which may result in an
adverse impact on our business and financial results. Unless our growth results in an increase in our revenues that is proportionate to
the increase in our costs associated with our growth, our future profitability could be adversely affected.
We intend to explore acquisitions, other
investments and strategic alliances. We may not be successful in identifying opportunities or in integrating the acquired businesses.
Any such transaction may not produce the results we anticipate, which could adversely affect our business.
We intend to explore and pursue acquisitions,
strategic partnerships, joint ventures and other alliances to strengthen our business and grow our Company in the future. The market for
acquisitions and strategic opportunities is highly competitive. In addition, these transactions entail numerous operational and financial
risks, including but not limited to difficulties in valuing acquired businesses, combining personnel and firm cultures, integrating acquired
products, services and operations, achieving anticipated synergies that were inherent in our valuation assumptions, exposure to unknown
material liabilities, the potential loss of key vendors, clients or employees of acquired companies, incurrence of substantial debt or
dilutive issuance of equity securities to pay for acquisitions, higher-than expected acquisition or integration costs, write-downs of
assets or impairment charges, increased amortization expenses and decreased earnings, revenue or cash flow from dispositions.
If we need to seek additional financing
but are not able to do so on commercially acceptable terms, our liquidity and financial condition will be adversely affected.
As of the date of this annual report, we have
entered into loan and credit agreements with financial lending institutions. For further details on our bank borrowings, see “Item
5. Operating And Financial Review And Prospects—B. Liquidity and Capital Resources.” The viability of our business is
dependent on the availability of adequate capital to develop and maintain our business. We will need to continue to invest in our operations
for the foreseeable future to carry out our business plan. If we do not attract customers and does not achieve the expected operating
results, we will need to seek additional financing or revise our business plan. Our ability to borrow additional funds may be impacted
by financial lending institutions’ ability or willingness to lend to us on commercially acceptable terms. If we have low levels
of operating cash flow together with limited access to capital or credit in the future, it could have an impact on our ability to meet
our capital requirements, invest in our software and infrastructure, engage in strategic initiatives, make acquisitions or strategic investments
in other companies, react to changing economic and business conditions, or repay our outstanding debt. Such outcomes could have an adverse
effect on our business, financial condition and operating results.
Operational risk may materially and adversely
affect our performance.
Operational risk is the risk of an adverse outcome
resulting from inadequate or failed internal processes, people, systems or external events. Our exposure to operational risk arises from
routine processing errors, as well as extraordinary incidents, such as major system failures or legal and regulatory matters. Because
our business lines are reliant on both technology and human expertise and execution, we are exposed to material operational risks arising
from a number of factors, including, but not limited to, human error, processing and communication errors, errors of third-party service
providers, counterparties or other third parties, failed or inadequate processes, design flaws and technology or system failures and malfunctions.
Operational errors or significant operational delays could have a materially negative impact on our ability to conduct its business or
service its clients, which could adversely affect our results of operations.
We may not have sufficient insurance to
cover potential losses and claims.
We currently maintain insurance coverage against
the risk of property damage caused by fires, lightning strikes, explosions, riots, vehicle collisions, thefts, and flooding. We also maintain
earthquake insurance coverage. While we believe that there have not been instances when we had to incur losses, damages, and liabilities
because of the lack of insurance coverage, there may be such instances in the future, which may in turn adversely affect our financial
condition and results of operations.
We may become involved in legal and other
proceedings from time to time and may suffer significant liabilities or other losses as a result.
Certain shareholders of the Company filed a lawsuit
in the Tokyo District Court against the Company and Mr. Satoshi Kobayashi, the Company’s Chief Executive Officer and Representative
Director. The complaint, which is dated December 18, 2023, was served on the Company and Mr. Kobayashi on January 12, 2024. The plaintiffs
alleged that Mr. Kobayashi violated Article 709 of the Japanese Civil Code by intentionally delaying or misrepresenting the procedures
necessary for the sale of shares, thereby unfairly depriving the plaintiffs of the opportunity to sell their shares on the Nasdaq market
at a higher price following the Company’s initial public offering, and that the Company shall be liable for damages caused by Mr.
Kobayashi in the discharge of his duties as the Company’s Representative Director under Article 350 of the Japanese Companies Act.
The plaintiffs sought monetary damages in the total amount of $2,925,747, plus interest and costs. From time to time, we may become
involved in other disputes with the provision of our services or other aspects of our business and operations, including labor disputes
with employees and contract disputes with our customers. These disputes may lead to legal or other proceedings and may result in substantial
costs and diversion of resources and management’s attention. Disputes and legal and other proceedings may require substantial time
and expense to resolve, which could divert valuable resources, such as management time and working capital, delay our planned projects,
and increase our costs. Third parties that are found liable to us may not have the resources to compensate us for our incurred costs and
damages. We could also be required to pay significant costs and damages if we do not prevail in any such disputes or proceedings.
General economic, political and market conditions
may have an adverse impact on our operating performance, results of operations and cash flow.
Our business is influenced by a range of factors
that are beyond our control including general economic and business conditions and legal, regulatory, and political developments. Challenging
economic conditions worldwide have from time to time contributed, and may continue to contribute, to slowdowns in the information technology
industry at large. Weakness in the economy could have a negative effect on our business, operations and financial condition, including
decreases in revenue and operating cash flow, and inability to attract future equity and debt financing on commercially reasonable terms.
Additionally, in a down-cycle economic environment, we may experience the negative effects of a slowdown in the usage of our blockchain
technology. The impact of global events, including the ongoing conflict between Russia and Ukraine and the armed conflict between Israel
and Hamas-led Palestinian militant groups, may also negatively impact our Company.
Our business may be adversely affected by
the impact of coronavirus, other epidemics or pandemics, acts of God, wars, insurrections, riots, infrastructure failures, and other force
majeure events.
Public health epidemics or outbreaks could adversely
impact our business. In addition, acts of terrorism, labor activism or unrest, and other geo-political unrest could cause disruptions
in the business, the businesses of partners, or the economy as a whole. In the event of a natural disaster, including a major earthquake,
blizzard, or hurricane, or a catastrophic event such as a fire, power loss, or telecommunications failure, we may be unable to continue
operations and may endure system interruptions, reputational harm, delays in development of our systems, lengthy interruptions in service,
breaches of data security, and loss of critical data, all of which could have an adverse effect on future operating results.
The regulatory regimes governing blockchain
technologies are uncertain, and new regulations or policies may materially adversely affect the development of blockchain.
Initially, it was unclear how blockchain technologies
and the businesses and activities utilizing such technologies would fit into the current web of government regulation. As blockchain technologies
have grown in popularity and in market size, international, federal, state and local regulatory agencies have begun to clarify their position.
Various legislative and executive bodies in the United States and in other countries have shown that they intend to adopt legislation
to regulate blockchain technologies. However, according to our Japanese legal counsel, there are no laws or regulations in Japan that
restrict or regulate blockchain technologies per se as of the date of this annual report.
New or changing laws and regulations or interpretations
of existing laws and regulations may materially and adversely impact the development and growth of blockchain technologies. The imposition
of restrictions on blockchains could adversely affect our business.
Our compliance and risk management programs
might not be effective and may result in outcomes that could adversely affect our reputation, financial condition and operating results.
Our ability to comply with applicable laws and
rules is largely dependent on our establishment and maintenance of compliance, review and reporting systems, as well as our ability to
attract and retain qualified compliance and other risk management personnel. There is no assurance that our compliance policies and procedures
will always be effective or that we will always be successful in monitoring or evaluating our risks. In the case of alleged non-compliance
with applicable laws or regulations, we could be subject to investigations and judicial or administrative proceedings that may result
in substantial penalties or civil lawsuits, including by customers, for damages, which could be significant. Any of these outcomes may
adversely affect our reputation, financial condition and operating results.
We have limited experience operating as
a public company.
We have limited experience conducting our operations
as a public company. We may encounter operational, administrative, and strategic difficulties as a public company. This may cause us to
react more slowly than our competitors to industry changes and may divert our management’s attention from running our business or
otherwise harm our operations. In addition, as a public company, our management team need to develop the expertise necessary to comply
with the numerous regulatory and other requirements applicable to public companies, including requirements relating to corporate governance
and investor relationships issues, and our management have to evaluate our internal controls system with new thresholds of materiality,
and may implement necessary changes to our internal controls system. We cannot guarantee that we will be able to do so in a timely and
effective manner.
The requirements of being a public company
may strain our resources and divert management’s attention.
As a public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing
requirements of Nasdaq, and other applicable securities rules and regulations. Despite recent reforms made possible by the Jumpstart Our
Business Startups Act of 2012, as amended, or the JOBS Act, compliance with these rules and regulations has nonetheless increased and
will continue to increase our legal, accounting, and financial compliance costs and investor relations and public relations costs, make
some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are
no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual reports and reports
of foreign private issuer with respect to our business and operating results as well as proxy statements.
As a result of disclosure of information in the
Form 20-F and in filings required of a public company, our business and financial condition are more visible, which we believe may result
in an increased likelihood of threatened or actual litigation, including by competitors and other third parties. If such claims are successful,
our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these
claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business,
brand and reputation, and results of operations.
Risks Related to Our Ordinary Shares and the
Trading Market
Share ownership is concentrated in the hands
of our management, who are able to exercise a direct or indirect controlling influence on us.
As of the date of this annual report, our directors
and executive officers together beneficially own more than a majority of our 15,076,900 Ordinary Shares outstanding. These shareholders,
acting together, have significant influence over all matters that require approval by our shareholders, including the election of directors
and approval of significant corporate transactions. Corporate action might be taken even if other shareholders oppose them. This concentration
of ownership might also have the effect of delaying or preventing a change of control of our Company that other shareholders may view
as beneficial.
The sale or availability for sale of substantial
amounts of the ADSs could adversely affect their market price.
Sales of a substantial amount of the ADSs in the
public market, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially
impair our ability to raise capital through equity offerings in the future. As of the date of this annual report, 15,076,900 Ordinary
Shares are issued and outstanding, and 1,025,740 ADSs (representing 5,128,700 Ordinary Shares) are issued, outstanding and freely tradeable.
We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the
availability of these securities for future sale will have on the market price of the ADSs.
If securities or industry analysts do not
publish research or reports about our business, or if they publish a negative report regarding the ADSs, the price of the ADSs and trading
volume could decline.
Any trading market for the ADSs may depend in
part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over
these analysts. If one or more of the analysts who cover us downgrade us, the price of the ADSs would likely decline. If one or more of
these analysts cease coverage of our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets,
which could cause the price of the ADSs and the trading volume to decline.
The market price of the ADSs may be volatile
or may decline regardless of our operating performance.
The market price of the ADSs may fluctuate significantly
in response to numerous factors, many of which are beyond our control, including:
| ● | actual
or anticipated fluctuations in our revenue and other operating results; |
| ● | the
financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections; |
| ● | actions
of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow
our company, or our failure to meet these estimates or the expectations of investors; |
| ● | announcements
by us or our competitors of significant products, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital
commitments; |
| ● | price
and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; |
| ● | the
trading volume of the ADSs on Nasdaq; |
| ● | sales
of the ADSs or Ordinary Shares by us, our executive officers and directors, or our shareholders or the anticipation that such sales may
occur in the future; |
| ● | lawsuits
threatened or filed against us; and |
| ● | other
events or factors, including those resulting from war or incidents of terrorism, or responses to these events. |
In addition, stock markets have experienced extreme
price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock
prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In
the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved
in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business,
and adversely affect our business.
If we fail to implement and maintain an
effective system of internal control, we may fail to meet our reporting obligations or be unable to accurately report our results of operations
or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.
As a public company in the United States, we are
subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires that we
include a report of management on our internal control over financial reporting in our annual report on Form 20-F. In addition, once we
cease to be an “emerging growth company,” as such term is defined in the JOBS Act, our independent registered public accounting
firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that
our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over
financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may
issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented,
designed, operated, or reviewed, or if it interprets the relevant requirements differently from us. In addition, our reporting obligations
may place a significant strain on our management, operational, and financial resources and systems for the foreseeable future. We may
be unable to complete our evaluation testing and any required remediation in a timely manner.
During the course of documenting and testing our
internal control procedures, in order to satisfy the requirements of Section 404, we may identify weaknesses and deficiencies in our internal
control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as
these standards are modified, supplemented, or amended from time to time, we may not be able to conclude on an ongoing basis that we have
effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal
control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which
would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital
markets, harm our results of operations, and lead to a decline in the trading price of the ADSs. Additionally, ineffective internal control
over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting
from Nasdaq, regulatory investigations, and civil or criminal sanctions. We may also be required to restate our financial statements for
prior periods. See “Item 15. Controls And Procedures” for more information.
As a foreign private issuer, we have followed
home country practice even though we are considered a “controlled company” under Nasdaq corporate governance rules, which
could adversely affect our public shareholders.
As of the date of this annual report, Mr. Satoshi
Kobayashi, our Chief Executive Officer and Representative Director, owns more than a majority of the voting power of our outstanding Ordinary
Shares. Under the Nasdaq corporate governance rules, a company of which more than 50% of the voting power is held by an individual, group,
or another company is a “controlled company” and may elect not to comply with certain Nasdaq corporate governance standards,
including the requirements that:
| ● | a
majority of its board of directors consist of independent directors; |
| ● | its
director nominations be made, or recommended to the full board of directors, by its independent directors or by a nominations committee
that is comprised entirely of independent directors and that it adopt a written charter or board resolution addressing the nominations
process; and |
| ● | it
has a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s
purpose and responsibilities. |
As a foreign private issuer, however, Nasdaq corporate
governance rules allow us to follow corporate governance practice in our home country, Japan, with respect to appointments to our board
of directors and committees. We have followed home country practice as permitted by Nasdaq rather than rely on the “controlled company”
exception to the corporate governance rules. See “—Because we are a foreign private issuer and have taken advantage of
exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you have less protection than you would have
if we were a domestic issuer.” Accordingly, you do not have the same protections afforded to shareholders of companies that
are subject to all of the corporate governance requirements of Nasdaq.
We do not intend to pay dividends for the
foreseeable future.
We currently intend to retain most, if not all,
of our available funds and any future earnings to fund the operation, development, and growth of our business and, as a result, we do
not expect to declare or pay any dividends in the foreseeable future. Therefore, you should not rely on an investment in the ADSs as a
source for any future dividend income. Accordingly, the return on your investment in the ADSs likely depends entirely upon any future
price appreciation of the ADSs. There is no assurance that the ADSs will appreciate in value or even maintain the price at which you purchased
the ADSs. You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.
Rights of shareholders under Japanese law
may be different from rights of shareholders in other jurisdictions.
Our amended articles of incorporation and the
Companies Act of Japan (Act No. 86 of 2005, as amended), or the Companies Act, govern our corporate affairs. Legal principles relating
to matters such as the validity of corporate procedures, directors’ and executive officers’ fiduciary duties, and obligations
and shareholders’ rights under Japanese law may be different from, or less clearly defined than, those that would apply to a company
incorporated in any other jurisdiction. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights
under the law of other countries. For example, under the Companies Act, only holders of 3% or more of our total voting rights or our outstanding
shares are entitled to examine our accounting books and records. Furthermore, there is a degree of uncertainty as to what duties the directors
of a Japanese joint-stock corporation may have in response to an unsolicited takeover bid, and such uncertainty may be more pronounced
than that in other jurisdictions.
As holders of ADSs, you may have fewer rights
than holders of our Ordinary Shares and must act through the depositary to exercise those rights.
The rights of shareholders under Japanese law
to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting
books and records, and exercising appraisal rights, are available only to shareholders of record. ADS holders are not shareholders of
record. The depositary, through its custodian agents, is the record holder of our Ordinary Shares underlying the ADSs. ADS holders are
not able to bring a derivative action, examine our accounting books and records, or exercise appraisal rights through the depositary.
Holders of ADSs may exercise their voting rights
only in accordance with the provisions of the deposit agreement. If we instruct the depositary to ask for your voting instructions, upon
receipt of voting instructions from the ADS holders in the manner set forth in the deposit agreement, the depositary will make efforts
to vote the Ordinary Shares underlying the ADSs in accordance with the instructions of the ADS holders. The depositary and its agents
may not be able to send voting instructions to ADS holders or carry out their voting instructions in a timely manner. Furthermore, the
depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote
is cast, or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote.
Direct acquisition of our Ordinary Shares,
in lieu of ADSs, is subject to a prior filing requirement under the amendments in 2019 to the Japanese Foreign Exchange and Foreign Trade
Act of Japan and related regulations.
Under the amendments in 2019 to the Foreign Exchange
and Foreign Trade Act of Japan (Act No. 228 of 1949, as amended) (“FEFTA”) and related regulations, direct acquisition of
our Ordinary Shares, in lieu of ADSs, by a Foreign Investor (as defined herein under “Item 10. Additional Information—D.
Exchange Controls”) could be subject to the prior filing requirement under FEFTA, regardless of the number of shares to be acquired.
A Foreign Investor wishing to acquire direct ownership of our Ordinary Shares, rather than ADSs, will be required to make a prior filing
with the relevant governmental authorities through the Bank of Japan and wait until clearance for the acquisition is granted by the applicable
governmental authorities, which approval may take up to 30 days and could be subject to further extension. Without such clearance, the
Foreign Investor will not be permitted to acquire our Ordinary Shares directly.
A prior filing requirement as set forth above
is not triggered for acquiring or trading the ADSs since the depositary received clearance for the acquisition of our Ordinary Shares
underlying the ADS in June 2023. In addition, any Foreign Investor expecting to receive delivery of our Ordinary Shares upon surrender
of ADSs must also obtain pre-clearance from the applicable Japanese governmental authority prior to accepting delivery, which approval
may take up to 30 days and could be subject to further extension. Although such prior filing requirement is not triggered for trading
the ADSs once the depositary receives clearance for the deposit of the underlying Ordinary Shares, we cannot assure you that there will
not be delays for additional Foreign Investors who wish to acquire our Ordinary Shares or for holders of the ADSs who are Foreign Investors
and who wish to surrender their ADSs and acquire the underlying Ordinary Shares. In addition, we cannot assure you that the applicable
Japanese governmental authorities will grant such clearance in a timely manner or at all.
The discussion above is not exhaustive of all
possible foreign exchange controls requirements that may apply to a particular investor, and potential investors are advised to satisfy
themselves as to the overall foreign exchange controls consequences of the acquisition, ownership and disposition of our Ordinary Shares
or the ADSs by consulting their own advisors. For a more detailed discussion on the requirements and procedures regarding the prior notifications
under the Foreign Exchange Regulations, see “Item 10. Additional Information—D. Exchange Controls.”
ADS holders may not be entitled to a jury
trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in
any such action.
The deposit agreement governing the ADSs representing
our Ordinary Shares provides that, to the fullest extent permitted by applicable law, owners and holders of ADSs irrevocably waive the
right to a jury trial for any claim that they may have against us or the depositary arising from or relating to our Ordinary Shares, the
ADSs, or the deposit agreement, including any claim under the U.S. federal securities laws.
However, ADS holders will not be deemed, by agreeing
to the terms of the deposit agreement, to have waived our or the depositary’s compliance with U.S. federal securities laws and the
rules and regulations promulgated thereunder. In fact, ADS holders cannot waive our or the depositary’s compliance with U.S. federal
securities laws and the rules and regulations promulgated thereunder. If we or the depositary opposed a demand for jury trial relying
on jury trial waiver mentioned above, it is up to the court to determine whether such waiver was enforceable considering the facts and
circumstances of that case in accordance with the applicable state and federal law.
If this jury trial waiver provision is prohibited
by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge,
the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court or by
the United States Supreme Court. Nonetheless, we believe that a jury trial waiver provision is generally enforceable under the laws of
the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York. In determining whether
to enforce a jury trial waiver provision, New York courts will consider whether the visibility of the jury trial waiver provision within
the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the
case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in
order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s negligence in failing to
liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim, none of which we believe are applicable
in the case of the deposit agreement or the ADSs. If you or any other owners or holders of ADSs bring a claim against us or the depositary
relating to the matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other
owner or holder may not have the right to a jury trial regarding such claims, which may limit and discourage lawsuits against us or the
depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice
of the applicable trial court, which would be conducted according to different civil procedures and may have different outcomes compared
to that of a jury trial, including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if the jury trial waiver provision
is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No
condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any owner or holder of ADSs or by us or the
depositary of compliance with any substantive provision of U.S. federal securities laws and the rules and regulations promulgated thereunder.
Holders of ADSs may not receive distributions
on our Ordinary Shares or any value for them if it is illegal or impractical to make them available to such holders.
Subject to the terms of the deposit agreement,
the depositary has agreed to pay holders of ADSs the cash dividends or other distributions it or the custodian for the ADSs receives on
the Ordinary Shares or other deposited securities after deducting its fees and expenses and any taxes or other government charges. Holders
of ADSs will receive these distributions in proportion to the number of our Ordinary Shares that such ADSs represent. However, the depositary
is not responsible for making such payments or distributions if it is unlawful or impractical to make a distribution available to any
holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require
registration under the Securities Act, but that are not properly registered or distributed pursuant to an applicable exemption from registration.
The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration
required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other
action to permit distributions on our Ordinary Shares to holders of ADSs. This means that holders of ADSs may not receive the distributions
we make on our Ordinary Shares if it is illegal or impractical to make them available to such holders. These restrictions may materially
reduce the value of the ADSs.
Holders of ADSs may be subject to limitations
on transfer of their ADSs.
ADSs are transferable on the books of the depositary.
However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance
of its duties. In addition, the depositary may refuse to deliver, transfer, or register transfers of ADSs generally when our books or
the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement
of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
We may amend the deposit agreement without
consent from holders of ADSs and, if such holders disagree with our amendments, their choices will be limited to selling the ADSs or cancelling
and withdrawing the underlying Ordinary Shares.
We may agree with the depositary to amend the
deposit agreement without consent from holders of ADSs. If an amendment increases fees to be charged to ADS holders or prejudices a substantial
existing right of ADS holders, it will not become effective until 30 days after the depositary notifies ADS holders of the amendment.
At the time an amendment becomes effective, ADS holders are considered, by continuing to hold their ADSs, to have agreed to the amendment
and to be bound by the amended deposit agreement. If holders of ADSs do not agree with an amendment to the deposit agreement, their choices
will be limited to selling the ADSs or cancelling and withdrawing the underlying Ordinary Shares. No assurance can be given that a sale
of ADSs could be made at a price satisfactory to the holder in such circumstances.
We are incorporated in Japan, and it may
be more difficult to enforce judgments obtained in courts outside Japan.
We are incorporated in Japan as a joint-stock
corporation with limited liability. All of our directors are non-U.S. residents, and a substantial portion of our assets and the personal
assets of our directors and executive officers are located outside the United States. As a result, when compared to a U.S. company, it
may be more difficult for investors to effect service of process in the United States upon us or to enforce against us, our directors
or executive officers, judgments obtained in U.S. courts predicated upon civil liability provisions of the federal or state securities
laws of the U.S. or similar judgments obtained in other courts outside Japan. There is doubt as to the enforceability in Japanese courts,
in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon the federal
and state securities laws of the United States.
Dividend payments and the amount you may
realize upon a sale of our Ordinary Shares or the ADSs that you hold will be affected by fluctuations in the exchange rate between the
U.S. dollar and the Japanese yen.
Cash dividends, if any, in respect of our Ordinary
Shares represented by the ADSs will be paid to the depositary in Japanese yen and then converted by the depositary or its agents into
U.S. dollars, subject to certain conditions and the terms of the deposit agreement. Accordingly, fluctuations in the exchange rate between
the Japanese yen and the U.S. dollar will affect, among other things, the amounts a holder of ADSs will receive from the depositary in
respect of dividends, the U.S. dollar value of the proceeds that a holder of ADSs would receive upon sale in Japan of our Ordinary Shares
obtained upon cancellation and surrender of ADSs and the secondary market price of ADSs. Such fluctuations will also affect the U.S. dollar
value of dividends and sales proceeds received by holders of our Ordinary Shares.
If we cease to qualify as a foreign private
issuer, we would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers,
and we would incur significant additional legal, accounting, and other expenses that we would not incur as a foreign private issuer.
As a foreign private issuer, we are exempt from
the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our executive officers, directors, and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently
or as promptly as United States domestic issuers, and we are not required to disclose in our periodic reports all of the information that
United States domestic issuers are required to disclose. We may cease to qualify as a foreign private issuer in the future, in which case
we would incur significant additional expenses that could have a material adverse effect on our results of operations.
Because we are a foreign private issuer
and have taken advantage of exemptions from certain Nasdaq corporate governance standards applicable to U.S. issuers, you have less protection
than you would have if we were a domestic issuer.
Nasdaq listing rules require listed companies
to have, among other things, a majority of its board members be independent. As a foreign private issuer, however, we are permitted to,
and we have followed home country practice in lieu of the above requirements. The corporate governance practice in our home country, Japan,
does not require a majority of our board to consist of independent directors. Thus, although a director must act in the best interests
of the company, it is possible that fewer board members will be exercising independent judgment and the level of board oversight on the
management of our company may decrease as a result. In addition, Nasdaq listing rules also require U.S. domestic issuers to have an audit
committee and a compensation committee and a nominating/corporate governance committee composed entirely of independent directors, and
an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to these requirements. Consistent
with corporate governance practices in Japan, we do not have a standalone compensation committee or nomination and corporate governance
committee of our board. As a result of these exemptions, investors would have less protection than they would have if we were a domestic
issuer.
If we cannot satisfy the continued listing
requirements and other rules of Nasdaq, the ADSs may be delisted, which could negatively impact the price of the ADSs and your ability
to sell them.
In order to maintain our listing on Nasdaq, we
are required to comply with the continued listing requirements and other rules of Nasdaq. If we are unable to satisfy Nasdaq criteria
for maintaining our listing, the ADSs could be subject to delisting. If Nasdaq subsequently delists the ADSs from trading, we could face
significant consequences, including:
| ● | a
limited availability for market quotations for the ADSs; |
| ● | reduced
liquidity with respect to the ADSs; |
| ● | a
determination that the ADS is a “penny stock,” which will require brokers trading in the ADSs to adhere to more stringent
rules and possibly result in a reduced level of trading activity in the secondary trading market for the ADSs; |
| ● | limited
amount of news and analyst coverage; and |
| ● | a
decreased ability to issue additional securities or obtain additional financing in the future. |
We are an “emerging growth company”
within the meaning of the Securities Act, and we have taken advantage of certain exemptions from disclosure requirements available to
emerging growth companies, which will make it more difficult to compare our performance with other public companies.
We are an “emerging growth company”
within the meaning of the Securities Act, as modified by the JOBS Act. Section 102(b)(1) of the JOBS Act exempts emerging growth companies
from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not
had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act)
are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out
of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election
to opt out is irrevocable. We have elected not to opt out of such an extended transition period, which means that when a standard is issued
or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new
or revised standard at the time private companies adopt the new or revised standard. This will make comparison of our financial statements
with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the
extended transition period difficult or impossible because of the potential differences in accounting standards used.
Because we are an “emerging growth
company,” we may not be subject to requirements that other public companies are subject to, which could affect investor confidence
in us and the ADSs.
For as long as we remain an “emerging growth
company,” as defined in the JOBS Act, we have elected to take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not
being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and exemptions from the requirements of shareholder approval of any golden
parachute payments not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without
information or rights available to shareholders of other public companies. If some investors find the ADSs less attractive as a result,
there may be a less active trading market for the ADSs and the ADS price may be more volatile.
If we are classified as a passive foreign
investment company, United States taxpayers who own the ADSs or our Ordinary Shares may have adverse United States federal income tax
consequences.
A non-U.S. corporation such as ourselves will
be classified as a passive foreign investment company (“PFIC”) for any taxable year if, for such year, either:
| ● | at
least 75% of our gross income for the year is passive income; or |
| ● | the
average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which
are held for the production of passive income is at least 50%. |
Passive income generally includes dividends, interest,
rents and royalties (other than rents or royalties derived from the active conduct of a trade or business), and gains from the disposition
of passive assets.
If we are determined to be a PFIC for any taxable
year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds the ADSs or our Ordinary Shares, the U.S.
taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
Based on our operations and the composition of
our assets, we do not believe we were a PFIC for our 2024 taxable year. However, it is possible that, for our 2025 taxable year or for
any subsequent year, more than 50% of our assets may be assets which produce passive income, in which case we would be deemed a PFIC,
which could have adverse U.S. federal income tax consequences for U.S. taxpayers who are shareholders. We will make this determination
following the end of any particular tax year.
The classification of certain of our income as
active or passive, and certain of our assets as producing active or passive income, and hence whether we are or will become a PFIC, depends
on the interpretation of certain United States Treasury Regulations as well as certain IRS guidance relating to the classification of
assets as producing active or passive income. Such regulations and guidance are potentially subject to different interpretations. If due
to different interpretations of such regulations and guidance the percentage of our passive income or the percentage of our assets treated
as producing passive income increases, we may be a PFIC in one or more taxable years.
U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS
ABOUT THE PFIC RULES, THE POTENTIAL APPLICABILITY OF THESE RULES TO THE COMPANY CURRENTLY AND IN THE FUTURE, AND THEIR FILING OBLIGATIONS
IF THE COMPANY IS A PFIC.
Item 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Corporate History and Structure
We were incorporated in Japan on May 1, 2018 as
a joint-stock corporation with limited liability pursuant to the laws of Japan. As of the date of this annual report, we do not have any
subsidiaries.
Corporate Information
Our principal executive office is located at 5-7-11,
Ueno, Taito-ku, Tokyo, Japan 110-0005, and our telephone number is +81 03-5614-0978. Our website is https://e-arly.works/. The information
contained in, or accessible from, our website or any other website does not constitute a part of this annual report. Our agent for service
of process in the United States is Cogency Global Inc., at 122 East 42nd Street, 18th Floor, New York, NY 10168.
The SEC maintains a website at www.sec.gov that
contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC using
its EDGAR system.
For information regarding our principal capital
expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”
B. Business Overview
Overview
We are a blockchain-based technology company incorporated
in Japan. We deliver services and develop solutions based on our proprietary GLS to leverage blockchain technology in various business
settings, including advertisement tracking, online visitor management, and sales of non-fungible tokens. Our customers represent a diverse
range of industries, such as information technology, metaverse, advertisement, real estate, telecommunication and entertainment. We generate
revenue from our (i) software and system development services, (ii) consulting and solution services, and (iii) sale of NFTs. For the
fiscal years ended April 30, 2024, 2023 and 2022, we had total revenue of approximately JPY179.4 million (US$1.1 million), JPY46.6 million,
and JPY463.7 million, respectively, revenue generated from our software and system development services accounted for approximately 70.0%,
47.0%, and 50.6% of our total revenue, respectively, revenue generated from our consulting and solution services accounted for approximately
1.6%, 48.2%, and 49.4% of our total revenue, respectively, and revenue generated from the sale of NFTs accounted for approximately 28.4%,
4.8%, and 0% of our total revenue, respectively. For the same fiscal years, we had net loss of approximately JPY330.2 million (US$2.1
million), JPY382.3 million, and JPY602.5 million, respectively.
Our mission is to optimize business operations
with our creative ideas and the use of blockchain technology. We believe in a data centric future where blockchain technology will be
indispensable and widely used, due to its efficiency, security, and reliability.
Industry Background
A distributed ledger is a ledger containing records
of transactions between parties in a shared network. When a party in the network adds a transaction to the ledger, it is synchronized
to other parties in the network through a consensus algorithm. The consensus algorithm enables transactions to be validated and confirmed
without the need for a central point of authority. A validated transaction is added to the network in a permanent and immutable way. Every
party in the network has simultaneous access to view the information, which is kept secure with the use of cryptographic functions.
A blockchain is a type of distributed ledger where
transaction data is grouped into specific, time-stamped sets. Once consensus is reached for the data to go into a set, the set is sealed
with a cryptographic signature, creating a sealed block. This block is then mathematically tied to the previous block on the ledger, forming
a chain.
The potential benefits of blockchain technology
include, among others:
| ● | decentralization,
where value is created from the removal of a need for a central point of control to verify transactions; |
| ● | efficiency,
where transactions are processed and settled automatically between parties without an intermediary; |
| ● | transparency,
where data is written into the blockchain to allow it to be shared publicly among parties in the network, thereby enabling more transparent
data management; |
| ● | security,
where data is written in a mechanism with the aim of ensuring its immutability; as a result of the provision of information that parties
know to be verified and immutable, the value lost by a lack of trust between parties is reduced; |
| ● | stability,
where data on blockchain is managed on multiple servers, or a peer-to-peer blockchain network, so that even if one server goes down,
the service will continue stably as long as the other servers in the network are up and running; |
| ● | cost-effectiveness
in equipment installation, maintenance, and inspection; currently the data necessary to provide services is stored on servers, which
require high-performance servers to process the data in time depending on the number of service users, resulting in high initial installation
costs. In contrast, with blockchain, the role of the server can be substituted for the user’s personal computer, and the initial
installation and ongoing service costs can be reduced without the need for a high-performance server; and |
| ● | privacy,
where personal information is stored in an encrypted manner. |
While blockchains have various benefits, we believe
that the conventional blockchains cannot yet be widely applied in business settings. The issues associated with the conventional blockchains
include, among others:
| ● | slow
processing speed due to their complexity and their encrypted, distributed nature; |
| ● | poor
real-time data processing because data is not immediately fixed due to the lack of absolute finality, which is also known as a definite
consensus algorithm. The conventional blockchains use the proof-of-work method, which validates and confirms transaction data based on
the amount of computational effort expended. The proof-of-work method requires time for each server to send and receive information about
the approvers of a transaction. If a majority of them approve a transaction, the transaction will be approved as correct, even if it
is a wrong transaction and needs to be overturned. Thus, even if a transaction is approved in conventional blockchains, the transaction
cannot enjoy the status of absolute finality and may be overturned later if it is a wrong transaction; |
| ● | impossible
to complete an emergency stop, even if a serious problem occurs in the system, due to the lack of a kill switch; and |
| ● | burdensome
learning costs due to the need to develop in a proprietary development language. |
Our Technology
Since our inception in May 2018, we have focused
on blockchain technology and developing systems with a view to making our proprietary GLS an infrastructural technology in the future.
As of the date of this annual report, GLS has been developed by our CTO, Hiroki Yamamoto, with collaboration efforts from the following
partners:
| ● | NTT
Docomo, Inc. In July 2018, we evaluated the data transfer speed from PC to PC using GLS under the 5G environment at the demonstration
test site of NTT Docomo, Inc. and also evaluated the compatibility between 5G and blockchain. In December 2018, we participated in an
exhibition hosted by NTT Docomo, Inc. |
| ● | Professor
Kazuyuki Shudo, who was an associate professor at Tokyo Institute of Technology and is now a professor at Kyoto University, has served
as our advisor since November 2018. Professor Kazuyuki Shudo has a research lab on software and networks. With the advice of Professor
Kazuyuki Shudo, we have improved the simultaneous processing of GLS and its resistance against malicious attacks. We have continually
received academic reports and advice from Professor Kazuyuki Shudo. |
| ● | NEC
Communication Systems, Ltd. Since January 2020, we have started joint research with NEC Communication Systems. We conducted performance
evaluation of the GLS node alone and with other RDB products when using Structured Query Language. |
| ● | Other
projects. We have been involved in other projects in various industries, such as applying GLS to online identity verification and authentication. |
We believe that GLS is superior to the conventional
blockchains. The conventional blockchains provide a high level of security but are criticized for being slow in processing data reads
and writes, especially when the number of parties in the network increases to a certain level. We have developed GLS to balance the trade-off
between security and convenience and believe that GLS achieves both security performance and processing speed.
GLS is a hybrid blockchain that combines the technical
advantages of both blockchain technology and database technology. Database technology provides the traditional infrastructure for data
storage, collection, organization and processing, and enables the construction of systems. GLS demonstrates the following features:
| ● | high
processing speed. We believe GLS enables the construction of blockchain systems with high processing speed. The conventional blockchain
systems slow down their processing speeds and require at least a few seconds to complete one transaction due to the need for enhanced
security measures. The conventional blockchain systems generate blocks in series. In comparison, GLS generates blocks in parallel and
the approval time for one transaction in GLS can reach 0.016 seconds while GLS offers enhanced security at the same time; |
| ● | parallel
processing and auto-scale functions, which provide appropriate performance according to the user’s expansion and contraction needs.
The conventional blockchain networks expand at random and consolidate processing in a single node, which represents one of the personal
computers in a blockchain network. In comparison, GLS arranges nodes within the network in a circular fashion and reduces the processing
load for each node by sharing the processing load among intermediate processing nodes, thereby accommodating the user’s different
levels of needs; |
| ● | high
tamper-resistance. The incorporation of blockchain technology ensures that data managed by GLS is more resistant to tampering and cannot
be easily overwritten. Even if a tampering incident occurs, the record of when and by whom the data was tampered with can be traced; |
| ● | zero
server downtime. The use of peer-to-peer blockchain network ensures that the services provided by GLS remain stable, even in the event
of system maintenance or malicious cyber-attacks. To eliminate security concerns related to a single point of failure, GLS employs intermediate
processing nodes, which are independent of the nodes that make up the blockchain network and process the actual transactions. Even if
the intermediate processing nodes are stopped, the transactions cannot be tampered with. To reduce the impact of attacks on intermediate
processing nodes and any unauthorized access, GLS allows the use of firewalls and other means to prevent cyberattacks, thereby providing
transaction security; |
| ● | versatile
applications. The conventional blockchains have limited commercial applications in part due to their lack of absolute finality. In comparison,
we believe that GLS has a wider range of business applications partly because GLS enables finality by adopting a definite consensus algorithm; |
| ● | emergency
stop. The conventional blockchains cannot be stopped in the event of emergencies because of their lack of a kill switch. In comparison,
GLS can be stopped in an emergency due to the presence of a kill switch; |
| ● | lower
construction, installation and maintenance costs compared to the conventional database infrastructure. The conventional database infrastructure
often stores data on expensive high-performance servers. In comparison, GLS enables the storage of data on the user’s personal
computer, thereby reducing the initial and ongoing costs of the services supported by GLS; and |
| ● | flexible
fees. Generally, public blockchains are structured to charge fees for each transaction that occurs. We are enterprise-oriented and have
a private blockchain GLS that allows us to process a large number of transactions at high speed, making it possible to set fees flexibly. |
GLS was designed and developed as an integrated
distributed computing management system that we believe will serve as the infrastructure for the latest technologies such as artificial
intelligence, big data, and the Internet of Things. The services provided by GLS are limited to the scope of the current telecommunications
infrastructure and the capabilities of blockchain-equipped devices, and we believe that future advances in telecommunications infrastructure
and blockchain devices will further enhance the potential value of GLS.
We recognize that there is a lack of engineers
who can handle blockchain in Japan, and we plan to increase the number of use cases for GLS and invest in researching and developing a
universally usable System Development Kit (“SDK”) for GLS. We are a company that operates with an eye on the Web3. To that
end, we hope that various applications using our blockchain technology will be developed and the industry as a whole will grow.
Our Services
We derive our revenue from our (i) software and
system development services, (ii) consulting and solution services, and (iii) sale of NFTs.
Through our software and system development services,
we serve companies that have digital assets and intend to leverage these assets for the purposes of creating new businesses and new systems.
We develop systems that are tailored to the specific needs of each customer.
Through our consulting services, we assist companies
that seek to update their existing data and digital technology, add additional functions to their systems, and transform their businesses,
operations, and processes. The companies that purchase our solution services are often repeat customers for whom we have developed systems
and who return to us for additional services.
The sale of NFTs was achieved through an NFT trading
platform that we developed for a business partner. Such business partner operates the platform and provides customer services to users
of the platform. Such business partner is principally responsible for marketing and sales activities. The marketing and sales activities
are mainly focused on the Japanese market and no NFT purchasers on the platform are from the U.S. as of the date of this annual report.
We provide technological expertise by developing the NFT trading platform, creating the NFTs that are sold on the platform and providing
technological support if needed. The creation of the NFTs is decided through consultation with the business partner and not independently
controlled by us. We own the intellectual property rights in the platform and the NFTs that we developed and created. As of the date of
this annual report, the users of the platform are allowed to buy the NFTs, but not transfer or resell the NFTs on the platform. Such users
may resell the NFTs on secondary markets such as OpenSea. The NFT purchasers on the platform are of various backgrounds, a certain number
of whom are NFT collectors. We also play the secondary role serving as a sales agent for the business partner to enhance the sales activities.
In fulfilling such a secondary role, we sell the NFTs on behalf of our business partner. We do not hold the NFTs for investment purposes
but we may hold the NFTs from time to time for sales promotion purposes. We do not make marketing activities in terms that indicate the
NFTs as an investment opportunity. We receive a percentage of the sales revenue, and we accept cryptocurrencies as payment as NFTs are
traded generally using cryptocurrencies.
We developed another NFT trading platform, Animap,
for Hakuhodo DY Music & Pictures Inc. (“Hakuhodo”). Pursuant to the agreement between our Company and Hakuhodo, Hakuhodo
is the sole owner of Animap and independently manages the daily operation of Animap. Hakuhodo obtains license from copyright owners, converts
their copyrighted works into NFTs within the scope of the license, sells the NFTs on Animap, handles inquiries, complaints, purchase cancellations,
refunds and requests as well as provides other customer support for Animap users. We used our technological expertise to develop Animap
based on the public blockchain Ethereum. We own certain intellectual property rights in the system used to develop Animap. We stress-tested
Animap prior to its launch in June 2022 and stress test Animap at least once every six months. We do not own, operate, or maintain Animap.
The currently available NFTs on Animap represent some popular Japanese IPs, such as Tatsunoko Production, Big Hat Monkeys, and Mentori.
The NFTs are stored by Animap users through manners of their choice, the most common of which is Metamask. The copyright owners remain
the owners of the intellectual property rights in the underlying content represented by the NFTs. Hakuhodo maintains the royalty interest
in, or intellectual property of, the NFTs that are offered on Animap. When the NFTs are sold, the ownership interests and intellectual
property rights in the NFTs are transferred from Hakuhodo to the NFT buyers. We do not have any custody, ownership or intellectual property
interests in the NFTs that are on Animap. In the event of disputes over the intellectual property underlying the NFTs, we believe it is
unlikely for our Company to be a party to such disputes. As of the date of this annual report, Animap users are allowed to purchase NFTs,
but not transfer, distribute, or resell their NFTs on Animap. Animap users may resell their NFTs on secondary markets such as OpenSea
and Rarible. We are entitled to a system usage fee, which is equal to a percentage of the NFT sales revenue, under the precondition that
such revenue reaches a predetermined level. We do not accept and do not plan to accept payment for our services in the form of digital
assets. As of the date of this annual report, we have not received any revenue from the sale of NFTs on Animap.
Business Model
The process for achieving our revenue is as follows.
Identifying business opportunities
We are introduced to customers through our sales
team as well as personal connections of our board members and shareholders. We also use other marketing channels, such as participating
in industry online programs and events. We evaluate our sales strategies and progress at least once per month.
We typically receive orders from customers who
are interested in blockchain and hope to digitally transform their internal databases. To determine whether to accept an order, we consider
whether the project is profitable, whether the customer is credible and reputable, and whether a long-standing business relationship will
be created with the customer.
Forming business cooperation
When a customer places an order with us, we invite
the customer to consider whether the ordered system has the potential to contribute to the customer’s future earnings, whether it
will reduce the customer’s costs, and whether the customer’s investment in the system is reasonable. We assist our customers
with making well informed business decisions.
For the fiscal year ended April 30, 2024, we had
three customers that each contributed to over 10% of our total sales revenue, accounting for approximately 42.6%, 27.2%, and 21.5% of
our total sales revenue, respectively. For the fiscal year ended April 30, 2023, we had three customers that each contributed to
over 10% of our total sales revenue, accounting for approximately 42.9%, 24.1%, and 10.5% of our total sales revenue, respectively. For
the fiscal year ended April 30, 2022, we had two customers that each contributed to over 10% of our total sales revenue, accounting for
approximately 47.4% and 25.9% of our total sales revenue, respectively. Although we derived a significant portion of our sales revenue
from a limited number of customers, we did not heavily rely upon any one customer for the majority of our revenue.
Planning the project
In the planning phase, we enter into discussions
with our customers and divide roles and responsibilities. We select specialists on our team and put them in charge of designing proposals,
developing solutions, and providing other incidental support to our customers. Our customers appoint points of contact and make them responsible
for reviewing proposals, facilitating communications in the course of the projects, and inspecting solutions upon completion.
We develop blockchain-based solutions tailored
to the needs of each customer. To understand our customers’ issues, we interview our customers, engage a group of specialists across
industries, study our customers’ business flow, and verify whether there are any areas where the ordered systems can solve the issues.
We then evaluate the available proposals and discuss the solutions to be developed with our customers.
Working on the project
In the course of the projects, we strive to eliminate
the discrepancies between the project progress and the project targets. We keep close communications with our customers for updates on
the project progress. We hold regular meetings with our customers at least once per month to discuss the project progress and future plans.
We also hold additional meetings as needed, for example where the customers need to immediately change their functional requirements.
We sometimes outsource work to external engineers.
To determine whether to outsource, we consider the availability of our resources, the outsourcing fee structures, and the technical requirements
of ordered systems. The external engineers are responsible for ancillary support to our team and not for greater roles. To control the
quality of outsourced work, our team evaluates the quality of the outsourced work each day and requires the external engineers to submit
a work report each month, so that our team can confirm the outsourced work is executed efficiently in accordance with the project schedules.
Completing the project
At the end of projects, we provide work completion
reports to our customers. Our customers review the reports during the inspection period. When our customers have no objections to our
products and services, they will stamp their names on the reports and deliver the reports to us to confirm project completion. When our
customers do not sign the reports and raise no objections before the termination of the inspection period, the projects will also be considered
completed.
Competition and Strengths
Market entry
The technological barrier to enter the blockchain
industry is high, therefore many companies hesitate to enter this industry. Another challenge in the blockchain industry is that it is
difficult to balance the trade-off among speed, security and transparency. Other companies seek to develop their solutions to balance
such trade-off but such development processes can be lengthy and costly. In addition, we believe that conventional blockchains are too
slow to go beyond the realm of demonstration testing and achieve monetization in business settings. Companies equipped with the conventional
blockchains are only able to create limited commercial value. Our Company sought to overcome the technical issues of conventional blockchains
and has developed our proprietary GLS, which we believe can be widely and flexibly applied in various business settings.
Market competition
We believe that we are one of the very few companies
in Japan that are capable of commercializing blockchain technology. However, the market for blockchain technology is developing and we
anticipate new entrants to the market and competition to intensify in the future. Our future competitors may have greater resources than
us and there can be no assurance that we will have the financial and operational resources necessary to carry out our business plan and
successfully compete with our competitors.
Our strengths
We believe the following competitive advantages
are essential for our success and differentiate us from our competitors.
Our transformative blockchain-based technology
GLS constitutes our core strength and demonstrates
the following advantages compared to the conventional blockchains:
| ● | faster
processing speed. The conventional blockchains require at least a few seconds to generate a block and complete one transaction. For example,
the cryptocurrency EOS requires 3 seconds, the Ethereum requires 15 seconds, and the Bitcoin requires 10 minutes. In comparison, the
approval time for one transaction in GLS can reach 0.016 seconds depending on the design of systems; |
| ● | greater
real-time data processing. The conventional blockchains are poor at processing real-time data because they lack absolute finality, also
known as a definite consensus algorithm. Therefore, the conventional blockchains require some time to confirm that transactions are finalized
and will not be reverted. In comparison, we believe that GLS resolves this issue and is better at processing and validating real-time
data; |
| ● | flexible
fee. The conventional public blockchains are structured to charge fees for each transaction that occurs. We have a private blockchain
GLS that allows us to process a large number of transactions at high speed, making it possible to set fees flexibly; and |
| ● | wider
business applications and proven track record. The conventional blockchains have limited business applications. In comparison, we believe
that GLS can be widely applied in various business settings due to its processing speed, parallel processing, auto-scale functions, and
other features. Our GLS realizes a cyclic network structure for nodes (computer devices participating in the blockchain network), making
it easy for multiple nodes to simultaneously execute approval processes in parallel, thereby speeding up the transaction approval process
and ensuring scalability. |
Dedicated talent team
Our robust research and development team members
are dedicated to blockchain research, operations, and development to support the improvement of blockchain technology. We, on occasions,
consult with academia to keep abreast of the most recent advancement and technological issues of blockchain technology and to apply academic
perspectives to system development. Our professional management team collectively has experience working with corporations of various
operating scales across different industries. Our management has cultivated business knowledge and expertise by undertaking diverse roles,
including sales, business planning, consulting, accounting, and programming. We also have an agreement with a third-party company for
external engineers, some of whom are graduates of Hanoi University of Technology, Vietnam’s leading school for IT professionals,
majoring in information technology.
Trusted relationships with business partners
We value the trust that we have built with our
customers and business partners, who work with us for advice, joint research, and system development. Some of our system development customers
return to us for additional consulting and system maintenance services. Our customers are of different operating scales, ranging from
venture companies to multi-national businesses. Our customers represent a wide spectrum of industries, including information technology,
metaverse, advertisement, real estate, telecommunication and entertainment industry , among others. We will continue to grow by leveraging
the trust and expertise of the companies that we have worked with.
Growth Strategies
In February 2021, we were selected by “Microsoft
for Startups” in recognition of the wide applicability of GLS. As of the date of this annual report, we have verified the applicability
of GLS in various domains, including, but not limited to, the following:
| ● | the
application of Structured Query Language to GLS based on a demonstration test with NEC Communication Systems, Ltd.; |
| ● | the
application of GLS to online identity verification and authentication; |
| ● | the
application of GLS to an online lease signing system based on the cooperation with AMBITION DX HOLDINGS Co., Ltd.; |
| ● | the
application of GLS in the financial domain; |
| ● | the
application of GLS in virtual space (Metaverse); and |
| ● | the
application of GLS in an NFT platform. |
In the future, we hope to generate revenue by
applying GLS to the following domains:
| ● | Insurance:
It takes time to verify the authenticity of information at the time of screening or switching insurance policies. It requires explanatory
actions to sign insurance contracts. We believe that GLS, which can verify identity and manage contractual data, will facilitate the
completion of insurance transactions and enable smooth, accurate, and quick switching of insurance policies. |
| ● | Energy:
Rapid processing of records of electricity generated by individuals and companies and transaction records are required. We believe GLS
will enable the required rapid processing. |
| ● | Entertainment:
Entertainment, especially online gaming, requires rapid processing of a large number of transactions conducted among a large number of
users, user identity verification and in-game activity records. We believe GLS will enable such processing. |
| ● | Supply
chain: It is difficult to fully grasp and control the movement of goods from production sites to consumers in real time. By implementing
blockchain technology throughout the supply chain, companies can securely record movements in real time based on accurate information.
We believe GLS will provide fast real-time data management that enables companies involved in the supply chain to obtain meaningful information. |
| ● | Trade:
Multi-party collaboration, among importers, exporters, shipping companies, and customs offices, is required to accurately record the
large volume of processed goods. We believe GLS will provide fast real-time data management that enables companies involved in the trade
domain to obtain meaningful information. |
To achieve these goals, we will invest in research
and development of GLS, secure talented human resources, and actively pursue alliances with partner companies, aiming to become a company
that functions as one of the world’s infrastructures.
Research and Development
We conduct independent research and development
with dedication to innovation. Our research and development team members also work with external engineers to improve GLS.
We design, implement, and review a comprehensive
set of rules governing our independent research and development projects. To start a R&D project, an inventor must make an application
where the inventor must specify certain information including the content to be developed, development schedule, delivery date, required
resources, and estimated profitability. The relevant heads of department evaluate the project. To determine whether to approve the project,
they consider factors such as the availability of resources and profitability. After they approve the project, they select and appoint
a project manager. The project manager supervises the progress of the project and reports to the relevant heads of department at least
once a month. At the end of the project, the relevant heads of department review and inspect the final product. When the product passes
the inspection, the project will be considered completed.
Besides independent research and development,
we also conduct joint research and development projects with academia and business partners. One such joint project to develop an ultra-high-speed
next-generation hybrid database called “SmokeDB,” which is expected to facilitate the introduction of blockchain into non-financial
fields. Applying blockchain to non-financial fields incur various issues such as low processing speeds and technical difficulties in development
and maintenance. We aim to resolve these challenges by combining our blockchain technology and our business partner’s network expertise.
Intellectual Property
We seek to protect our intellectual property rights
by relying on Japanese intellectual property laws and on contractual measures. It is our practice to enter into confidentiality, non-disclosure,
and invention assignment agreements with our employees and contractors, and into confidentiality and non-disclosure agreements with other
third parties, in order to limit access to our confidential information and proprietary technology. In addition to these contractual measures,
we also rely on a combination of trademarks, registered domain names, and patent rights to protect our brand and our intellectual property.
As of the date of this annual report, we have registered 2 patents, 14 trademarks and 9 domain names. Our pending intellectual property
applications include 1 patent. We consider the patent “Information processing equipment and program (GLS)” to be material
to our business. The chart below presents information about some intellectual property that we have registered or applied for.
Type |
|
Name |
|
Issuing authority |
|
Application date |
|
Status |
|
Expiration date |
Trademark |
|
|
|
Japan Patent Office |
|
August 12, 2022 |
|
registered |
|
April 28, 2033 |
|
|
データキャナル |
|
Japan Patent Office |
|
October 14, 2021 |
|
registered |
|
April 04, 2032 |
|
|
Data Canal |
|
Japan Patent Office |
|
October 13, 2021 |
|
registered |
|
April 04, 2032 |
|
|
|
|
Japan Patent Office |
|
February 25, 2021 |
|
registered |
|
August 12, 2031 |
|
|
APO |
|
Japan Patent Office |
|
February 27, 2020 |
|
registered |
|
June 22, 2031 |
|
|
SmokeDB |
|
Japan Patent Office |
|
January 22, 2020 |
|
registered |
|
January 28, 2031 |
|
|
|
|
Japan Patent Office |
|
November 25, 2019 |
|
registered |
|
December 15, 2030 |
|
|
アーリーワークス |
|
Japan Patent Office |
|
November 25, 2019 |
|
registered |
|
December 15, 2030 |
|
|
|
|
Japan Patent Office |
|
July 01, 2019 |
|
registered |
|
June 23, 2030 |
|
|
Grid Ledger System |
|
Japan Patent Office |
|
May 14, 2019 |
|
registered |
|
June 25, 2030 |
Patent |
|
Information processing equipment and program |
|
Japan Patent Office |
|
October 31, 2022 |
|
in progress |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
Information processing equipment and program |
|
Japan Patent Office |
|
December 2, 2020 |
|
registered |
|
December 2, 2040 |
|
|
Information processing equipment and program (GLS) |
|
Japan Patent Office |
|
October 27, 2020 |
|
registered |
|
October 27, 2040 |
Property and Equipment
Our principal executive office is located in Tokyo,
Japan. Our office space is leased from an independent third party with an area of 184.12 square meters starting from October 1, 2019.
Mr. Satoshi Kobayashi, our Chief Executive Officer and Representative Director, is the guarantor on the lease agreement. The lease agreement
automatically renews for another two years, unless either party notifies the other party of its intention to the contrary no later than
six months before the expiration of the current term. The lease agreement may be terminated on six months’ notice of the intention
to terminate. The current expiration date for the lease agreement is on September 30, 2024 and we intend to renew such lease agreement.
We do not hold title or interest in any other property, plants, or equipment.
We believe that the current office facilities
are adequate for the time being. As our business grow, there may be a need to secure additional office space.
Employees
We strive to attract, recruit, and retain talents
through our compensation and benefit programs, as well as learning and development opportunities that support career advancement. In addition
to salaries, we offer complementary benefits including bonuses, communications allowance, commuting allowance, overtime allowance, employment
insurance, health insurance, and employee pension.
In the selection of team members, we consider
whether the candidates empathize with our mission and vision, and whether the candidates can flexibly endure changes in a rapidly evolving
environment. In the selection of engineers, we consider whether the candidates have sufficient experience in designing databases.
We enter into employment agreements with each
of our employees. The employment agreements typically contain certain restrictions, including non-compete covenants for a period of one
year following the termination of employment, and confidentiality restrictions through the time period the information remains confidential,
among other covenants. The employment agreements typically last for indefinite terms. There is no labor union or collective agreement
that covers any of our employees.
As of the date of this annual report, we have
a headcount of 15 full-time employees (excluding our directors and company auditors) at our principal executive office in Japan. The chart
below presents the number of our employees as of April 30, 2024, 2023 and 2022.
| |
Number of employees | |
For the fiscal years ended April 30, | |
Full-time | | |
Part-time | | |
Contract | |
2024 | |
| 15 | | |
| 0 | | |
| 0 | |
2023 | |
| 11 | | |
| 0 | | |
| 1 | |
2022 | |
| 15 | | |
| 0 | | |
| 0 | |
We also enter into outsourcing contracts with
external engineers from time to time, which enables us to have access to additional engineers as needed.
Insurance
We currently maintain insurance coverage against
the risk of property damage caused by fires, lightning strikes, explosions, riots, vehicle collisions, thefts, flooding and certain other
damaging accidents. We also maintain earthquake insurance coverage. We have obtained directors and officers liability insurance. We review
and renegotiate our premiums, coverage limits, and other terms of insurance policies on an annual basis. We do not hold major tangible
assets and our assets are predominantly intangible and intellectual. We believe our insurance coverage is sufficient for our business
practice and consistent with the customary industry practice in Japan.
Seasonality
Our business is not subject to seasonal fluctuations.
We enter into business contracts with our customers throughout the year.
Regulations
Intellectual Property Protection Laws
There are various intellectual property laws in
Japan, including the Patent Act (Act No. 121 of April 13, 1959, as amended), the Utility Model Act (Act No. 123 of April 13, 1959, as
amended), the Design Act (Act No. 125 of April 13, 1959, as amended), the Trademark Act (Act No. 127 of April 13, 1959, as amended), the
Copyright Act (Act No. 48 of May 6, 1970). The Patent Act provides patent right and regulates protection and utilization of inventions.
The Utility Model Act provides utility model right and regulates protection and utilization of devices. The Design Act provides design
rights. The Trademark Act provides trademark rights. The Copyright Act provides provide for authors’ rights and neighboring rights.
According to our Japanese legal counsel, as of
the date of this annual report, we have registered 2 patents, 14 trademarks and 9 domain names in Japan. Our pending intellectual property
applications in Japan include 1 patent.
Labor Laws
There are various labor-related laws in Japan,
including the Labor Standards Act (Act No. 49 of April 7, 1947, as amended), the Industrial Safety and Health Act (Act No. 57 of June
8, 1972, as amended), and the Labor Contracts Act (Act No. 128 of December 5, 2007). The Labor Standards Act regulates, among others,
minimum standards for working conditions such as working hours, leave period, and leave days. The Industrial Safety and Health Act requires,
among others, the implementation of measures to secure employee safety and protect the health of workers in the workplace. The Labor Contracts
Act regulates, among others, the change of terms of employment contracts and working rules, and dismissal and disciplinary action.
According to our Japanese legal counsel, as of
the date of this annual report, we comply with these laws and regulations.
Regulations on Lease Agreements
Our lease agreements are generally subject to
the Civil Code (Act No. 89 of April 27, 1896, as amended) and Act on Land and Building Leases (Act No. 90 of October 4, 1991, as amended).
According to our Japanese legal counsel, as of
the date of this annual report, the terms and conditions of our lease agreements are consistent with these laws and are valid and enforceable
as provided for in these agreements.
Regulations on Privacy Protection
The Act on the Protection of Personal Information
(Act No. 57 of May 30, 2003, as amended) aims to protect an individual’s rights and interests and establishes obligations that a
personal information handling business operator shall fulfill.
According to our Japanese legal counsel, as of
the date of this annual report, we comply with these laws and regulations.
Regulations on Whistleblower Protection
The Whistleblower Protection Act No. 122 of June
18, 2004 (Act No. 122 of June 18, 2004, as amended) provides prohibition of disadvantageous treatment of whistleblowers on the grounds
of whistleblowing and the measures that a business operator and administrative organ should take concerning whistleblowing to protect
whistleblowers.
According to our Japanese legal counsel, as of
the date of this annual report, we comply with these laws and regulations.
C. Organizational Structure
See “—A. History and Development of the Company.”
D. Property, Plants and Equipment
See “—B. Business Overview—Property
and Equipment.”
Item 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition
and results of operations is based upon and should be read in conjunction with our financial statements and their related notes included
in this annual report. This report contains forward-looking statements. In evaluating our business, you should carefully consider the
information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report.
We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
A. Operating Results
The following table sets forth our selected profit
or loss data, both in absolute amount and as a percentage of total revenue, for the periods indicated.
| |
For the fiscal year ended April 30, 2024 | | |
| | |
For the fiscal year ended April 30, 2023 | | |
| | |
For the fiscal year ended April 30, 2022 | | |
| |
| |
US$ | | |
JPY | | |
| | |
JPY | | |
| | |
JPY | | |
| |
OPERATING REVENUES | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Software and system development services | |
| 797,373 | | |
| 125,618,177 | | |
| 70.0 | % | |
| 21,874,517 | | |
| 47.0 | % | |
| 234,732,715 | | |
| 50.6 | % |
Consulting and solution services | |
| 17,777 | | |
| 2,800,620 | | |
| 1.6 | % | |
| 22,435,120 | | |
| 48.2 | % | |
| 228,986,136 | | |
| 49.4 | % |
Sale of NFTs | |
| 323,327 | | |
| 50,936,854 | | |
| 28.4 | % | |
| 2,258,892 | | |
| 4.8 | % | |
| — | | |
| 0.0 | % |
TOTAL OPERATING REVENUES | |
| 1,138,477 | | |
| 179,355,651 | | |
| 100 | % | |
| 46,568,529 | | |
| 100.0 | % | |
| 463,718,851 | | |
| 100 | % |
COST OF REVENUES | |
| (238,561 | ) | |
| (37,582,914 | ) | |
| -21.0 | % | |
| (30,502,236 | ) | |
| -65.5 | % | |
| (108,379,683 | ) | |
| -23.4 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
GROSS PROFIT | |
| 899,916 | | |
| 141,772,737 | | |
| 79.0 | % | |
| 16,066,293 | | |
| 34.5 | % | |
| 355,339,168 | | |
| 76.6 | % |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Selling and marketing expenses | |
| (350,765 | ) | |
| (55,259,489 | ) | |
| -30.8 | % | |
| (55,667,926 | ) | |
| -119.5 | % | |
| (29,727,815 | ) | |
| -6.4 | % |
General and administrative expenses | |
| (2,477,476 | ) | |
| (390,301,519 | ) | |
| -217.6 | % | |
| (240,003,326 | ) | |
| -515.4 | % | |
| (201,976,446 | ) | |
| -43.5 | % |
Share-based compensation expenses | |
| (10,261 | ) | |
| (1,616,463 | ) | |
| -0.9 | % | |
| — | | |
| 0.0 | % | |
| (670,000,000 | ) | |
| -144.5 | % |
Research and development expenses | |
| (482,936 | ) | |
| (76,081,726 | ) | |
| -42.4 | % | |
| (108,823,664 | ) | |
| -233.7 | % | |
| (25,753,717 | ) | |
| -5.6 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
TOTAL OPERATING EXPENSES | |
| (3,321,438 | ) | |
| (523,259,197 | ) | |
| -291.7 | % | |
| (404,494,916 | ) | |
| -868.6 | % | |
| (927,457,978 | ) | |
| -200 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
LOSS FROM OPERATIONS | |
| (2,421,522 | ) | |
| (381,486,460 | ) | |
| -212.7 | % | |
| (388,428,623 | ) | |
| -834.1 | % | |
| (572,118,810 | ) | |
| -123.4 | % |
Loss on digital assets | |
| (393 | ) | |
| (61,860 | ) | |
| 0.0 | % | |
| (629,195 | ) | |
| -1.4 | % | |
| — | | |
| 0.0 | % |
Interest expenses, net | |
| (10,089 | ) | |
| (1,589,399 | ) | |
| -0.9 | % | |
| (2,699,144 | ) | |
| -5.8 | % | |
| (1,258,722 | ) | |
| -0.3 | % |
Foreign exchange gain, net | |
| 296,218 | | |
| 46,666,234 | | |
| 26.0 | % | |
| 222,079 | | |
| 0.5 | % | |
| — | | |
| 0.0 | % |
Other (expense) income, net | |
| 840 | | |
| 132,317 | | |
| 0.1 | % | |
| 6,864 | | |
| 0.0 | % | |
| (155,434 | ) | |
| 0.0 | % |
LOSS BEFORE INCOME TAXES | |
| (2,134,946 | ) | |
| (336,339,168 | ) | |
| -187.5 | % | |
| (391,528,019 | ) | |
| -840.8 | % | |
| (573,532,966 | ) | |
| -123.7 | % |
Provision for income tax | |
| 1,196 | | |
| 188,496 | | |
| 0.1 | % | |
| 9,222,980 | | |
| 19.8 | % | |
| (28,941,602 | ) | |
| -6.2 | % |
NET LOSS | |
| (2,133,750 | ) | |
| (336,150,672 | ) | |
| -187.4 | % | |
| (382,305,039 | ) | |
| -821.0 | % | |
| (602,474,568 | ) | |
| -129.9 | % |
Revenue
The following table sets forth the breakdown of
our revenue by category, both in absolute amount and as a percentage of the total revenue for each category for the periods indicated:
| |
Year Ended
April 30, 2024 | | |
Year Ended
April 30, 2023 | | |
Year Ended
April 30, 2022 | |
| |
USD | | |
JPY | | |
% | | |
JPY | | |
% | | |
JPY | | |
% | |
Software and system development services | |
| 797,373 | | |
| 125,618,177 | | |
| 70.0 | % | |
| 21,874,517 | | |
| 47.0 | % | |
| 234,732,715 | | |
| 50.6 | % |
Consulting and solution services | |
| 17,777 | | |
| 2,800,620 | | |
| 1.6 | % | |
| 22,435,120 | | |
| 48.2 | % | |
| 228,986,136 | | |
| 49.4 | % |
Sale of NFTs | |
| 323,327 | | |
| 50,936,854 | | |
| 28.4 | % | |
| 2,258,892 | | |
| 4.8 | % | |
| - | | |
| - | |
Total | |
| 1,138,477 | | |
| 179,355,651 | | |
| 100.0 | % | |
| 46,568,529 | | |
| 100.0 | % | |
| 463,718,851 | | |
| 100.0 | % |
Our total revenue for the fiscal year ended April 30,
2024 increased by approximately JPY132.8 million, or 285.1%, compared to that of the fiscal year ended April 30, 2023. Our total
revenue for the fiscal year ended April 30, 2023 decreased by approximately JPY417.2 million, or 90.0%, compared to that of the fiscal
year ended April 30, 2022.
Revenue generated from our software and system
development services accounted for 70.0%, 47.0%, and 50.6% of our total revenue for the fiscal years ended April 30, 2024, 2023,
and 2022, respectively. Revenue from software and system development services for the fiscal year ended April 30, 2024 increased
by JPY103.7 million, or 474.3%, compared to that of the fiscal year ended April 30, 2023. Such increase was mainly attributable to
the completion of the GLS SDK, which we had been developing last year. This has enabled us to provide services that meet customer needs.
Additionally, our listing on the Nasdaq Capital Market has increased our industry presence and bolstered trust from other companies, contributing
to our revenue growth. Furthermore, in Japan, there are no publicly listed companies developing blockchain technology themselves, and
it is difficult to find blockchain partners with the necessary technical capabilities. This has brought attention to our technology. Moreover,
increased interest in blockchain technology has also contributed to our revenue growth. Revenue from software and system development services
for the fiscal year ended April 30, 2023 decreased by JPY212.9 million, or 90.7%, compared to that of the fiscal year ended April 30,
2022. Such decrease was mainly due to the fact that in fiscal year 2022 we entered into a number of contracts to the extent that we were
unable to devote substantial resources to research and development activities; most of such contracts were for terms of one year or less
and expired during 2023. During the fiscal year ended April 30, 2023, we were more selective in entering into contracts and conducting
projects in which we devote our resources, and we were engaged in research and development projects that are expected to generate revenue
in the future.
Revenue generated from our consulting and solution
services accounted for 1.6%, 48.2%, and 49.4% of our total revenue for the fiscal years ended April 30, 2024, 2023, and 2022, respectively.
Revenue from consulting and solution services for the fiscal year ended April 30, 2024 decreased by JPY19.6 million, or 87.5%, compared
to that of the fiscal year ended April 30, 2023. Such decrease was mainly due to the improved understanding of blockchain technology
among our corporate clients, leading to an increase in requests for the development of specific systems using blockchain. However, this
has also resulted in a decrease in consulting and solution services for how to use blockchain. Revenue from consulting and solution services
for the fiscal year ended April 30, 2023 decreased by JPY206.6 million, or 90.2%, compared to that of the fiscal year ended April 30,
2022. Such decrease was due to the fact that in fiscal year 2023, we entered into a number of contracts to the extent that we were unable
to devote substantial resources to research and development activities; most of such contracts were for terms of one year or less and
expired during 2023. During the fiscal year ended April 30, 2023, we were more selective in entering into contracts and conducting projects
in which we devote our resources, and we were engaged in research and development projects that are expected to generate revenue in the
future.
Revenue generated from the sale of NFTs accounted
for 28.4%, 4.8%, and nil of our total revenue for the fiscal years ended April 30, 2024, 2023, and 2022, respectively. Revenue from the
sale of NFTs for the fiscal year ended April 30, 2024 increased by JPY48.7 million, or 2,154.9%, compared to that of the fiscal year ended
April 30, 2023. Such increase was mainly because of the increased sales support for NFTs. The Company started to receive revenue from
the sale of NFTs in the fiscal year ended April 30, 2023.
Cost of Revenue
The following table sets forth the breakdown of
our cost of revenue by category, both in absolute amount and as a percentage of the cost of revenue, for the periods indicated:
| |
Year Ended
April 30, 2024 | | |
Year Ended
April 30, 2023 | | |
Year Ended
April 30, 2022 | |
| |
USD | | |
JPY | | |
% | | |
JPY | | |
% | | |
JPY | | |
% | |
Outsourced staff cost | |
| 165,734 | | |
| 26,109,793 | | |
| 69.5 | % | |
| 8,949,650 | | |
| 29.3 | % | |
| 56,291,194 | | |
| 51.9 | % |
Staff cost | |
| 57,986 | | |
| 9,135,039 | | |
| 24.3 | % | |
| 12,095,669 | | |
| 39.7 | % | |
| 34,473,809 | | |
| 31.8 | % |
Telecommunication cost | |
| 8,959 | | |
| 1,411,352 | | |
| 3.8 | % | |
| 7,892,415 | | |
| 25.9 | % | |
| 15,697,664 | | |
| 14.5 | % |
Rental expense | |
| 5,180 | | |
| 816,030 | | |
| 2.2 | % | |
| 1,346,876 | | |
| 4.4 | % | |
| 1,581,841 | | |
| 1.5 | % |
Others | |
| 702 | | |
| 110,700 | | |
| 0.2 | % | |
| 217,626 | | |
| 0.7 | % | |
| 335,175 | | |
| 0.3 | % |
Total | |
| 238,561 | | |
| 37,582,914 | | |
| 100.0 | % | |
| 30,502,236 | | |
| 100.0 | % | |
| 108,379,683 | | |
| 100.0 | % |
Cost of revenue primarily comprises (1) outsourced
staff cost; (2) staff cost; (3) telecommunication cost; (4) rental expense; and (5) others. Cost of revenue for the fiscal
year ended April 30, 2024 increased by approximately JPY7.1 million, or 23.2%, compared to that of the fiscal year ended April 30,
2023. Such increase was primarily attributable to an increase of JPY17.2 million in outsourced staff cost, partially offset by a decrease
of JPY9.4 million in staff cost and telecommunication cost. Cost of revenue for the fiscal year ended April 30, 2023 decreased by
approximately JPY77.9 million, or 71.9%, compared to that of the fiscal year ended April 30, 2022. Such decrease was primarily attributable
to a decrease of JPY77.5 million in staff cost, outsourced staff cost and telecommunication cost.
Gross Profit/Loss
As a result of changes in revenue and cost of
revenue, our gross profit for the fiscal year ended April 30, 2024 increased by JPY125.7 million, or 782.4%, compared to that of
the fiscal year ended April 30, 2023, and our gross profit for the fiscal year ended April 30, 2023 decreased by JPY339.3 million,
or 95.5%, compared to that of the fiscal year ended April 30, 2022. The following table sets forth a breakdown of gross profit by
services offered for the fiscal years ended April 30, 2024, 2023, and 2022:
| |
Year Ended
April 30, 2024 | | |
Year Ended
April 30, 2023 | | |
Year Ended
April 30, 2022 | |
| |
USD | | |
JPY | | |
% | | |
JPY | | |
% | | |
JPY | | |
% | |
Software and system development services | |
| 616,730 | | |
| 97,159,712 | | |
| 68.5 | % | |
| 3,126,372 | | |
| 19.5 | % | |
| 161,310,365 | | |
| 45.4 | % |
Consulting and solution services | |
| 10,772 | | |
| 1,696,999 | | |
| 1.2 | % | |
| 10,681,029 | | |
| 66.5 | % | |
| 194,028,803 | | |
| 54.6 | % |
Others | |
| 272,414 | | |
| 42,916,026 | | |
| 30.3 | % | |
| 2,258,892 | | |
| 14.0 | % | |
| - | | |
| - | |
Total | |
| 899,916 | | |
| 141,772,737 | | |
| 100.0 | % | |
| 16,066,293 | | |
| 100.0 | % | |
| 355,339,168 | | |
| 100.0 | % |
Operating Expenses
The following table sets forth our operating expenses,
both in absolute amount and as a percentage of the total operating expenses, for the periods indicated:
| |
Year Ended
April 30, 2024 | | |
Year Ended
April 30, 2023 | | |
Year Ended
April 30, 2022 | |
| |
USD | | |
JPY | | |
% | | |
JPY | | |
% | | |
JPY | | |
% | |
Selling and marketing expenses | |
| 350,765 | | |
| 55,259,489 | | |
| 10.6 | % | |
| 55,667,926 | | |
| 13.8 | % | |
| 29,727,815 | | |
| 3.2 | % |
General and administrative expenses | |
| 2,477,476 | | |
| 390,301,519 | | |
| 74.6 | % | |
| 240,003,326 | | |
| 59.3 | % | |
| 201,976,446 | | |
| 21.8 | % |
Share-based compensation expenses | |
| 10,261 | | |
| 1,616,463 | | |
| 0.3 | % | |
| - | | |
| 0.0 | % | |
| 670,000,000 | | |
| 72.2 | % |
Research and development expenses | |
| 482,936 | | |
| 76,081,726 | | |
| 14.5 | % | |
| 108,823,664 | | |
| 26.9 | % | |
| 25,753,717 | | |
| 2.8 | % |
Total | |
| 3,321,438 | | |
| 523,259,197 | | |
| 100.0 | % | |
| 404,494,916 | | |
| 100.0 | % | |
| 927,457,978 | | |
| 100.0 | % |
Selling and marketing expenses
Selling
and marketing expenses include (1) salaries and benefits of our sales and marketing staff, and (2) others, such as advertising
expense and other related payment for our sales and marketing staff. Selling and marketing expenses for the fiscal year ended April 30,
2024 decreased by JPY0.4 million, or 0.7%, compared to those of the fiscal year ended April 30, 2023. Such decrease was primarily
attributable to the reduction in executive compensation, the streamlining of our personnel structure, and the review and adjustment of
employee salaries to appropriate levels. Selling and
marketing expenses for the fiscal year ended April 30, 2023 increased by JPY25.9 million, or 87.3%, compared to those of the fiscal
year ended April 30, 2022. Such increase was primarily attributable to an increase of JPY29.9 million in advertising expenses. The
following table sets forth the breakdown of selling and marketing expenses, both in absolute amount and as a percentage of the total selling
and marketing expenses, for the periods indicated:
| |
Year Ended
April 30, 2024 | | |
Year Ended
April 30, 2023 | | |
Year Ended
April 30, 2022 | |
| |
USD | | |
JPY | | |
% | | |
JPY | | |
% | | |
JPY | | |
% | |
Staff salaries and benefits | |
| 132,690 | | |
| 20,903,945 | | |
| 37.8 | % | |
| 25,812,795 | | |
| 46.4 | % | |
| 29,727,815 | | |
| 100.0 | % |
Other advertising expenses | |
| 218,075 | | |
| 34,355,544 | | |
| 62.2 | % | |
| 29,855,131 | | |
| 53.6 | % | |
| - | | |
| 0.0 | % |
Total | |
| 350,765 | | |
| 55,259,489 | | |
| 100.0 | % | |
| 55,667,926 | | |
| 100.0 | % | |
| 29,727,815 | | |
| 100.0 | % |
General and administrative expenses
Administrative expenses include (1) professional
service fee; (2) salaries and benefits of our management, finance, operations and other staff and outsourced administrative staff; (3)
insurance fee; (4) office expense for our operating; (5) taxes and duties; (6) transportation fee; (7) outsourced staff cost; (8)
rental expense and (9) others, including depreciation and amortization, entertainment fee. The general and administrative expenses for
the fiscal year ended April 30, 2024 increased by JPY150.3 million, or 62.6%, compared to those of the fiscal year ended April 30,
2023. Such increase was primarily attributable to NASDAQ listing and D&O insurance costs. The general and administrative expenses
for the fiscal year ended April 30, 2023 increased by JPY38.0 million, or 18.8%, compared to those of the fiscal year ended April
30, 2022. Such increase was primarily attributable to the increase of staff salaries and benefits and outsourced staff cost. The following
table sets forth the breakdown of general and administrative expenses, both in absolute amount and as a percentage of the total general
and administrative expenses, for the periods indicated:
| |
Year Ended
April 30, 2024 | | |
Year Ended
April 30, 2023 | | |
Year Ended
April 30, 2022 | |
| |
USD | | |
JPY | | |
% | | |
JPY | | |
% | | |
JPY | | |
% | |
Professional service fee | |
| 1,352,423 | | |
| 213,060,659 | | |
| 54.6 | % | |
| 70,537,295 | | |
| 29.4 | % | |
| 69,404,375 | | |
| 34.4 | % |
Staff salaries and benefits | |
| 677,877 | | |
| 106,792,806 | | |
| 27.4 | % | |
| 128,217,664 | | |
| 53.4 | % | |
| 104,440,158 | | |
| 51.7 | % |
Insurance fee | |
| 170,713 | | |
| 26,894,080 | | |
| 6.9 | % | |
| 16,900 | | |
| 0.0 | % | |
| - | | |
| 0.0 | % |
Office expense | |
| 72,075 | | |
| 11,354,771 | | |
| 2.9 | % | |
| 12,298,320 | | |
| 5.1 | % | |
| 7,526,856 | | |
| 3.7 | % |
Taxes and duties | |
| 44,959 | | |
| 7,082,825 | | |
| 1.8 | % | |
| 431,920 | | |
| 0.2 | % | |
| 7,555,945 | | |
| 3.7 | % |
Transportation fee | |
| 43,963 | | |
| 6,925,970 | | |
| 1.8 | % | |
| 4,257,343 | | |
| 1.8 | % | |
| 4,463,061 | | |
| 2.2 | % |
Outsourced staff cost | |
| 42,500 | | |
| 6,695,384 | | |
| 1.7 | % | |
| 16,182,257 | | |
| 6.7 | % | |
| - | | |
| 0.0 | % |
Rental expense | |
| 35,123 | | |
| 5,533,245 | | |
| 1.4 | % | |
| 5,067,643 | | |
| 2.2 | % | |
| 7,104,654 | | |
| 3.5 | % |
Others | |
| 37,843 | | |
| 5,961,779 | | |
| 1.5 | % | |
| 2,993,984 | | |
| 1.2 | % | |
| 1,481,397 | | |
| 0.8 | % |
Total | |
| 2,477,476 | | |
| 390,301,519 | | |
| 100.0 | % | |
| 240,003,326 | | |
| 100.0 | % | |
| 201,976,446 | | |
| 100.0 | % |
Share-based compensation expenses
On July 1, 2019, the shareholders and board of
directors of the Company approved the 2019 trust-type stock option plan (the “2019 Trust-type Plan”), which has an exercise
period of 10 years from July 4, 2019 to July 3, 2029. Under the “2019 Trust-type Plan,” the Company is committed to issue
2,000,000 Ordinary Shares (retrospectively restated to include the effects of the share split of 50-for-1 and 100-for-1 on July 16, 2019
and on October 25, 2021, respectively) of the Company to its eligible employees, officers, directors or any other individual as determined
by the board of directors. The share-based compensation expenses were JPY 1.6 million, nil, and JPY670.0 million for the fiscal year
ended April 30, 2024, 2023, and 2022, respectively. See our financial statements and the related notes included elsewhere in this annual
report for more information.
Research and development expenses
| |
Year Ended
April 30, 2024 | | |
Year Ended
April 30, 2023 | | |
Year Ended
April 30, 2022 | |
| |
USD | | |
JPY | | |
% | | |
JPY | | |
% | | |
JPY | | |
% | |
Staff cost | |
| 207,369 | | |
| 32,668,949 | | |
| 42.9 | % | |
| 27,282,813 | | |
| 25.1 | % | |
| 15,887,724 | | |
| 61.6 | % |
Outsourced staff cost | |
| 200,807 | | |
| 31,635,213 | | |
| 41.6 | % | |
| 71,175,511 | | |
| 65.4 | % | |
| 4,705,466 | | |
| 18.3 | % |
Telecommunication cost | |
| 59,075 | | |
| 9,306,677 | | |
| 12.2 | % | |
| 8,152,791 | | |
| 7.5 | % | |
| 4,171,560 | | |
| 16.2 | % |
Rental expense | |
| 12,732 | | |
| 2,005,725 | | |
| 2.6 | % | |
| 1,759,352 | | |
| 1.6 | % | |
| 866,825 | | |
| 3.4 | % |
Others | |
| 2,953 | | |
| 465,162 | | |
| 0.7 | % | |
| 453,197 | | |
| 0.4 | % | |
| 122,142 | | |
| 0.5 | % |
Total | |
| 482,936 | | |
| 76,081,726 | | |
| 100.0 | % | |
| 108,823,664 | | |
| 100.0 | % | |
| 25,753,717 | | |
| 100.0 | % |
Research and development expenses include (1) salaries
and benefits of our research development staff; (2) outsourced development cost; and (3) other miscellaneous expenses for our
research and development department, such as telecommunication expenses and rental and utility expenses. Research and development expenses
for the fiscal year ended April 30, 2024 decreased by JPY32.7 million, or 30.1%, compared to those of the fiscal year ended April 30,
2023. Such decrease was primarily achieved by the completion of the GLS SDK, which reduced research and development costs, and by reducing
outsourced staff costs through bringing staff in-house. Research and development expenses for the fiscal year ended April 30, 2023
increased by JPY83.1 million, or 322.6%, compared to those of the fiscal year ended April 30, 2022. Such increase was primarily attributable
to the increase in staff cost, outsourced staff cost and telecommunication cost.
Income tax provisions
Income tax benefit was JPY0.2 million for the
fiscal year ended April 30, 2024, as compared to income tax benefit of JPY9.2 million for the fiscal year ended April 30, 2023. Such decrease
in income tax benefit was primarily due to income tax benefit of approximately JPY9.3 million recorded for the fiscal year ended April
30, 2023 which resulted from refund of income taxes paid for the fiscal year ended April 30, 2022. Income tax benefit was JPY9.2 million
(US$0.1 million) for the fiscal year ended April 30, 2023, as compared to income tax expense of JPY28.9 million for the fiscal year ended
April 30, 2022. Such decrease primarily resulted from the decrease of our revenue.
Net loss
As a result of the foregoing reasons, we reported
a net loss of JPY336.2 million for the fiscal year ended April 30, 2024, a net loss of JPY382.3 million for the fiscal year ended April
30, 2023, and a net loss of JPY602.5 million for the fiscal year ended April 30, 2022.
B. Liquidity and Capital Resources
Our primary source of liquidity historically has
been cash generated from our business operations, bank loans, equity contributions from our shareholders and borrowings, which have historically
been sufficient to meet our working capital and capital expenditure requirements.
The following table sets forth the breakdown and
terms of our outstanding borrowings as of April 30, 2024, 2023, and 2022.
|
|
Maturity date |
|
Interest
rate |
|
|
As of April 30,
2024 |
|
|
As of April 30,
2023 |
|
|
As of April 30,
2022 |
|
Kiraboshi bank* |
|
November 2024-March 2030 |
|
|
1.60 |
% |
|
JPY |
33,668,000 |
|
|
JPY |
46,668,000 |
|
|
JPY |
58,668,000 |
|
Resona bank Ltd* |
|
July 2024 |
|
|
1.48 |
% |
|
JPY |
100,000,000 |
|
|
JPY |
100,000,000 |
|
|
|
--- |
|
Shoko Chukin Bank Ltd. |
|
September 2027 |
|
|
2.69 |
% |
|
JPY |
34,700,000 |
|
|
JPY |
45,750,000 |
|
|
|
--- |
|
* |
Guaranteed by Mr. Satoshi Kobayashi, our Chief Executive Officer and Representative Director. |
We believe that our existing cash and cash equivalents
and anticipated cash flow from operations, together with the net proceeds from our initial public offering, will be sufficient to meet
our anticipated cash needs for the next 12 months and beyond the next 12 months from the date of this annual report. However, the exact
amount of proceeds we use for our operations and expansion plans will depend on the amount of cash generated from our operations and any
strategic decisions we may make that could alter our expansion plans and the amount of cash necessary to fund these plans. We may, however,
decide to enhance our liquidity position or increase our cash reserve for future investments through additional capital and finance funding.
We may need additional cash resources in the future if we experience changes in business conditions or other developments, or if we find
and wish to pursue opportunities for investments, acquisitions, capital expenditures or similar actions. If we determine that our cash
requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities
or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence
of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations.
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Our ability to manage our working capital, including
receivables and other assets and liabilities and accrued liabilities, may materially affect our financial condition and results of operations.
The following table sets forth our selected cash
flow data for the fiscal years ended April 30, 2024, 2023, and 2022:
| |
Year Ended April 30, 2024 | | |
Year Ended April 30, 2023 | | |
Year Ended April 30, 2022 | |
| |
USD | | |
JPY | | |
JPY | | |
JPY | |
Net cash flows provided by (used in) operating activities | |
| (2,500,093 | ) | |
| (393,864,227 | ) | |
| (399,737,207 | ) | |
| 100,266,688 | |
Net cash flows provided by (used in) investing activities | |
| (636,890 | ) | |
| (100,336,193 | ) | |
| (1,627,539 | ) | |
| (3,762,358 | ) |
Net cash flows provided by (used in) financing activities | |
| 4,093,272 | | |
| 644,854,140 | | |
| (78,410,121 | ) | |
| 189,134,000 | |
Effect of exchange rate | |
| 259,345 | | |
| 40,857,242 | | |
| 243,159 | | |
| - | |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| 1,215,634 | | |
| 191,510,962 | | |
| (479,531,708 | ) | |
| 293,163,046 | |
Cash, cash equivalents and restricted cash at the beginning of the year/period | |
| 1,129,151 | | |
| 177,886,393 | | |
| 657,418,101 | | |
| 364,255,055 | |
Cash, cash equivalents and restricted cash at the end of the year/period | |
| 2,344,785 | | |
| 369,397,355 | | |
| 177,886,393 | | |
| 657,418,101 | |
Operating Activities
Net cash used in operating activities for
the fiscal year ended April 30, 2024 was JPY393.9 million (US$2.5 million), which primarily reflected our net loss of JPY336.2
million (US$2.1 million) as mainly adjusted for foreign currency exchange gain of JPY40.9 million (US$0.3 million) and changes in
working capital. Adjustments for changes in working capital primarily consisted of (1) JPY40.4 million (US$0.3 million) increase of
contract assets, (2) JPY19.0 million (US$0.1 million) increase of income taxes, net, and (3) JPY18.2 million (US$0.1 million)
increase of other payables and accrued liabilities.
Net cash used in operating activities for the
fiscal year ended April 30, 2023 was JPY399.7 million (US$2.5 million), which primarily reflected our loss of JPY382.3 million (US$2.4
million) as mainly adjusted for changes in working capital. Adjustments for changes in working capital primarily consisted of (1) JPY41.3
million (US$0.3 million) decrease of account receivables, net, and (2) JPY57.6 million (US$0.4 million) decrease of tax payable.
Net cash provided by operating activities for
the fiscal year ended April 30, 2022 was JPY100.3 million (US$0.6 million), which primarily reflected our loss of JPY602.5 million
(US$3.8 million) as mainly adjusted for: (1) share based compensation of JPY670.0 million (US$4.3 million), (2) deferred income taxes
adjustments of JPY16.0 million (US$0.1 million) and changes in working capital. Adjustment for changes in working capital primarily consisted
of (1) JPY31.6 million (US$0.2 million) decrease of account receivables, net, (2) JPY28.1 million (US$0.2 million) increase of income
taxes payables, and (3) JPY24.0 million (US$0.2 million) increase of accrued liabilities and other payables.
Investing Activities
Net cash used in investing activities for the
fiscal year ended April 30, 2024 was JPY100.3 million (US$0.6 million), attributable to purchase of property and equipment of JPY0.3
million (US$0.0 million) and a purchase of time deposit of JPY100.0 million (US$0.6 million).
Net cash used in investing activities for the
fiscal year ended April 30, 2023 was JPY1.6 million (US$0.01 million), attributable to purchase of property and equipment of JPY1.6
million (US$0.01 million).
Net cash provided by investing activities for
the fiscal year ended April 30, 2022 was JPY3.8 million (US$0.02 million), mainly attributable to purchase of property and equipment
of JPY1.0 million (US$0.01 million) and disposal of long-term investment of JPY4.6 million (US$0.03 million).
Financing Activities
Net cash provided by financing activities for
the fiscal year ended April 30, 2024 was JPY644.9 million (US$4.1 million), mainly attributable to proceeds from issuance of
equity securities to shareholders upon IPO on July 27, 2023 in the amount of JPY783.1 million (US$5.0 million), partially offset by payments
on IPO costs of JPY114.2 million (US$0.7 million) and repayment of loan in the amount of JPY24.1 million (US$0.2 million).
Net cash used in financing activities for the
fiscal year ended April 30, 2023 was JPY78.4 million (US$0.5 million), mainly attributable to proceeds from loans in the amount of
JPY150.0 million (US$1.0 million), partially offset by repayment of loan in the amount of JPY16.3 million (US$0.1 million) and payments
on deferred IPO costs in the amount of JPY212.2 million (US$1.3 million).
Net cash provided by financing activities for
the fiscal year ended April 30, 2022 was JPY189.1 million (US$1.2 million), mainly attributable to proceeds from issuance of equity
securities to shareholders in the amount of JPY200.1 million (US$1.3 million) and repayment of long-term loan in the amount of JPY11.0
million (US$0.1 million).
Effect of exchange rate
Effect of exchange rate for the fiscal year ended
April 30, 2024 was JPY40.9 million (US$0.3 million), which resulted from currency exchange gain from cash denominated in USD. Effect of
exchange rate for the fiscal year ended April 30, 2023 was JPY0.2 million (US$0.0 million), which resulted from exchange gain from cash
denominated in USD. Effect of exchange rate for the fiscal year ended April 30, 2022 was nil.
Capital Expenditures
We made capital expenditures of JPY0.3 million,
JPY1.6 million, and JPY1.0 million in the fiscal years ended April 30, 2024, 2023, and 2022, respectively. In these fiscal years, our
capital expenditures were mainly used for procurement of office equipment and leasehold improvements.
Contractual Obligations and Commitments
The following table sets forth our contractual
obligations as of April 30, 2024:
| |
Payment due by period |
|
| |
Total | |
Less than one year | | |
One to three years | | |
Three to five years | | |
More than five years | |
Long-term loan | |
JPY | 68,368,000 | | |
| 19,305,000 | | |
| 39,095,000 | | |
| 9,968,000 | | |
| - | |
Short-term loan | |
JPY | 100,000,000 | | |
| 100,000,000 | | |
| - | | |
| - | | |
| - | |
Operating lease obligations | |
JPY | 11,140,000 | | |
| 8,355,000 | | |
| 2,785,000 | | |
| - | | |
| - | |
Total | |
JPY | 179,508,000 | | |
| 127,660,000 | | |
| 41,880,000 | | |
| 9,968,000 | | |
| - | |
Off-Balance Sheet Arrangements
As of April 30, 2024, 2023, and 2022, we were
not party to any material off-balance sheet financial arrangements that are reasonably likely to have a current or future effect on our
financial condition or operating results. We do not have any relationship with unconsolidated entities or financial partnerships for the
purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.
C. Research and Development, Patents and Licenses, etc.
See “Item 4. Information on the
Company—B. Business Overview—Research and Development” and “Item 4. Information on the Company—B.
Business Overview—Intellectual Property.”
D. Trend Information
Other than as disclosed below and elsewhere in
this annual report on Form 20-F, we are not aware of any trends, uncertainties, demands, commitments, or events for the period from
May 1, 2023 to April 30, 2024 that are reasonably likely to have a material adverse effect on our net sales or revenues, income
from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily
to be indicative of future operating results or financial condition.
Factors and Trends Affecting Our Results of
Operations
We believe the following key factors may affect
our financial condition and results of operations:
The development or acceptance of blockchain
technology in the commercial marketplace
Our business model is dependent on continued investment
in and development of the blockchain industry and related technologies. If investments in the blockchain industry become less attractive
to investors, innovators, and developers, or if blockchain networks and assets do not gain public acceptance or are not adopted and used
by a substantial number of individuals, companies and other entities, it could have a material adverse impact on our prospects and operations.
Our ability to apply the technology effectively
in driving value for our customers through blockchain-based solutions
Our success depends on our ability to apply our
proprietary blockchain technology GLS, develop new services, and improve the performance and cost-effectiveness of the existing services,
in each case in ways that address current and anticipated customer requirements, industry needs and future trends. Such success is dependent
upon several factors, including technology effectiveness, functionality, competitive pricing, licensing and integration with existing
and emerging technologies. The blockchain industry is characterized by rapid technological changes. If we fail to develop and implement
technology solutions and technical expertise that keep pace with changes in technology, industry standards, and customer preferences,
our value proposition could be adversely affected. We may not be successful in anticipating or responding to these developments on a timely
and cost-effective basis and our ideas may not be accepted in the marketplace. Additionally, the effort to gain technological expertise
and develop new technologies in our business may require us to incur significant expenses. Any of these events could result in a material
adverse effect on our operating results, customer relationships, and business.
Telecommunications infrastructure and the
performance of devices equipped with blockchain
The success of our blockchain-based services will
depend on the continued development of a stable telecommunications infrastructure with the necessary speed, data capacity and security,
complementary products such as high-speed networking equipment for providing reliable internet access and services, and other devices
that are equipped with blockchain. There is no assurance that the relevant infrastructure and devices will continue to be able to support
the demands placed on it by the growth of blockchain technology. There is also no assurance that the infrastructure or complementary products
or services necessary to support the blockchain technology will be developed in a timely manner, or that such development will not incur
substantial costs to adapt to changing technologies. The failure of these platforms and devices or their development could materially
and adversely affect our business, financial condition and results of operation.
Our ability to compete successfully
We design, upgrade, and maintain technology systems
for our customers. We expect to encounter competition in our business, including from entities having substantially greater capital and
resources and offering a wider range of products and services. Many of our competitors may have greater financial, marketing, technological
and personnel resources than we do, and may offer a wider range of bundled services, have broader name recognition, and have larger customer
bases than we do.
Our ability to develop competitive advantages
will require continued improvement in GLS, enhancements to our services, investment in the development of our services, and additional
marketing activities. There can be no assurance that we will timely implement changes into our technology, that we will have resources
to make sufficient investments in the development of our services, that our competitors will not devote significantly more resources to
competing services, or that we will otherwise be successful in developing market share. If competitors offer superior services, or implement
changes in a timelier and more cost-effective manner, our market share could be affected, and this would adversely impact our business
and results of operations.
Our ability to retain major customers and
acquire new customers
Although we do not heavily rely upon any one customer
for the majority of our revenue, our revenue is dependent on a limited number of customers who account for a large percentage of our contractually
committed capacity. If one or more of our significant customers fail to make payments to us or does not honor their contractual commitments,
our revenue and results of operations would be materially and adversely affected.
In addition, our reliance on any individual significant
customer may give that customer a degree of pricing leverage against us when negotiating contracts and terms of services with us. The
loss of any of our major customers, or a significant decrease in the extent of the services that they outsource to us or the level of
prices we offer, could materially and adversely affect our financial condition and results of operations.
Any of our customers could experience a downturn
in their business, which in turn could result in their inability or failure to make timely payments to us pursuant to their contracts
with us. In the event of any customer default, our liquidity could be adversely impacted. These risks would be particularly significant
if one of our major customers were to experience adverse effects to its business and defaults under their contracts with us.
E. Critical
Accounting Estimates
Our financial statements are prepared in accordance
with U.S. GAAP, which requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the
financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. We base our accounting estimates and assumptions on historical experience and other factors that we believe to be reasonable under
the circumstances. However, actual results may differ from those estimates. Our critical accounting policies are those that materially
affect our financial statements and are subject to complex judgment by our management.
Income taxes
Deferred income taxes reflect the impact of temporary
differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes and
tax loss carryforwards. These deferred taxes are measured using the currently enacted tax rates in effect for the year in which the
temporary differences or tax loss carryforwards and tax credits are expected to reverse.
Valuation allowances are provided against deferred
tax assets when it is more likely than not that a tax benefit will not be realized. The Company considers all available evidence (both
positive and negative) when determining whether a valuation allowance is required, with emphasis on its past operating results, the existence
of cumulative losses in the most recent years and its forecast of near-term taxable income.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors
and Senior Management
The following sets forth information regarding
members of our board of directors and our executive officers as of the date of this annual report.
Name |
|
Age |
|
Position(s) |
Satoshi Kobayashi |
|
38 |
|
Chief Executive Officer, and Representative Director |
Hiroki Yamamoto |
|
33 |
|
Chief Technology Officer, and Director |
Kota Kobayashi |
|
30 |
|
Chief Financial Officer |
Masahiro Tominaga |
|
45 |
|
Independent Director |
Kiyomitsu Takayama |
|
48 |
|
Independent Director |
Masayoshi Gomita |
|
44 |
|
Independent Director |
Shinpei Ogose* |
|
32 |
|
Company Auditor |
Masaaki Aono* |
|
40 |
|
Company Auditor |
Kohichi Goto* |
|
57 |
|
Company Auditor |
* |
Company auditors are not members of our board of directors. |
Satoshi Kobayashi has served as
our Chief Executive Officer and Representative Director since our inception. He co-founded our Company in May 2018. From July 2017 to
December 2018, Mr. Satoshi Kobayashi served as the representative director with FEELO.Co. to oversee that company’s entire
merchandising business. From January 2013 to December 2015, he acted as a manager of Pasona Inc., where he was in charge of temporary
staff management and consulting.
Hiroki Yamamoto has served as our
Chief Technology Officer and Director since our inception. Mr. Hiroki Yamamoto co-founded our Company with Mr. Satoshi Kobayashi
in May 2018. From August 2015 to May 2018, he was in charge of software development at arl-Y Office. From April 2013 to July 2015, he
acted as a software developer at Sunplan Soft Co. He studied Robotics Creation and obtained an Associate Degree from Nagoya Kogakuin College
of Technology in March 2013.
Kota Kobayashi has served as our
Chief Financial Officer since May 2024. Mr. Kobayashi has served as the co-founder and CEO of Hotaru Inc., which provides rent guarantees
to tenants who need a guarantor under lease agreements, since December 2023. He has served as the founder and CEO of Pyrus Inc., which
provides fundraising support and management consulting for companies in the sports industry and start-ups, since November 2018. He served
as an analyst at Mizuho Securities Co., Ltd. from April 2018 to November 2018, and an analyst at Mizuho Bank, Ltd. from April 2017 to
March 2018. He obtained a Bachelor’s degree in finance from Benedictine College in Kansas, United States in 2016.
Masahiro Tominaga has served as
our Independent Director since July 2019. Since January 2016, he has served as the representative director of Dizzy Co., which is engaged
in the business of management consulting and web-related consulting. From January 2003 to December 2015, he was the executive vice president
of UNIMEDIA INC., a company dedicated to digital innovation. He studied economics and obtained a Bachelor’s degree from Musashi
University in March 2001.
Kiyomitsu Takayama has served as
our Independent Director since February 2021. Since September 2023, he has served as the CRO at Josys inc. Since November 2020, he has
served as chairman at Pendo.io Japan, which is a product management company. From February 2014 to October 2020, he was an executive officer
and the general manager of sales of Box Japan, Inc., a digital solution provider. He studied business administration and obtained a Bachelor’s
degree from Aoyama Gakuin University in 1999.
Masayoshi Gomita has served as our
Independent Director since November 2023. Since August 2017, he has served as the representative director of JWS Japan White Spread. In
March 2020, he founded Canvas Certified Social Insurance and Labor Consultant Corporation, where he currently serves as an advisor. He
was appointed as the chairman and CEO of Create Management Association in July 2022. In June 2021, he founded Peer Pressure LLC, serving
as the representative member. Additionally, he has been an independent director of Waybe Inc. since September 2021 and a director of WeCapital
Co., Ltd. since December 2022. He studied economics and obtained a Bachelor’s degree from Wakayama University in March 2003.
Shinpei Ogose has served as our
Company Auditor since November 2023. He was an associate at Ernst & Young ShinNihon LLC from April 2014 to October 2017 and a manager
at dely Inc. from August 2018 to October 2021. In November 2021, he established Ogose CPA Office, where he currently serves. In July 2022,
he founded in Co., Ltd., and served as its CEO until March 2024. In July 2023, he founded Tokyo Kokusai Consulting Inc, and has served
as its CEO. He studied economics and obtained a Bachelor’s degree from University of Rikkyo in March 2014.
Masaaki Aono has served as our Company
Auditor since September 2022. He practiced law at Nagashima Ohno & Tsunematsu from December 2009 to March 2022 and at Mayer Brown
from September 2015 to July 2016 in the U.S. Since October 2022, he has served as an outside director, and audit and supervisory committee
member at Halmek Holdings Inc, which is a publicly listed company in Japan (TYO: 7119). Since April 2022, he has been a partner at CrossOver
Law Firm in Japan. He graduated from the University of Tokyo School of Law in March 2008 and from the University of Chicago School of
Law (LL.M.) in June 2015.
Koichi Goto has served as our Company
Auditor since July 2019. Since July 2020, he has served as an auditor of KakaoPiccoma Inc., which operates the electronic comic and novel
service “Piccoma.” From June 2023 to June 2024, he served as a director at WASEDA GAKUSHUKENKYUKAI CO., LTD, which is a publicly
listed company in Japan (TYO: 5869). From April 2016 to January 2024, he served as an auditor of WAKUWAKU Corporation, which is engaged
in a renovation platform. From August 2014 to December 2018, he served as a director at SPRIX Inc. He graduated from the Faculty of Economics
at Keio University in March 1990.
There is no family relationship among any of the
directors, company auditors, and officers. There is no arrangement or understanding among any of our directors and members of senior management
or any other person pursuant to which our directors and members of senior management are appointed.
Board Diversity
The table below provides certain information regarding
the diversity of our board of directors as of the date of this annual report.
Board Diversity Matrix |
Country of Principal Executive Offices: |
Japan |
Foreign Private Issuer |
Yes |
Disclosure Prohibited under Home Country Law |
No |
Total Number of Directors |
5 |
|
Female |
Male |
Non-
Binary |
Did Not
Disclose
Gender |
Part I: Gender Identity |
|
Directors |
0 |
5 |
0 |
0 |
Part II: Demographic Background |
|
Underrepresented Individual in Home Country Jurisdiction |
0 |
LGBTQ+ |
0 |
Did Not Disclose Demographic Background |
0 |
Controlled Company
As of the date of this annual report, Mr. Satoshi
Kobayashi, our Chief Executive Officer and Representative Director, beneficially owns more than 50% of the voting power of our outstanding
Ordinary Shares. As a result, we are a “controlled company” within the meaning of the Nasdaq listing rules. As a controlled
company, we are permitted to elect to rely on certain exemptions from the obligations to comply with certain corporate governance requirements,
including the requirements that:
| ● | a
majority of our board of directors consist of independent directors; |
| ● | our
director nominees be selected or recommended solely by independent directors; and |
| ● | we
have a nominating and corporate governance committee and a compensation committee that are composed entirely of independent directors
with a written charter addressing the purposes and responsibilities of the committees. |
As a foreign private issuer, however, Nasdaq corporate
governance rules allow us to follow corporate governance practice in our home country, Japan, with respect to appointments to our board
of directors and committees. We have followed home country practice as permitted by Nasdaq rather than rely on the “controlled company”
exception to the corporate governance rules. See “Item 3. Key Information—D. Risk Factors— Risks Related to
Our Ordinary Shares and the Trading Market—Because we are a foreign private issuer and have taken advantage of exemptions from certain
Nasdaq corporate governance standards applicable to U.S. issuers, you have less protection than you would have if we were a domestic issuer.”
Accordingly, you do not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance
requirements of Nasdaq.
B. Compensation
Compensation
In accordance with the Companies Act, compensation
for our directors, including bonuses, retirement allowances, and incentive stock options, must be approved at our general meeting of shareholders,
unless otherwise specified in our amended articles of incorporation. The shareholders’ approval may specify the upper limit of the
aggregate amount of compensation or calculation methods, but if compensation includes benefits in kind, the shareholders’ approval
must include the description of such benefits. Compensation for a director is fixed by our board of directors in accordance with our internal
regulations and practice and, in the case of retirement allowances, generally reflects the position of the director or executive officer
at the time of retirement, length of service as a director and contribution to our performance.
For the fiscal year ended April 30, 2024, we
paid an aggregate of JPY45,554,611 (US$289,162) as compensation to our executive officers and directors. For the fiscal year ended
April 30, 2024, we did not grant stock options or provide discretionary bonuses. We allocated stock options to certain individuals
as described below. We have not set aside or accrued any amount to provide pension, retirement, or other similar benefits to our
directors and senior management.
Stock Options
We have granted stock options to purchase our
Ordinary Shares, as authorized by our shareholders on February 5, 2019, under the share option plan, and on July 1, 2019, under the
2019 Trust-type Plan. The purpose of these grants is to enable our directors, senior management, and employees to share in our success
and to reinforce a corporate culture that aligns employee interests with those of our shareholders. Our stock option grants generally
prohibit transfers of options. A stock option holder generally forfeits such stock options if they are no longer a director, company auditor,
or employee of our Company, except under limited circumstances or as otherwise determined by our board of directors. A stock option holder
can generally exercise stock options only if our Company’s Ordinary Shares are listed on any financial instrument exchanges. The
following table summarizes the stock options we have issued.
Name of Issuance | |
Issuance Date | |
Beginning of Exercise Period | | |
End of Exercise Period | | |
Exercise Price (per share) | | |
Number of Ordinary Shares Granted | |
Share option plan | |
2/28/2019 | |
3/1/2021 | | |
2/28/2029 | | |
JPY | 2 | | |
| 1,020,000 | (1) |
2019 Trust-type Plan | |
7/4/2019 | |
7/4/2019 | | |
7/3/2029 | | |
JPY | 50 | | |
| 1,960,000 | |
Notes:
(1) |
Stock options to acquire 15,000 of our Ordinary Shares have expired, and stock options to acquire 1,020,000 of our Ordinary Shares remain outstanding as of April 30, 2024. |
Of the stock options granted pursuant to the above-mentioned
grants, stock options to acquire an aggregate of 60,000 of our Ordinary Shares have been extinguished, and stock options to acquire an
aggregate of 2,980,000 of our Ordinary Shares remained outstanding as of April 30, 2024.
The following table summarizes the outstanding
stock options with respect to our Ordinary Shares that we have granted to our directors and senior management:
Name | |
Grant Date | |
Beginning of Exercise Period | |
End of Exercise Period | |
Exercise Price (per share) | | |
Total Number of Stock Options Granted | | |
Total Number of Ordinary Shares Underlying Stock Options | |
Hiroki Yamamoto | |
2/28/2019 | |
3/1/2021 | |
2/28/2029 | |
JPY | 2 | | |
| 200 | | |
| 1,000,000 | |
Hiroki Yamamoto | |
1/25/2024 | |
7/4/2019 | |
7/3/2029 | |
JPY | 50 | | |
| 3,600 | | |
| 360,000 | |
Masahiro Tominaga | |
1/25/2024 | |
7/4/2019 | |
7/3/2029 | |
JPY | 50 | | |
| 5,000 | | |
| 500,000 | |
Kiyomitsu Takayama | |
1/25/2024 | |
7/4/2019 | |
7/3/2029 | |
JPY | 50 | | |
| 200 | | |
| 20,000 | |
Masayoshi Gomita | |
1/25/2024 | |
7/4/2019 | |
7/3/2029 | |
JPY | 50 | | |
| 100 | | |
| 10,000 | |
Shinpei Ogose | |
1/25/2024 | |
7/4/2019 | |
7/3/2029 | |
JPY | 50 | | |
| 100 | | |
| 10,000 | |
C. Board Practices
Board of Directors
Our board of directors has the ultimate responsibility
for the administration of our affairs. Under the Companies Act and our amended articles of incorporation, we are required to have no fewer
than three but not more than ten directors. Directors are elected at general meetings of shareholders. The normal term of office of any
director expires at the close of the annual general meeting of shareholders held with respect to the last fiscal year ended within two
years after such company auditor’s election to office.
The board of directors appoints from among its
members one or more representative directors, who have the authority individually to represent us in the conduct of our affairs. Mr. Satoshi
Kobayashi is the representative director of our Company. The board of directors may appoint from among its members a chairperson and a
president, or one or more vice-presidents, senior managers, and executive managers of the board.
Our board of directors consists of five directors.
Our board of directors has determined that our outside directors, Masahiro Tominaga, Kiyomitsu Takayama, and Masayoshi Gomita satisfy
the “independence” requirements of the Nasdaq corporate governance rules and the rules and regulations of the SEC.
Company auditors (kansayaku)
We currently have three company auditors. As permitted
under the Companies Act, we have elected to structure our corporate governance system as a company with a board of company auditors instead
of board committees. Under the Companies Act and our amended articles of incorporation, we are required to have at least three but no
more than 5 company auditors. Company auditors are elected at general meetings of shareholders. The normal term of office of any company
auditor expires at the close of the annual general meeting of shareholders held with respect to the last fiscal year ended within four
years after such company auditor’s election to office. Our company auditors may, however, serve any number of consecutive terms.
Company auditors may be removed by a special resolution of a general meeting of shareholders.
Our company auditors are not required to be certified
public accountants. Our company auditors may not at the same time be directors, employees, or accounting advisors (kaikei sanyo) of our
Company.
The function of company auditors is similar to
that of independent directors, including those who are members of the audit committee, of a U.S. company. Each company auditor has a statutory
duty to supervise the administration by the directors of our affairs, to examine the financial statements and business reports to be submitted
by a representative director at the general meetings of shareholders and to prepare an audit report. They are obligated to participate
in meetings of the board of directors and, if necessary, to express their opinion at such meetings, but are not entitled to vote. Our
company auditors must inspect the proposals, documents, and any other materials to be submitted by our board of directors to the shareholders
at the shareholders’ meeting. If a company auditor finds a violation of statutory regulations or our amended articles of incorporation,
or another significant improper matter, such auditor must report those findings to the shareholders at the shareholders’ meeting.
Furthermore, if a company auditor believes that
a director has engaged in, or is likely to engage in, misconduct or acts that are significantly improper, or that there has been a violation
of statutory regulations or our amended articles of incorporation, the company auditor: (i) must report that fact to our board of
directors; (ii) can demand that a director convene a meeting of our board of directors; and (iii) if no such meeting is convened
in response to the demand, can convene the meeting under the company auditor’s own authority. If a director engages in, or is likely
to engage in, an activity outside the scope of the objectives of our Company or otherwise in violation of laws or regulations or our amended
articles of incorporation, and such act is likely to cause significant damage to our Company, then a company auditor can demand that the
director cease such activity.
Our board of company auditors has a statutory
duty to prepare an audit report based on the audit reports issued by the individual company auditors and submit such audit reports to
a relevant director and, in the case of audit reports related to financial statements, the independent auditors of our Company each year.
A company auditor may note an opinion in an audit report issued by our board of company auditors, if the opinion expressed in such company
auditor’s individual audit report is different from the opinion expressed in the audit report issued by our board of company auditors.
Our board of company auditors is empowered to establish the audit principles, the method of examination by our company auditors of our
affairs and financial position, and any other matters relating to the performance of our company auditors’ duties.
Additionally, our company auditors must represent
our Company in: (i) any litigation between our Company and a director; (ii) dealing with shareholders’ demands seeking
a director’s liability to our Company; and (iii) dealing with notices of litigation and settlement in a derivative suit seeking
a director’s liability to our Company. A company auditor can file court actions relating to our Company within the authority of
our company auditors, such as an action to nullify the incorporation of our Company, the issuance of shares, or a merger, or to cancel
a resolution at a shareholders’ meeting.
Limitation of Liability of Directors
Under the Companies Act and our amended articles
of incorporation we may exempt, by resolution of the board of directors, our directors from liabilities to us arising in connection with
their failure to execute their duties in good faith and without gross negligence, within the limits stipulated by applicable laws and
regulations. In addition, our amended articles of incorporation provide that we may enter into agreements with our directors (excluding
executive directors) to limit their respective liabilities to us arising in connection with a failure to execute their duties in good
faith and without gross negligence to an amount stipulated in laws and regulations. We have obtained directors and officers liability
insurance, which covers expenses, capped at a certain amount, that our directors and officers may incur in connection with their conduct
as our directors or executive officers.
D. Employees
See “Item 4. Information on the
Company—B. Business Overview—Employees.”
E. Share Ownership
The following table sets forth information with
respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange Act, of our Ordinary Shares as of April
30, 2024 for:
| ● | each
of our named executive officers and directors; |
| ● | all
our named executive officers and directors as a group; and |
| ● | each
person or entity (or group of affiliated persons or entities) known by us to be the beneficial owner of 5% or more of our Ordinary Shares. |
Beneficial ownership includes voting or investment
power with respect to the Ordinary Shares. Except as indicated below, and subject to applicable community property laws, the persons named
in the table have sole voting and investment power with respect to all Ordinary Shares shown as beneficially owned by them. Percentage
of beneficial ownership of each listed person is based on 15,076,900 Ordinary Shares outstanding and 2,980,000 Ordinary Shares subject
to options that are exercisable.
Information with respect to beneficial ownership
has been furnished by each named executive officer, director, or beneficial owner of 5% or more of our Ordinary Shares. Beneficial ownership
is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with
respect to securities. In computing the number of Ordinary Shares beneficially owned by a person listed below and the percentage
ownership of such person, Ordinary Shares underlying options, warrants, or convertible securities held by each such person that are exercisable
or convertible within 60 days of the date of this annual report are deemed outstanding, but are not deemed outstanding for computing
the percentage ownership of any other person.
| |
Ordinary Shares Beneficially Owned | |
| |
Number | | |
Percent | |
Directors and Executive Officers(1): | |
| | |
| |
Satoshi Kobayashi(2) | |
| 9,462,265 | | |
| 62.76 | % |
Hiroki Yamamoto(3) | |
| 1,360,000 | | |
| 8.81 | % |
Kota Kobayashi | |
| — | | |
| — | |
Masahiro Tominaga(4) | |
| 500,000 | | |
| 3.21 | % |
Kiyomitsu Takayama(5) | |
| 20,000 | | |
| * | |
Masayoshi Gomita(6) | |
| 10,000 | | |
| * | |
Shinpei Ogose(7) | |
| 10,000 | | |
| * | |
Masaaki Aono | |
| 10,000 | | |
| * | |
Kohichi Goto | |
| 25,000 | | |
| * | |
All directors and executive officers as a group (9 individuals)(8): | |
| 9,462,265 | | |
| 69.62 | % |
| |
| | | |
| | |
5% Shareholders: | |
| | | |
| | |
Satoshi Kobayashi(2) | |
| 9,462,265 | | |
| 62.76 | % |
Hiroki Yamamoto(3) | |
| 1,360,000 | | |
| 8.81 | % |
Themis Capital GK(9) | |
| 4,000,000 | | |
| 26.53 | % |
* |
Represents less than 1% of the number of Ordinary Shares outstanding. |
Notes:
(1) |
Unless otherwise indicated, the business address of each of the individuals is 5-7-11, Ueno, Taito-ku, Tokyo, Japan. |
(2) |
Represents (i) 5,462,265 Ordinary Shares held personally, and (ii) 4,000,000 Ordinary Shares held by Themis Capital GK (合同会社テミスキャピタル), which is 100% owned by Satoshi Kobayashi. |
(3) |
The aggregate number of
Ordinary Shares beneficially owned by Hiroki Yamamoto represents (i) 1,000,000 outstanding Ordinary Shares held personally, and
(ii) 360,000 Ordinary Shares that may be issued upon exercise of stock options, held by Hiroki Yamamoto. |
(4) |
The aggregate number of Ordinary Shares beneficially owned by Masahiro Tominaga represents 500,000 Ordinary Shares that may be issued upon exercise of stock options, held by Masahiro Tominaga. Masahiro Tominaga does not personally own any outstanding Ordinary Shares. |
|
|
(5) |
The aggregate number of Ordinary Shares beneficially owned by Kiyomitsu Takayama represents 20,000 Ordinary Shares that may be issued upon exercise of stock options, held by Kiyomitsu Takayama. Kiyomitsu Takayama does not personally own any outstanding Ordinary Shares. |
(6) |
The aggregate number of Ordinary Shares beneficially owned by Masayoshi Gomita represents 10,000 Ordinary Shares that may be issued upon exercise of stock options, held by Masayoshi Gomita. Masayoshi Gomita does not personally own any outstanding Ordinary Shares. |
|
|
(7) |
The aggregate number of Ordinary Shares beneficially owned by Shinpei Ogose represents 10,000 Ordinary Shares that may be issued upon exercise of stock options, held by Shinpei Ogose. Shinpei Ogose does not personally own any outstanding Ordinary Shares. |
|
|
(8) |
Excludes (i) 360,000 Ordinary Shares that may be issued upon exercise of stock options, held by Hiroki Yamamoto, (ii) 500,000 Ordinary Shares that may be issued upon exercise of
stock options, held by Masahiro Tominaga, (iii) 20,000 Ordinary Shares that may be issued upon exercise of stock options, held by Kiyomitsu
Takayama, (iv) 10,000 Ordinary Shares that may be issued upon exercise of stock options, held by Masayoshi Gomita, and (v) 10,000 Ordinary
Shares that may be issued upon exercise of stock options, held by Shinpei Ogose. |
|
|
(9) |
Represents 4,000,000 ordinary shares held by Themis Capital GK (合同会社テミスキャピタル), which is 100% owned by Satoshi Kobayashi. Its business address is 5-7-11, Ueno, Taito-ku, Tokyo, Japan. |
On May 16, 2024, we effected the change to the
ratio of our ADSs to Ordinary Shares, from one (1) ADS representing one (1) Ordinary Share to one (1) ADS representing five (5) Ordinary
Shares. Such change has no impact on an ADS holder’s proportional equity interest in the Company.
As of April 30, 2024, approximately 34.02% of
our issued and outstanding Ordinary Shares were held in the United States by one record holder, the Bank of New York Mellon.
To our knowledge, the Company is not directly
or indirectly owned or controlled by another corporation(s), by any foreign government, or by any other natural or legal person(s) severally
or jointly. None of the Company’s major shareholders have any different or special voting rights with respect to their Ordinary
Shares. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our Company.
F. Disclosure of a registrant’s action
to recover erroneously awarded compensation
Not applicable.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
See “Item 6. Directors, Senior Management
and Employees—E. Share Ownership.”
B. Related
Party Transactions
The relationship and the nature of related party
transactions are summarized as follows:
Name of Related Party |
|
Relationship to Our Company |
Satoshi Kobayashi |
|
Our Chief Executive Officer and Representative Director |
On October 1, 2019, our Company entered into an
office space lease agreement with a third party, pursuant to which our Company promised to pay JPY696,250 (US$5,120) per month to lease
our office space. Mr. Satoshi Kobayashi is a guarantor for the rental payment. The expiration date for the lease agreement is on September
30, 2025.
On November 13, 2019, our Company entered into
a loan agreement with Kiraboshi Bank, pursuant to which our Company borrowed JPY35,000,000 (US$222,166) at an annual interest rate of
1.6%. Mr. Satoshi Kobayashi was a guarantor for the loan. The maturity date for such loan is November 12, 2024. As of April 30, 2024,
the outstanding principal balance of such loan was JPY4,101,000 (US$26,031). As of the date of this annual report, the outstanding principal
balance of such loan is JPY2,352,000 (US$14,930).
On April 16, 2020, our Company entered into a
second loan agreement with Kiraboshi Bank, pursuant to which our Company borrowed JPY50,000,000 (US$317,380) at an annual interest rate
of 1.6%. Mr. Satoshi Kobayashi was a guarantor for the loan. The maturity date for such loan is March 31, 2030. As of April 30, 2024,
the outstanding principal balance of such loan was JPY29,567,000 (US$187,679). As of the date of this annual report, the outstanding principal
balance of such loan is JPY28,316,000 (US$179,738).
On August 31, 2022, our Company entered into an
overdraft agreement with Resona Bank, Ltd. The maximum borrowing amount is JPY100 million (US$634,759). We borrowed JPY100 million on
September 29, 2022 at an annual interest rate of 1.475%. The maturity date for such loan was April 28, 2023, which was extended to July
31, 2024. Satoshi Kobayashi is the joint guarantor on the loan. As of the date of this annual report, the loan has been paid off.
C. Interests
of Experts and Counsel
Not applicable.
Item 8. FINANCIAL INFORMATION
A. Consolidated
Statements and Other Financial Information
We have appended financial statements filed as
part of this annual report. See “Item 18. Financial Statements.”
Legal Proceedings
Certain shareholders of the Company filed a lawsuit
in the Tokyo District Court against the Company and Mr. Satoshi Kobayashi, the Company’s Chief Executive Officer and Representative
Director. The complaint, which is dated December 18, 2023, was served on the Company and Mr. Kobayashi on January 12, 2024. The plaintiffs
alleged that Mr. Kobayashi violated Article 709 of the Japanese Civil Code by intentionally delaying or misrepresenting the procedures
necessary for the sale of shares, thereby unfairly depriving the plaintiffs of the opportunity to sell their shares on the Nasdaq market
at a higher price following the Company’s initial public offering, and that the Company shall be liable for damages caused by Mr.
Kobayashi in the discharge of his duties as the Company’s Representative Director under Article 350 of the Japanese Companies Act.
The plaintiffs sought monetary damages in the total amount of $2,925,747, plus interest and costs. We may from time to time be subject
to various legal or administrative claims and proceedings arising in the ordinary course of our business. Any litigation or other legal
or administrative proceedings, regardless of the outcome, are likely to result in substantial costs and a diversion of our resources,
including our management’s time and attention.
Dividend Policy
We currently intend to retain any future earnings
to finance the development and expansion of our businesses and, therefore, do not intend to pay any cash dividends in the foreseeable
future. Since our inception, we have not declared or paid any cash dividends on our shares. Any decision to pay dividends in the future
will be subject to a number of factors, including our financial condition, results of operations, the level of our retained earnings,
capital demands, general business conditions, and other factors our board of directors may deem relevant. Accordingly, we cannot give
any assurance that any dividends may be declared and paid in the future.
If declared, holders of our outstanding shares
on a dividend record date will be entitled to the full dividend declared without regard to the date of issuance of the shares or any subsequent
transfer of the shares. Payment of declared annual dividends in respect of a particular year, if any, will be made in the following year
after approval by our shareholders at the annual general meeting of shareholders, subject to certain provisions of our amended articles
of incorporation and the Companies Act. Any dividend we declare will be paid by the depositary bank to the holders of ADSs, subject to
the terms of the deposit agreement, to the same extent as holders of our shares, to the extent permitted by applicable law and regulations,
less the fees and expenses payable under the deposit agreement.
B. Significant
Changes
Except as disclosed elsewhere in this annual report,
we have not experienced any significant changes since the date of our audited financial statements included in this annual report.
Item 9. THE OFFER AND LISTING
A. Offer and
Listing Details.
Our ADSs are listed on the Nasdaq Capital Market
under the symbol “ELWS.” Holders of our ADSs should obtain current market quotations for their ADSs.
B. Plan of
Distribution
Not applicable.
C. Markets
Our ADSs are listed on the Nasdaq Capital Market
under the symbol “ELWS.” Holders of our ADSs should obtain current market quotations for their ADSs.
D. Selling
Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses
of the Issue
Not applicable.
Item 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum
and Articles of Association
We incorporate by reference into this annual report
the description of our articles of association, Exhibit 3.1, and the description of differences in corporate laws contained in our
registration statement on Form F-1 (File No. 333-269068), as amended, initially filed with the SEC on December 30, 2022. Also
see Exhibit 2.3 attached to this annual report.
C. Material
Contracts
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 4. Information on the Company”
or elsewhere in this annual report.
D. Exchange
Controls
Foreign Exchange Regulations
FEFTA and related regulations regulate certain
transactions involving a “Non-Resident of Japan” or a “Foreign Investor,” including “inward direct investments”
by Foreign Investors, and payments from Japan to foreign countries or by residents of Japan to Non-Residents of Japan.
“Non-Residents of Japan” are defined
as individuals who are not residents in Japan and corporations whose principal offices are located outside of Japan. Generally, branches
and other offices of Japanese corporations which are located outside of Japan are regarded as Non-Residents of Japan, and branches and
other offices of non-resident corporations which are located within Japan are regarded as residents of Japan.
“Foreign Investors” are defined as:
|
(i) |
individuals who are Non-Residents of Japan; |
|
(ii) |
entities which are organized under the laws of foreign countries or whose principal offices are located outside of Japan; |
|
(iii) |
companies of which 50% or more of their voting rights are held by individuals who are Non-Residents of Japan and/or corporations which are organized under the laws of foreign countries or whose principal offices are located outside of Japan; |
|
(iv) |
partnerships engaging in investment activities and investment limited partnerships (including partnerships formed under the laws of foreign countries) which satisfy one of the following conditions: |
(a) 50% or more of contributions to
the partnership were made by (i) individuals who are Non-Residents of Japan, (ii) entities which are organized under the laws
of foreign countries or whose principal offices are located outside of Japan, (iii) companies of which 50% or more of their voting
rights are held by individuals who are Non-Residents of Japan and/or corporations which are organized under the laws of foreign countries
or whose principal offices are located outside of Japan, (iv) entities a majority of whose officers, or officers having the power
of representation, are individuals who are Non-Residents of Japan, or (v) partnerships a majority of whose executive partners fall
within items (i) through (iv) above; and
(b) a majority of the executive partners
of the partnership are (A) any persons or entities who fall within items (i) through (v) above, (B) any partnerships
to which 50% or more of contribution were made by persons or entities who fall within items (i) through (v) above, or (C) limited
partnerships a majority of whose executive partners fall within Non-Residents of Japan, persons or entities who fall within (A) or
(B), or any officers of entities which fall within (A) or (B); and
|
(v) |
entities, a majority of whose officers are individuals who are Non-Residents of Japan. |
Under FEFTA and related regulations, dividends
paid on, and the proceeds of sales in Japan of, shares held by Non-Residents of Japan may in general be converted into any foreign currency
and repatriated abroad.
Under FEFTA, among other triggering events, a
Foreign Investor who desires to acquire shares in a Japanese company which is not listed on any stock exchange in Japan, is subject to
a prior filing requirement, regardless of the acquired amount of shares, if such Japanese company engages any business in certain industries
related to the national security. Such industries include, among other things, manufacturing in relation to weapons, aircraft, space,
and nuclear power, as well as agriculture, fishery, mining, and utility service. Additionally, due to today’s growing awareness
of cybersecurity, the recent amendment to FEFTA expanded the scope of the prior filing requirement, broadly covering industries related
to data processing businesses and information and communication technologies service. Since our software services could potentially involve
custom software services and miscellaneous fixed telecommunications, direct acquisition of our Ordinary Shares, rather than ADSs, by a
Foreign Investor could be subject to the prior filing requirement under FEFTA.
A Foreign Investor wishing to acquire or hold
our Ordinary Shares directly will be required to make a prior filing with the relevant government authorities through the Bank of Japan
and wait until clearance for the acquisition is granted by the applicable governmental authorities. Without such clearance, the Foreign
Investor will not be permitted to acquire or hold our Ordinary Shares directly. Once clearance is obtained, the Foreign Investor may acquire
shares in the amount indicated in the filing any time within six months of the filing. While the standard waiting period to obtain
clearance is 30 days, the waiting period could be expedited to two weeks, at the discretion of the applicable governmental authorities,
depending on the level of potential impact to national security.
In addition to the prior filing requirement above,
when a Foreign Investor who completed a prior filing and received clearance has acquired shares in accordance with the filed information,
such Foreign Investor will be required to make a post-acquisition notice filing to report the completed acquisition. Such post-acquisition
notice filing must be made no later than 45 days after the acquisition of the shares.
Under FEFTA, in each case where a resident of
Japan receives a single payment of more than JPY30 million from a Non-Resident of Japan for a transfer of shares in a Japanese company,
such resident of Japan is required to report each receipt of payment to the Minister of Finance of Japan.
E. Taxation
Japanese Taxation
The following is a general summary of the principal
Japanese tax consequences (limited to national tax) to owners of our Ordinary Shares, in the form of Ordinary Shares or ADSs, who are
non-resident individuals of Japan or who are non-Japanese corporations without a permanent establishment in Japan, collectively referred
to in this section as non-resident holders. The statements below regarding Japanese tax laws are based on the laws and treaties in force
and as interpreted by the Japanese tax authorities as of the date of this annual report, and are subject to changes in applicable Japanese
laws, tax treaties, conventions, or agreements, or in the interpretation of them, occurring after that date. This summary is not exhaustive
of all possible tax considerations that may apply to a particular investor, and potential investors are advised to satisfy themselves
as to the overall tax consequences of the acquisition, ownership, and disposition of our Ordinary Shares, including, specifically, the
tax consequences under Japanese law, under the laws of the jurisdiction of which they are resident and under any tax treaty, convention,
or agreement between Japan and their country of residence, by consulting their own tax advisors.
For the purpose of Japanese tax law and the tax
treaty between the United States and Japan, a U.S. holder of ADSs will generally be treated as the owner of the Ordinary Shares underlying
the ADSs evidenced by the ADRs.
Generally, a non-resident holder of Ordinary Shares
or ADSs will be subject to Japanese income tax collected by way of withholding on dividends (meaning in this section distributions made
from our retained earnings for the Companies Act purposes) we pay with respect to our Ordinary Shares and such tax will be withheld prior
to payment of dividends. Share splits generally are not subject to Japanese income or corporation taxes.
In the absence of any applicable tax treaty, convention,
or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of the
Japanese withholding tax applicable to dividends paid by Japanese corporations on their Ordinary Shares to non-resident holders is generally
20.42% (or 20% for dividends due and payable on or after January 1, 2038) under Japanese tax law. However, with respect to dividends paid
on listed shares issued by a Japanese corporation (such as Ordinary Shares or ADSs) to non-resident holders, other than any individual
shareholder who holds 3% or more of the total number of shares issued by the relevant Japanese corporation (to whom the aforementioned
withholding tax rate will still apply), the aforementioned withholding tax rate is reduced to (i) 15.315% for dividends due and payable
up to and including December 31, 2037 and (ii) 15% for dividends due and payable on or after January 1, 2038. The withholding tax rates
described above include the special reconstruction surtax (2.1% multiplied by the original applicable withholding tax rate, i.e., 15%
or 20%, as the case may be), which is imposed during the period from and including January 1, 2013 to and including December 31, 2037,
to fund the reconstruction from the Great East Japan Earthquake.
If distributions were made from our capital surplus,
rather than retained earnings, for the Companies Act purposes, the portion of such distributions in excess of the amount corresponding
to a pro rata portion of return of capital as determined under Japanese tax laws would be deemed dividends for Japanese tax purposes,
while the rest would be treated as return of capital for Japanese tax purposes. The deemed dividend portion, if any, would generally be
subject to the same tax treatment as dividends as described above, and the return of capital portion would generally be treated as proceeds
derived from the sale of Ordinary Shares and subject to the same tax treatment as sale of our Ordinary Shares as described below. Distributions
made in consideration of repurchase by us of our own shares or in connection with certain reorganization transactions will be treated
substantially in the same manner.
Japan has income tax treaties whereby the withholding
tax rate (including the special reconstruction surtax) may be reduced, generally to 15%, for portfolio investors, with, among others,
Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, New Zealand, Norway, Singapore, and Spain, while the income tax
treaties with, among others, Australia, France, Hong Kong, the Netherlands, Portugal, Sweden, Switzerland, the United Arab Emirates, the
United Kingdom, and the United States generally reduce the withholding tax rate to 10% for portfolio investors. In addition, under the
income tax treaty between Japan and the United States, dividends paid to pension funds which are qualified U.S. residents eligible to
enjoy treaty benefits are exempt from Japanese income taxation by way of withholding or otherwise unless the dividends are derived from
the carrying on of a business, directly or indirectly, by the pension funds. Similar treatment is applicable to dividends paid to pension
funds under the income tax treaties between Japan and the United Kingdom, the Netherlands, and Switzerland. Under Japanese tax law, any
reduced maximum rate applicable under a tax treaty shall be available when such maximum rate is below the rate otherwise applicable under
the Japanese tax law referred to in the second preceding paragraph with respect to the dividends to be paid by us on our Ordinary Shares
or the ADSs.
Non-resident holders of our Ordinary Shares who
are entitled under an applicable tax treaty to a reduced rate of, or exemption from, Japanese withholding tax on any dividends on our
Ordinary Shares, in general, are required to submit, through the withholding agent to the relevant tax authority prior to the payment
of dividends, an Application Form for Income Tax Convention regarding Relief from Japanese Income Tax and Special Income Tax for Reconstruction
on Dividends together with any required forms and documents. A standing proxy for a non-resident holder of our Ordinary Shares or the
ADSs may be used in order to submit the application on a non-resident holder’s behalf. In this regard, a certain simplified special
filing procedure is available for non-resident holders to claim treaty benefits of reduction of or exemption from Japanese withholding
tax, by submitting a Special Application Form for Income Tax Convention regarding Relief from Japanese Income Tax and Special Income Tax
for Reconstruction on Dividends of Listed Stock, together with any required forms or documents. If the depositary needs investigation
to identify whether any non-resident holders of ADSs are entitled to claim treaty benefits of exemption from or reduction of Japanese
withholding tax the depositary or its agent submits an application form before payment of dividends so that the withholding cannot be
made in connection with such holders for eight months after the record date concerning such payment of dividends. If it is proved that
such holders are entitled to claim treaty benefits of exemption from or reduction of Japanese withholding tax within the foregoing eight-month
period, the depositary or its agent submits another application form together with certain other documents so that such holder can be
subject to exemption from or reduction of Japanese withholding tax. To claim this reduced rate or exemption, such non-resident holder
of ADSs will be required to file a proof of taxpayer status, residence, and beneficial ownership, as applicable, and to provide other
information or documents as may be required by the depositary. Non-resident holders who are entitled, under any applicable tax treaty,
to a reduced rate of Japanese withholding tax below the rate otherwise applicable under Japanese tax law, or exemption therefrom, as the
case may be, but fail to submit the required application in advance may nevertheless be entitled to claim a refund from the relevant Japanese
tax authority of withholding taxes withheld in excess of the rate under an applicable tax treaty (if such non-resident holders are entitled
to a reduced treaty rate under the applicable tax treaty) or the full amount of tax withheld (if such non-resident holders are entitled
to an exemption under the applicable tax treaty), as the case may be, by complying with a certain subsequent filing procedure. We do not
assume any responsibility to ensure withholding at the reduced treaty rate, or exemption therefrom, for shareholders who would be eligible
under an applicable tax treaty but who do not follow the required procedures as stated above.
Gains derived from the sale of our Ordinary Shares
or the ADSs outside Japan by a non-resident holder that is a portfolio investor will generally not be subject to Japanese income or corporation
taxes. Japanese inheritance and gift taxes, at progressive rates, may be payable by an individual who has acquired from another individual
our Ordinary Shares or the ADSs as a legatee, heir, or donee, even if none of the acquiring individual, the decedent, or the donor is
a Japanese resident.
United States Federal Income Taxation
WE URGE POTENTIAL PURCHASERS OF THE ADSS OR
OUR ORDINARY SHARES TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL, AND NON-U.S. TAX CONSEQUENCES OF PURCHASING,
OWNING, AND DISPOSING OF THE ADSS OR OUR ORDINARY SHARES.
The following brief summary does not address the
tax consequences to any particular investor or to persons in special tax situations such as:
| ● | regulated
investment companies; |
| ● | real
estate investment trusts; |
| ● | persons
that elect to mark their securities to market; |
| ● | U.S.
expatriates or former long-term residents of the U.S.; |
| ● | governments
or agencies or instrumentalities thereof; |
| ● | persons
liable for alternative minimum tax; |
| ● | persons
holding our Ordinary Shares or the ADSs as part of a straddle, hedging, conversion or integrated transaction; |
| ● | persons
that actually or constructively own 10% or more of our voting power or value (including by reason of owning our Ordinary Shares or the
ADSs); |
| ● | persons
who acquired our Ordinary Shares or the ADSs pursuant to the exercise of any employee share option or otherwise as compensation; |
| ● | persons
holding our Ordinary Shares or the ADSs through partnerships or other pass-through entities; |
| ● | beneficiaries
of a Trust holding our Ordinary Shares or the ADSs; or |
| ● | persons
holding our Ordinary Shares or the ADSs through a trust. |
The brief summary set forth below is addressed
only to U.S. Holders that purchase Ordinary Shares or ADSs. Prospective purchasers are urged to consult their own tax advisors about the
application of the U.S. federal income tax rules to their particular circumstances as well as the state, local, foreign and other tax
consequences to them of the purchase, ownership and disposition of our Ordinary Shares or the ADSs.
Material Tax Consequences Applicable to
U.S. Holders of the ADSs or Ordinary Shares
The following brief summary sets forth the material
U.S. federal income tax consequences related to the ownership and disposition of the ADSs or our Ordinary Shares. This description does
not deal with all possible tax consequences relating to ownership and disposition of the ADSs or our Ordinary Shares or U.S. tax laws,
other than the U.S. federal income tax laws, such as the tax consequences under non-U.S. tax laws, state, local, and other tax laws.
The following brief description applies only to
U.S. Holders (defined below) that hold ADSs or Ordinary Shares as capital assets and that have the U.S. dollar as their functional currency.
This brief description is based on the federal income tax laws of the United States in effect as of the date of this annual report and
on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative
interpretations thereof available on or before such date, and the income tax treaty between the United States and Japan (the “Tax
Convention”). All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the
tax consequences described below.
The brief description below of the U.S. federal
income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of ADSs or Ordinary Shares and you
are, for U.S. federal income tax purposes,
| ● | an
individual who is a citizen or resident of the United States; |
| ● | a
corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States,
any state thereof or the District of Columbia; |
| ● | an
estate whose income is subject to U.S. federal income taxation regardless of its source; or |
| ● | a
trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons
for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S.
person. |
If a partnership (or other entities treated as
a partnership for United States federal income tax purposes) is a beneficial owner of the ADSs or our Ordinary Shares, the tax treatment
of a partner in the partnership will depend upon the status of the partner and the activities of the partnership. Partnerships and partners
of a partnership holding the ADSs or our Ordinary Shares are urged to consult their tax advisors regarding an investment in the ADSs or
our Ordinary Shares.
An individual is considered a resident of the
U.S. for federal income tax purposes if he or she meets either the “Green Card Test” or the “Substantial Presence Test”
described as follows:
The Green Card Test: You are a lawful permanent
resident of the United States, at any time, if you have been given the privilege, according to the immigration laws of the United States,
of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services
issued you an alien registration card, Form I-551, also known as a “green card.”
The Substantial Presence Test: If an alien is
present in the United States on at least 31 days of the current calendar year, he or she will (absent an applicable exception) be classified
as a resident alien if the sum of the following equals 183 days or more (See §7701(b)(3)(A) of the Internal Revenue Code and related
Treasury Regulations):
| 1. | The
actual days in the United States in the current year; plus |
| 2. | One-third
of his or her days in the United States in the immediately preceding year; plus |
| 3. | One-sixth
of his or her days in the United States in the second preceding year. |
This summary is based, in part, upon the representations made by the
depositary to us and assumes that the deposit agreement for the ADSs, and all other related agreements, will be performed in accordance
with their terms.
Treatment of the ADSs
U.S. Holders of ADSs generally will be treated
for U.S. federal income tax purposes as holding our Ordinary Shares represented by the ADSs. No gain or loss will be recognized on an
exchange of our Ordinary Shares for ADSs or an exchange of ADSs for our Ordinary Shares if the depositary has not taken any action inconsistent
with the material terms of the deposit agreement for the ADSs or the U.S. Holder’s ownership of the underlying Ordinary Shares.
A U.S. Holder’s tax basis in the Ordinary Shares received in exchange for ADSs will be the same as its tax basis in the ADSs, and
the holding period in the shares will include the holding period in the ADSs.
Taxation of Dividends and Other Distributions
on the ADSs or Our Ordinary Shares
Subject to the application of the PFIC rules discussed
below, a U.S. Holder generally will recognize ordinary dividend income in an amount equal to the amount of any cash and the value of any
property we distribute as a distribution with respect to the U.S. Holder’s Ordinary Shares (or ADSs), to the extent that the distribution
is paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, when the distribution
is received (or when received by the depositary in the case of ADSs). We do not intend to maintain calculations of earnings and profits
under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that distributions paid with respect to our Ordinary
Shares or the ADSs generally will be treated as dividends. Dividends will not be eligible for the dividends received deduction generally
allowable to U.S. corporations. Dividends paid on our Ordinary Shares or the ADSs will be treated as “qualified dividends”
taxable at preferential rates, if (i) we are eligible for the benefits of a comprehensive income tax treaty with the United States that
the IRS has approved for the purposes of the qualified dividend rules, (ii) we were not, in the year prior to the year in which the dividend
was paid, and are not, in the year in which the dividend is paid, a PFIC, and (iii) the U.S. Holder satisfies certain holding period and
other requirements. The Tax Convention has been approved for the purposes of the qualified dividend rules and we believe we will be eligible
for the benefits of the Tax Convention.
Dividend income will include any amounts withheld
in respect of Japanese taxes, and will be treated as foreign-source income for foreign tax credit purposes. Subject to applicable limitations,
some of which vary depending upon the U.S. Holder’s circumstances, Japanese taxes withheld from dividends on our Ordinary Shares
or the ADSs generally will be creditable against the U.S. Holder’s U.S. federal income tax liability to the extent such taxes do
not exceed any reduced withholding rate available under the Tax Convention. The rules governing foreign tax credits are complex, and U.S.
Holders should consult their tax advisors regarding the creditability of foreign taxes in their particular circumstances. In lieu of claiming
a foreign tax credit, a U.S. Holder may, at its election, deduct creditable foreign taxes, including Japanese taxes, in computing its
taxable income, subject to applicable limitations. Generally, an election to deduct foreign taxes instead of claiming foreign tax credits
applies to all foreign taxes paid or accrued by the U.S. Holder in the taxable year.
Dividends paid in a currency other than U.S. dollars
will be includable in income in a U.S. dollar amount based on the exchange rate in effect on the date of receipt (or the date of the depositary’s
receipt in the case of ADSs), whether or not the payment is converted into U.S. dollars at that time. A U.S. Holder should not recognize
any foreign currency gain or loss in respect of the distribution if the foreign currency is converted into U.S. dollars on the date the
distribution is received. If the foreign currency is not converted into U.S. dollars on the date of receipt, however, gain or loss may
be recognized upon a subsequent sale or other disposition of the foreign currency. The foreign currency gain or loss (if any) generally
will be treated as ordinary income or loss to the U.S. Holder and generally will be treated as U.S.-source income or loss, which may be
relevant in calculating the U.S. Holder’s foreign tax credit limitation.
Taxation of Dispositions of ADSs or Ordinary
Shares
Subject to the passive foreign investment company
rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to
the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the ADSs or Ordinary
Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who
has held the ADSs or Ordinary Shares for more than one year, you will generally be eligible for reduced tax rates. The deductibility of
capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income
or loss for foreign tax credit limitation purposes which will generally limit the availability of foreign tax credits.
Passive Foreign Investment Company (“PFIC”)
Consequences
A non-U.S. corporation is considered a PFIC, as
defined in Section 1297(a) of the US Internal Revenue Code, for any taxable year if either:
| ● | at
least 75% of its gross income for such taxable year is passive income; or |
| ● | at
least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive income (the “asset test”). |
Passive income generally includes dividends, interest,
rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition
of passive assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income
of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In determining the value and composition
of our assets for purposes of the PFIC asset test, (1) the cash we raised in our recent initial public offering will generally be considered
to be held for the production of passive income and (2) the value of our assets must be determined based on the market value of the ADSs
or our Ordinary Shares from time to time, which could cause the value of our non-passive assets to be less than 50% of the value of all
of our assets on any particular quarterly testing date for purposes of the asset test.
Based on our operations and the composition of
our assets, we do not believe we were a PFIC for our 2024 taxable year. However, it is possible that, for our 2025 taxable year or for
any subsequent year, more than 50% of our assets may be assets which produce passive income, in which case we would be deemed a PFIC,
which could have adverse U.S. federal income tax consequences for U.S. taxpayers who are shareholders. We will make this determination
following the end of any particular tax year. If we are a PFIC for your taxable year(s) during which you hold ADSs or Ordinary Shares,
you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize
from a sale or other disposition (including a pledge) of the ADSs or Ordinary Shares, unless you make a “mark-to-market” election
as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received
during the shorter of the three preceding taxable years or your holding period for the ADSs or Ordinary Shares will be treated as an excess
distribution. Under these special tax rules:
| ● | the
excess distribution or gain will be allocated ratably over your holding period for the ADSs or Ordinary Shares; |
| ● | the
amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year
in which we were a PFIC, will be treated as ordinary income, and |
| ● | the
amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest
charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years
prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and
gains (but not losses) realized on the sale of the ADSs or Ordinary Shares cannot be treated as capital, even if you hold the ADSs or
Ordinary Shares as capital assets.
A U.S. Holder of “marketable stock”
(as defined below) in a PFIC may make a mark-to-market election under Section 1296 of the US Internal Revenue Code for such stock to elect
out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to
hold) ADSs or Ordinary Shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal
to the excess, if any, of the fair market value of the ADSs or Ordinary Shares as of the close of such taxable year over your adjusted
basis in such ADSs or Ordinary Shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary
loss for the excess, if any, of the adjusted basis of the ADSs or Ordinary Shares over their fair market value as of the close of the
taxable year. Such ordinary loss, however, is allowable only to the extent of any net mark-to-market gains on the ADSs or Ordinary Shares
included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the
actual sale or other disposition of the ADSs or Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies
to any loss realized on the actual sale or disposition of the ADSs or Ordinary Shares, to the extent that the amount of such loss does
not exceed the net mark-to-market gains previously included for such ADSs or Ordinary Shares. Your basis in the ADSs or Ordinary Shares
will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to
distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate
for qualified dividend income discussed above under “—Taxation of Dividends and Other Distributions on the ADSs or our
Ordinary Shares” generally would not apply.
The mark-to-market election is available only
for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each
calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations),
including the Nasdaq Capital Market. If the ADSs or Ordinary Shares are regularly traded on the Nasdaq Capital Market and if you are a
holder of ADSs or Ordinary Shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S. Holder of stock in a PFIC
may make a “qualified electing fund” election under Section 1295(b) of the US Internal Revenue Code with respect to such PFIC
to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a
PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings
and profits for the taxable year. The qualified electing fund election, however, is available only if such PFIC provides such U.S. Holder
with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently
intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold ADSs or Ordinary
Shares in any taxable year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 in each such year
and provide certain annual information regarding such ADSs or Ordinary Shares, including regarding distributions received on the ADSs
or Ordinary Shares and any gain realized on the disposition of the ADSs or Ordinary Shares.
If you do not make a timely “mark-to-market”
election (as described above), and if we were a PFIC at any time during the period you hold the ADSs or our Ordinary Shares, then such
ADSs or Ordinary Shares will continue to be treated as stock of a PFIC with respect to you even if we cease to be a PFIC in a future year,
unless you make a “purging election” for the year we cease to be a PFIC. A “purging election” creates a deemed
sale of such ADSs or Ordinary Shares at their fair market value on the last day of the last year in which we are treated as a PFIC. The
gain recognized by the purging election will be subject to the special tax and interest charge rules treating the gain as an excess distribution,
as described above. As a result of the purging election, you will have a new basis (equal to the fair market value of the ADSs or Ordinary
Shares on the last day of the last year in which we are treated as a PFIC) and holding period (which new holding period will begin the
day after such last day) in your ADSs or Ordinary Shares for tax purposes.
IRC Section 1014(a) provides for a step-up in
basis to the fair market value for the ADSs or our Ordinary Shares when inherited from a decedent that was previously a holder of the
ADSs or our Ordinary Shares. However, if we are determined to be a PFIC and a decedent that was a U.S. Holder did not make either a timely
qualified electing fund election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) the ADSs or
our Ordinary Shares, or a mark-to-market election and ownership of those ADSs or Ordinary Shares are inherited, a special provision in
IRC Section 1291(e) provides that the new U.S. Holder’s basis should be reduced by an amount equal to the Section 1014 basis minus
the decedent’s adjusted basis just before death. As such if we are determined to be a PFIC at any time prior to a decedent’s
passing, the PFIC rules will cause any new U.S. Holder that inherits the ADSs or our Ordinary Shares from a U.S. Holder to not get a step-up
in basis under Section 1014 and instead will receive a carryover basis in those ADSs or Ordinary Shares.
You are urged to consult your tax advisors regarding
the application of the PFIC rules to your investment in the ADSs or our Ordinary Shares and the elections discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to the ADSs or
our Ordinary Shares and proceeds from the sale, exchange or redemption of the ADSs or our Ordinary Shares may be subject to information
reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding under Section 3406 of the US Internal Revenue Code
with at a current flat rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification
number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding.
U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service
Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup
withholding rules.
Backup withholding is not an additional tax. Amounts
withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service
and furnishing any required information. We do not intend to withhold taxes for individual shareholders. Transactions effected through
certain brokers or other intermediaries, however, may be subject to withholding taxes (including backup withholding), and such brokers
or intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives to Restore Employment
Act of 2010, certain U.S. Holders are required to report information relating to the ADSs or our Ordinary Shares, subject to certain exceptions
(including an exception for ADSs or Ordinary Shares held in accounts maintained by certain financial institutions), by attaching a complete
Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they
hold ADSs or Ordinary Shares. Failure to report such information could result in substantial penalties. You should consult your own tax
advisor regarding your obligation to file a Form 8938.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have previously filed with the SEC our registration
statements on Form F-1 (File No. 333-269068), as amended. We are subject to the periodic reporting and other informational requirements
of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are
required to file annually a Form 20-F within four months after the end of each fiscal year. The SEC maintains a website
at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that
make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules of the Exchange
Act prescribing, among other things, the furnishing and content of proxy statements to shareholders, and our executive officers, directors
and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act.
I. Subsidiary Information
For information about our subsidiary, see “Item 4.
Information on the Company—A. History and Development of the Company.”
J. Annual Report to Security Holders
Not applicable.
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Concentration of Credit Risk
Financial instruments that potentially expose
us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash
equivalents with financial institutions with high credit ratings and quality.
We conduct credit evaluations of customers, and
generally do not require collateral or other security from our customers. We establish an allowance for doubtful accounts primarily based
upon the age of the receivables and factors surrounding the credit risk of specific customers.
Liquidity Risk
Our policy is to regularly monitor our liquidity
requirements and our compliance with lending covenants, to ensure that we maintain sufficient reserves of cash and readily realizable
marketable securities and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in
the short and longer term.
Inflation
Inflation does not materially affect our business
or the results of our operations.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants
and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American
Depositary Shares
The Bank of New York Mellon, as depositary, registers
and delivers ADSs. Each ADS represents five Ordinary Shares (or a right to receive five Ordinary Shares) deposited with MUFG Bank Ltd.,
as custodian for the depositary in Japan. Each ADS also represents any other securities, cash, or other property that may be held by the
depositary. The deposited shares together with any other securities, cash, or other property held by the depositary are referred to as
the deposited securities. The depositary’s principal executive office at which the ADSs will be administered is located at 240 Greenwich
Street, New York, New York 10286.
The form of deposit agreement for the ADSs and
the form of ADRs that represents an ADS have been incorporated by reference as exhibits to this annual report.
Fees and Expenses
Persons depositing or withdrawing shares or ADS holders must pay: |
|
For: |
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) |
|
Issuance of ADSs, including issuances resulting
from a distribution of shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates
|
$.05 (or less) per ADS |
|
Any cash distribution to ADS holders |
|
|
|
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs |
|
Distribution of securities distributed to holders of deposited securities (including rights) that are distributed by the depositary to ADS holders |
|
|
|
$.05 (or less) per ADS per calendar year |
|
Depositary services |
|
|
|
Registration or transfer fees |
|
Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares |
|
|
|
Expenses of the depositary |
|
Cable (including SWIFT) and facsimile transmissions
(when expressly provided in the deposit agreement)
Converting foreign currency to U.S. dollars
|
Taxes and other governmental charges the depositary or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes |
|
As necessary |
|
|
|
Any charges incurred by the depositary or its agents for servicing the deposited securities |
|
As necessary |
The depositary collects its fees for delivery
and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries
acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed
or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by
deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting
for them. The depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a portion of securities
or other property distributable) to ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting
services until its fees for those services are paid.
From time to time, the depositary may make payments
to us to reimburse us for costs and expenses generally arising out of establishment and maintenance of the ADS program, waive fees and
expenses for services provided to us by the depositary, or share revenue from the fees collected from ADS holders. In performing its duties
under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers, or other service providers that are owned
by or affiliated with the depositary and that may earn or share fees, spreads, or commissions.
The depositary may convert currency itself or
through any of its affiliates, or the custodian or we may convert currency and pay U.S. dollars to the depositary. Where the depositary
converts currency itself or through any of its affiliates, the depositary acts as principal for its own account and not as agent, advisor,
broker, or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will
retain for its own account. The revenue is based on, among other things, the difference between the exchange rate assigned to the currency
conversion made under the deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign
currency for its own account. The depositary makes no representation that the exchange rate used or obtained by it or its affiliate in
any currency conversion under the deposit agreement will be the most favorable rate that could be obtained at the time or that the method
by which that rate will be determined will be the most favorable to ADS holders, subject to the depositary’s obligation to act without
negligence or bad faith. The methodology used to determine exchange rates used in currency conversions made by the depositary is available
upon request. Where the custodian converts currency, the custodian has no obligation to obtain the most favorable rate that could be obtained
at the time or to ensure that the method by which that rate will be determined will be the most favorable to ADS holders, and the depositary
makes no representation that the rate is the most favorable rate and will not be liable for any direct or indirect losses associated with
the rate. In certain instances, the depositary may receive dividends or other distributions from us in U.S. dollars that represent the
proceeds of a conversion of foreign currency or translation from foreign currency at a rate that was obtained or determined by us and,
in such cases, the depositary will not engage in, or be responsible for, any foreign currency transactions and neither it nor we make
any representation that the rate obtained or determined by us is the most favorable rate and neither it nor we will be liable for any
direct or indirect losses associated with the rate.
Payment of Taxes
You will be responsible for any taxes or other
governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to
register any transfer of your ADSs or allow you to withdraw the deposited securities represented by your ADSs until those taxes or other
charges are paid. It may apply payments owed to you or sell deposited securities represented by your ADSs to pay any taxes owed and you
will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs
to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.
Part II
Item 13. DEFAULTS, DIVIDEND ARREARAGES
AND DELINQUENCIES
None.
Item 14. MATERIAL MODIFICATIONS TO THE
RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See “Item 10. Additional Information”
for a description of the rights of securities holders, which remain unchanged.
Use of Proceeds
This “Use of Proceeds” information
relates to the registration statement on Form F-1, as amended (File Number 333-269068), which was declared effective by the SEC on
July 24, 2023 (the “Registration Statement”). The Registration Statement relates to the firm commitment public offering by
the Company of 1,200,000 ADSs at a price to the public of $5.00 per ADS, and 2,338,400 ADSs offered by certain selling shareholders named
in the Registration Statement. On July 25, 2023, the ADSs began trading on the Nasdaq Capital Market under the ticker symbol “ELWS.”
US Tiger Securities Inc. acted as the underwriter for the Company’s offering. On July 27, 2023, the Company announced the closing
of its initial public offering. The Company received aggregate gross proceeds of US$6.00 million from its offering, before deducting underwriting
discounts and other related expenses, and did not receive any proceeds from the selling shareholders’ offering. The Company received
aggregate net proceeds of US$5,104,746.95 from its offering, after deducting underwriting discounts and other related expenses.
We still intend to use the proceeds from that
offering as disclosed in the Registration Statement.
Item 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer has performed an evaluation of the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b)
under the Exchange Act.
Based upon that evaluation, our management has
concluded that, as of April 30, 2024, our disclosure controls and procedures were not effective in certain respects, primarily due to
the material weakness in our internal controls, as discussed below, to ensure that the information required to be disclosed by us in the
reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal
Control over Financial Reporting and Attestation Report of the
Registered Public Accounting Firm
This annual report includes a report of management’s
assessment regarding internal control over financial reporting.
Internal Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our management
evaluated the effectiveness of our internal control over financial reporting, as required by Rule 13a-15(c) of the Exchange Act, as of
April 30, 2024, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework). Based on this evaluation, our management has concluded that our internal control over financial
reporting was not effective as of April 30, 2024 due to the existence of a material weakness, as described below.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness
of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the company’s financial statements will not be prevented or detected on a timely basis. Our material weakness is that we did
not have sufficient financial reporting and accounting personnel to formalize, design, implement and operate key controls over financial
reporting process in order to report financial information in accordance with U.S. GAAP and SEC reporting requirements.
Notwithstanding the identified material weakness,
management, including our Chief Executive Officer and Chief Financial Officer, believes the consolidated financial statements included
in this annual report on Form 20-F present fairly, in all material respects, our financial condition, results of operations and cash flows
in conformity with U.S. GAAP.
Changes in Internal Control over Financial
Reporting
We are currently in the process of remediating
the material weakness described above. For example, we have appointed a new Chief Financial Officer and are in the process of hiring more
qualified staff equipped with relevant U.S. GAAP and SEC reporting experience and qualifications. In 2024, we will continue to implement
additional measures to remediate the existing material weakness as discussed above. However, we cannot assure you that we will remediate
our material weakness in a timely manner. Other than as described above, there were no changes in our internal controls over financial
reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Item 16. [RESERVED]
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Under the Companies Act, we have elected to structure
our corporate governance system as a company with a separate board of company auditors and therefore do not have an audit committee. The
function of our board of company auditors and each company auditor is similar to that of independent directors, including those who are
members of the audit committee of a U.S. public company. Our board of company auditors is comprised of three company auditors, each of
which satisfies the requirements of Rule 10A-3 under the Exchange Act.
Item 16B. CODE OF ETHICS
Our board of directors has adopted a code of business
conduct and ethics, which is applicable to all of our directors and employees. Our code of business conduct and ethics has been attached
as Exhibit 11.1 to this annual report.
Item 16C. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The following table sets forth the aggregate fees
by categories specified below in connection with certain professional services rendered and billed by WWC, P.C., our independent registered
public accounting firm for the periods indicated.
| |
For the Fiscal Years Ended April 30, | |
| |
2024 | | |
2023 | | |
2022 | |
Audit fees | |
$ | 166,428 | | |
$ | 336,868 | | |
$ | 95,448 | |
Audit-Related fees | |
| 0 | | |
| 30,000 | | |
| 0 | |
Tax fees | |
| 0 | | |
| 0 | | |
| 0 | |
All other fees | |
| 0 | | |
| 0 | | |
| 0 | |
Total | |
$ | 166,428 | | |
$ | 366,868 | | |
$ | 95,448 | |
The policy of our board of company auditors is
to pre-approve all audit and non-audit services provided by our independent registered public accounting firm, including audit services,
audit-related services, tax services, and other services as described above.
Item 16D. EXEMPTIONS FROM THE LISTING
STANDARDS FOR AUDIT COMMITTEES
Please refer to “Item 3. Key Information—D.
Risk Factors—Risks Relating to Our Ordinary Shares and the Trading Market—As a foreign private issuer, we have followed home
country practice even though we are considered a ‘controlled company’ under Nasdaq corporate governance rules, which could
adversely affect our public shareholders.”
Item 16E. PURCHASES OF EQUITY SECURITIES
BY THE ISSUER AND AFFILIATED PURCHASERS
None.
Item 16F. CHANGE IN REGISTRANT’S
CERTIFYING ACCOUNTANT
None.
Item 16G. CORPORATE GOVERNANCE
We are a “foreign private issuer”
as defined under the federal securities laws of the U.S. and the Nasdaq listing standards. Under the federal securities laws of the United
States, foreign private issuers are subject to different disclosure requirements than U.S.-domiciled public companies. We intend to take
all actions necessary for us to maintain our status as a foreign private issuer under the applicable corporate governance requirements
of the Sarbanes-Oxley Act, the Exchange Act and other applicable rules adopted by the SEC, and the NASDAQ listing standards. Under
the SEC rules and the NASDAQ listing standards, a foreign private issuer is subject to less stringent corporate governance requirements.
Subject to certain exceptions, the SEC and NASDAQ permit a foreign private issuer to follow its home country practice in lieu of their
respective rules and listing standards. In general, our amended articles of incorporation and the Companies Act govern our corporate
affairs.
In particular, as a foreign private issuer, we
have followed Japanese law and corporate practice in lieu of the corporate governance provisions set out under NASDAQ Rule 5600,
the requirement in NASDAQ Rule 5250(b)(3) to disclose third party director and nominee compensation, and the requirement in
NASDAQ Rule 5250(d) to distribute annual and interim reports. Of particular note, the following rules under NASDAQ Rule 5600
differ from Japanese law requirements:
| ● | NASDAQ
Rule 5605(b)(1) requires that at least a majority of a listed company’s board of directors be independent directors,
and NASDAQ Rule 5605(b)(2) requires that independent directors regularly meet in executive session, where only independent
directors are present. Under our current corporate structure, the Companies Act does not require independent directors. However, our
board of directors is currently comprised of four directors, two of which are considered “independent,” as determined in
accordance with the applicable NASDAQ rules. We expect our independent directors to regularly meet in executive sessions, where only
the independent directors are present; |
| ● | NASDAQ
Rule 5605(c)(2)(A) requires a listed company to have an audit committee composed entirely of not less than three directors,
each of whom must be independent. Under Japanese law, a company may have a statutory auditor or a board of auditors. We have a three-member
board of company auditors. See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Company
auditors (kansayaku)” for additional information; |
| ● | NASDAQ
Rule 5605(d) requires, among other things, that a listed company’s compensation committee be comprised of at least two
members, each of whom is an independent director as defined under such rule. Our board of directors collectively participates in the
discussions and determination of compensation for our executive officers and directors, and other compensation related matters; |
| ● | NASDAQ
Rule 5605(e) requires that a listed company’s nomination and corporate governance committee be comprised solely of independent
directors. Our board of directors does not have a standalone nomination and corporate governance committee. Our board of directors collectively
participates in the nomination process of potential directors and oversee our corporate governance practices; and |
| ● | NASDAQ
Rule 5620(c) sets out a quorum requirement of 33-1/3% applicable to meetings of shareholders. In accordance with Japanese law
and generally accepted business practices, our amended articles of incorporation provide that there is no quorum requirement for a general
resolution of our shareholders. However, under the Companies Act and our amended articles of incorporation, a quorum of not less than
one-third of the total number of voting rights is required in connection with the election of directors, statutory auditors, and certain
other matters. |
Item 16H. MINE SAFETY DISCLOSURE
Not applicable.
Item 16I. DISCLOSURE REGARDING FOREIGN
JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
Item 16J. INSIDER TRADING POLICIES
Our board of directors has adopted insider trading
policies and procedures governing the purchase, sale, and other dispositions of our securities by directors, senior management, and employees
that are reasonably designed to promote compliance with applicable insider trading laws, rules, and regulations, and any listing standards
applicable to us.
Our board of directors has also adopted a compensation
recovery policy required by the Nasdaq Listing Rule 5608, which is attached as Exhibit 97.1 to this annual report.
Item 16K. Cybersecurity
Risk Management and Strategy
We have implemented cybersecurity risk management
measures intended to protect the confidentiality, integrity, and availability of our critical systems and information, primarily by the
Information System Unit. We have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity
incidents, that have materially affected or are reasonably likely to materially affect us, including our operations, business strategy,
results of operations, or financial condition.
Cybersecurity Governance
We consider cybersecurity risk through our Risk
Compliance Committee as part of our risk oversight function. The members of our Risk Compliance Committee consist of Satoshi Kobayashi,
our Chief Executive Officer, Kota Kobayashi, our Chief Financial Officer, Miyabi Ito, our General Affairs Manager, and Shinpei Ogose,
our Company Auditor. In addition, our management updates our board of directors, as necessary, regarding any material cybersecurity incidents,
as well as any incidents with lesser impact potential.
Our management team is responsible for assessing
and managing our material risks from cybersecurity threats. The Information System Unit has the primary responsibility for our overall
cybersecurity risk management program. Our management team supervises efforts to prevent, detect, mitigate, and remediate cybersecurity
risks and incidents through various means, which may include briefings from internal security personnel, threat intelligence and other
information obtained from governmental, public or private sources, and alerts and reports produced by security tools deployed in the IT
environment.
Part III
Item 17. FINANCIAL STATEMENTS
We have elected to provide financial statements
pursuant to Item 18.
Item 18. FINANCIAL STATEMENTS
The financial statements of our Company are included
at the end of this annual report.
Item 19. EXHIBITS
EXHIBIT INDEX
Exhibit No. |
|
Description |
1.1 |
|
Articles
of Incorporation of the Registrant (English Translation) (incorporated by reference to Exhibit 3.1 of our Registration Statement
on Form F-1 (File No. 333-269068), initially filed with the U.S. Securities and Exchange Commission on December 30, 2022) |
1.2* |
|
Amended Articles of Incorporation of the Registrant currently in effect (English Translation) |
2.1 |
|
Form of
Deposit Agreement among the Registrant, the depositary, and the owners and holders of the ADSs issued thereunder (incorporated by
reference to Exhibit 4.2 of our Registration Statement on Form F-1 (File No. 333-269068), initially filed with the
U.S. Securities and Exchange Commission on December 30, 2022) |
2.2 |
|
Specimen
American depositary receipt (included in Exhibit 2.1) |
2.3 |
|
Description of the rights of each class of securities registered (incorporated by reference to Exhibit 2.3 of our annual report on Form 20-F for the fiscal year ended April 30, 2023 filed with the SEC on September 15, 2023) |
4.1 |
|
English Translation of Loan Agreement dated October 28, 2022, by and between the Registrant and Shoko Chukin Bank (incorporated by reference to Exhibit 4.4 of our annual report on Form 20-F for the fiscal year ended April 30, 2023 filed with the SEC on September 15, 2023) |
11.1 |
|
Code
of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 of our Registration Statement on
Form F-1 (File No. 333-269068), initially filed with the U.S. Securities and Exchange Commission on December 30, 2022)
|
11.2* |
|
Insider Trading Policy of the Registrant |
12.1* |
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
12.2* |
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
13.1 ** |
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
13.2 ** |
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
97.1* |
|
Compensation Recovery Policy of the Registrant |
101.INS |
|
Inline
XBRL Instance Document |
101.SCH |
|
Inline
XBRL Taxonomy Extension Schema Document |
101.CAL |
|
Inline
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
Inline
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
Inline
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
Inline
XBRL Taxonomy Extension Presentation Linkbase Document |
104* |
|
Cover
Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* |
Filed with this annual report on Form 20-F |
** |
Furnished with this annual report on Form 20-F |
SIGNATURES
The registrant hereby certifies that it meets
all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report
on its behalf.
|
Earlyworks Co., Ltd. |
|
|
|
|
By: |
/s/ Satoshi Kobayashi |
|
|
Satoshi Kobayashi |
|
|
Chief Executive Officer and
Representative Director |
|
|
(Principal Executive Officer) |
|
|
|
Date: August 26, 2024 |
|
|
EARLYWORKS CO., LTD.
INDEX TO FINANCIAL STATEMENTS
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To: |
The Board of Directors
and Shareholders of |
Earlyworks Co., Ltd.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Earlyworks Co.,
Ltd. as of April 30, 2023 and 2024 and the related statements of operations, changes in shareholders’ equity,
and cash flows for each of the years in the three-year period ended April 30, 2024 and the related notes (collectively referred to as
the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of April 30, 2023 and 2024, and the results of its operations and its cash flows for each of the years in the
three-year period ended April 30, 2024 in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter — Substantial Doubt
about the Company’s Ability to Continue as a Going Concern
The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements,
the Company has incurred significant losses, and needs to raise additional funds to meet obligation and sustain its operations. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of
the events and conditions and management’s plans regarding those matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this
matter.
Basis for Opinion
These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits
in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ WWC, P.C.
WWC, P.C.
Certified Public Accountants
PCAOB ID: 1171
We have served as the Company’s auditor since 2022.
San Mateo, California
August 26, 2024
EARLYWORKS CO., LTD.
BALANCE SHEETS
| |
As of April 30, 2023 | | |
As of April 30, 2024 | | |
As of April 30, 2024 | |
| |
JPY | | |
JPY | | |
USD | |
| |
| | |
| | |
| |
ASSETS | |
| | |
| | |
| |
CURRENT ASSETS: | |
| | |
| | |
| |
Cash | |
| 177,886,393 | | |
| 337,911,102 | | |
| 2,144,923 | |
Time deposit | |
| — | | |
| 100,000,000 | | |
| 634,759 | |
Digital assets | |
| 750,307 | | |
| 44,662 | | |
| 283 | |
Accounts receivable, net | |
| 30,934,916 | | |
| 40,711,929 | | |
| 258,423 | |
Contract assets | |
| — | | |
| 40,359,303 | | |
| 256,184 | |
Prepayments | |
| 2,591,297 | | |
| 8,227,532 | | |
| 52,225 | |
Short-term deposits | |
| 3,096,509 | | |
| 3,096,509 | | |
| 19,655 | |
Income tax receivable | |
| 19,147,994 | | |
| 325 | | |
| 2 | |
Other current assets, net | |
| 275,577 | | |
| 39,600 | | |
| 253 | |
TOTAL CURRENT ASSETS | |
| 234,682,993 | | |
| 530,390,962 | | |
| 3,366,707 | |
Property and equipment, net | |
| 2,067,013 | | |
| 1,319,884 | | |
| 8,378 | |
Operating lease right-of-use assets | |
| 3,467,368 | | |
| 11,711,000 | | |
| 74,337 | |
Deferred initial public offering (“IPO”) costs | |
| 212,160,121 | | |
| — | | |
| — | |
Long-term deposits | |
| 657,740 | | |
| 657,740 | | |
| 4,175 | |
Restricted cash | |
| — | | |
| 31,486,253 | | |
| 199,862 | |
TOTAL ASSETS | |
| 453,035,235 | | |
| 575,565,839 | | |
| 3,653,459 | |
| |
| | | |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: | |
| | | |
| | | |
| | |
Bank loans – current portion, net | |
| 123,819,000 | | |
| 119,189,500 | | |
| 756,567 | |
Other payables and accrued liabilities | |
| 47,250,464 | | |
| 65,573,842 | | |
| 416,236 | |
Operating lease liabilities, current | |
| 3,467,368 | | |
| 8,239,009 | | |
| 52,298 | |
Income taxes payable | |
| 145,000 | | |
| — | | |
| — | |
Contract liabilities | |
| 1,397,470 | | |
| — | | |
| — | |
TOTAL CURRENT LIABILITIES | |
| 176,079,302 | | |
| 193,002,351 | | |
| 1,225,101 | |
Bank loans – non-current, net | |
| 68,252,500 | | |
| 49,063,000 | | |
| 311,432 | |
Operating lease liabilities, non-current | |
| — | | |
| 2,775,741 | | |
| 17,619 | |
Deferred tax liabilities – non-current | |
| 188,496 | | |
| — | | |
| — | |
TOTAL LIABILITIES | |
| 244,520,298 | | |
| 244,841,092 | | |
| 1,554,152 | |
| |
| | | |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY: | |
| | | |
| | | |
| | |
Ordinary shares, 55,300,000 shares authorized; 13,839,400 and 15,076,900 shares issued and outstanding as of April 30, 2023 and 2024 | |
| 100,000,000 | | |
| 50,000,000 | | |
| 317,380 | |
Additional paid-in capital | |
| 1,702,120,099 | | |
| 2,210,480,581 | | |
| 14,031,234 | |
Accumulated deficit | |
| (1,593,605,162 | ) | |
| (1,929,755,834 | ) | |
| (12,249,307 | ) |
TOTAL SHAREHOLDERS’ EQUITY | |
| 208,514,937 | | |
| 330,724,747 | | |
| 2,099,307 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| 453,035,235 | | |
| 575,565,839 | | |
| 3,653,459 | |
The accompanying notes are an integral part of
these financial statements.
EARLYWORKS CO., LTD.
STATEMENTS OF OPERATIONS
| |
For the year ended April 30, 2022 | | |
For the year ended April 30, 2023 | | |
For the year ended April 30, 2024 | | |
For the year ended April 30, 2024 | |
| |
JPY | | |
JPY | | |
JPY | | |
USD | |
OPERATING REVENUES | |
| | |
| | |
| | |
| |
Software and system development services | |
| 234,732,715 | | |
| 21,874,517 | | |
| 125,618,177 | | |
| 797,373 | |
Consulting and solution services | |
| 228,986,136 | | |
| 22,435,120 | | |
| 2,800,620 | | |
| 17,777 | |
Sale of NFTs | |
| — | | |
| 2,258,892 | | |
| 50,936,854 | | |
| 323,327 | |
TOTAL OPERATING REVENUES | |
| 463,718,851 | | |
| 46,568,529 | | |
| 179,355,651 | | |
| 1,138,477 | |
COST OF REVENUES | |
| (108,379,683 | ) | |
| (30,502,236 | ) | |
| (37,582,914 | ) | |
| (238,561 | ) |
GROSS PROFIT | |
| 355,339,168 | | |
| 16,066,293 | | |
| 141,772,737 | | |
| 899,916 | |
OPERATING EXPENSES: | |
| | | |
| | | |
| | | |
| | |
Selling and marketing expenses | |
| (29,727,815 | ) | |
| (55,667,926 | ) | |
| (55,259,489 | ) | |
| (350,765 | ) |
General and administrative expenses | |
| (201,976,446 | ) | |
| (240,003,326 | ) | |
| (390,301,519 | ) | |
| (2,477,476 | ) |
Share-based compensation expenses | |
| (670,000,000 | ) | |
| — | | |
| (1,616,463 | ) | |
| (10,261 | ) |
Research and development expenses | |
| (25,753,717 | ) | |
| (108,823,664 | ) | |
| (76,081,726 | ) | |
| (482,936 | ) |
TOTAL OPERATING EXPENSES | |
| (927,457,978 | ) | |
| (404,494,916 | ) | |
| (523,259,197 | ) | |
| (3,321,438 | ) |
LOSS FROM OPERATIONS | |
| (572,118,810 | ) | |
| (388,428,623 | ) | |
| (381,486,460 | ) | |
| (2,421,522 | ) |
Loss on digital assets | |
| — | | |
| (629,195 | ) | |
| (61,860 | ) | |
| (393 | ) |
Interest expenses, net | |
| (1,258,722 | ) | |
| (2,699,144 | ) | |
| (1,589,399 | ) | |
| (10,089 | ) |
Foreign exchange gain, net | |
| — | | |
| 222,079 | | |
| 46,666,234 | | |
| 296,218 | |
Other (expense) income, net | |
| (155,434 | ) | |
| 6,864 | | |
| 132,317 | | |
| 840 | |
LOSS BEFORE INCOME TAXES | |
| (573,532,966 | ) | |
| (391,528,019 | ) | |
| (336,339,168 | ) | |
| (2,134,946 | ) |
Provision for income taxes | |
| | | |
| | | |
| | | |
| | |
Current | |
| (12,963,341 | ) | |
| 9,345,241 | | |
| — | | |
| — | |
Deferred | |
| (15,978,261 | ) | |
| (122,261 | ) | |
| 188,496 | | |
| 1,196 | |
Total provision for income taxes | |
| (28,941,602 | ) | |
| 9,222,980 | | |
| 188,496 | | |
| 1,196 | |
NET LOSS | |
| (602,474,568 | ) | |
| (382,305,039 | ) | |
| (336,150,672 | ) | |
| (2,133,750 | ) |
| |
| | | |
| | | |
| | | |
| | |
LOSS PER SHARE | |
| | | |
| | | |
| | | |
| | |
Basic | |
| (43.62 | ) | |
| (27.62 | ) | |
| (22.77 | ) | |
| (0.14 | ) |
Diluted | |
| (43.62 | ) | |
| (27.62 | ) | |
| (22.77 | ) | |
| (0.14 | ) |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING* | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 13,811,305 | | |
| 13,839,400 | | |
| 14,764,646 | | |
| 14,764,646 | |
Diluted | |
| 13,811,305 | | |
| 13,839,400 | | |
| 14,764,646 | | |
| 14,764,646 | |
The accompanying notes are an integral part of
these financial statements.
EARLYWORKS CO., LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
| |
Ordinary
shares* | | |
Additional
Paid-in | | |
Accumulated | | |
Total
Shareholders’ | | |
Total
Shareholders’ | |
| |
Share* | | |
Amount | | |
Capital | | |
Deficit | | |
Equity | | |
Equity | |
| |
| | |
JPY | | |
JPY | | |
JPY | | |
JPY | | |
USD | |
Balance,
April 30, 2021 | |
| 13,508,600 | | |
| 234,508,200 | | |
| 754,508,200 | | |
| (665,855,856 | ) | |
| 323,160,544 | | |
| 2,051,292 | |
Issuance
of ordinary shares for cash | |
| 330,800 | | |
| 100,067,000 | | |
| 100,067,000 | | |
| — | | |
| 200,134,000 | | |
| 1,270,369 | |
Net
loss | |
| — | | |
| — | | |
| — | | |
| (602,474,568 | ) | |
| (602,474,568 | ) | |
| (3,824,264 | ) |
Share
based compensation | |
| — | | |
| — | | |
| 670,000,000 | | |
| — | | |
| 670,000,000 | | |
| 4,252,888 | |
Balance,
April 30, 2022 | |
| 13,839,400 | | |
| 334,575,200 | | |
| 1,524,575,200 | | |
| (1,268,330,424 | ) | |
| 590,819,976 | | |
| 3,750,285 | |
Capital
reduction to cover deficit | |
| — | | |
| (234,575,200 | ) | |
| 177,544,899 | | |
| 57,030,301 | | |
| — | | |
| — | |
Net
loss | |
| — | | |
| — | | |
| — | | |
| (382,305,039 | ) | |
| (382,305,039 | ) | |
| (2,426,717 | ) |
Balance,
April 30, 2023 | |
| 13,839,400 | | |
| 100,000,000 | | |
| 1,702,120,099 | | |
| (1,593,605,162 | ) | |
| 208,514,937 | | |
| 1,323,568 | |
Issuance
of ordinary shares for cash | |
| 1,200,000 | | |
| 781,200,000 | | |
| (326,330,981 | ) | |
| — | | |
| 454,869,019 | | |
| 2,887,324 | |
Exercise
of share options | |
| 37,500 | | |
| 12,281,250 | | |
| (10,406,250 | ) | |
| — | | |
| 1,875,000 | | |
| 11,904 | |
Capital
reduction | |
| — | | |
| (843,481,250 | ) | |
| 843,481,250 | | |
| — | | |
| — | | |
| — | |
Net
loss | |
| — | | |
| — | | |
| — | | |
| (336,150,672 | ) | |
| (336,150,672 | ) | |
| (2,133,750 | ) |
Share
based compensation | |
| — | | |
| — | | |
| 1,616,463 | | |
| — | | |
| 1,616,463 | | |
| 10,261 | |
Balance,
April 30, 2024 | |
| 15,076,900 | | |
| 50,000,000 | | |
| 2,210,480,581 | | |
| (1,929,755,834 | ) | |
| 330,724,747 | | |
| 2,099,307 | |
The accompanying notes are an integral part of
these financial statements.
EARLYWORKS CO., LTD.
STATEMENTS OF CASH FLOWS
| |
For the year ended April 30, 2022 | | |
For the year ended April 30, 2023 | | |
For the year ended April 30, 2024 | | |
For the year ended April 30, 2024 | |
| |
JPY | | |
JPY | | |
JPY | | |
USD | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| | |
| | |
| |
Net loss | |
| (602,474,568 | ) | |
| (382,305,039 | ) | |
| (336,150,672 | ) | |
| (2,133,750 | ) |
Adjustment to reconcile net loss to net cash generated from operating activities: | |
| | | |
| | | |
| | | |
| | |
Depreciation expense | |
| 309,508 | | |
| 778,611 | | |
| 1,083,322 | | |
| 6,876 | |
Loan origination fee | |
| 244,233 | | |
| 231,000 | | |
| 231,000 | | |
| 1,466 | |
Deferred tax expense | |
| 15,978,261 | | |
| 122,261 | | |
| (188,496 | ) | |
| (1,196 | ) |
Foreign currency exchange gain | |
| — | | |
| (243,159 | ) | |
| (40,720,270 | ) | |
| (258,476 | ) |
Unrealized loss on digital assets | |
| — | | |
| 629,195 | | |
| 6,235 | | |
| 40 | |
Share-based compensation expense | |
| 670,000,000 | | |
| — | | |
| 1,616,463 | | |
| 10,261 | |
Changes in assets and liabilities | |
| | | |
| | | |
| | | |
| | |
Accounts receivable | |
| (31,572,765 | ) | |
| 41,324,791 | | |
| (9,777,013 | ) | |
| (62,061 | ) |
Contract assets | |
| — | | |
| — | | |
| (40,359,303 | ) | |
| (256,184 | ) |
Prepayments | |
| (1,083,020 | ) | |
| 2,848,747 | | |
| (5,636,235 | ) | |
| (35,777 | ) |
Short-term deposits | |
| (3,096,564 | ) | |
| 55 | | |
| — | | |
| — | |
Digital assets | |
| — | | |
| (1,379,502 | ) | |
| 699,410 | | |
| 4,440 | |
Other current assets, net | |
| (87,296 | ) | |
| 54,369 | | |
| 235,977 | | |
| 1,498 | |
Long-term deposits | |
| — | | |
| (10,000 | ) | |
| — | | |
| — | |
Income taxes, net | |
| 28,148,718 | | |
| (57,557,091 | ) | |
| 19,002,669 | | |
| 120,621 | |
Contract liabilities | |
| (108,544 | ) | |
| 1,397,470 | | |
| (1,397,470 | ) | |
| (8,871 | ) |
Other payables and accrued liabilities | |
| 24,000,359 | | |
| (5,574,747 | ) | |
| 18,186,406 | | |
| 115,440 | |
Lease obligations net cash | |
| 8,366 | | |
| (54,168 | ) | |
| (696,250 | ) | |
| (4,420 | ) |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | |
| 100,266,688 | | |
| (399,737,207 | ) | |
| (393,864,227 | ) | |
| (2,500,093 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | | |
| | | |
| | |
Purchases of time deposit | |
| — | | |
| — | | |
| (100,000,000 | ) | |
| (634,759 | ) |
Proceeds from liquidation of equity method investments | |
| 4,559,728 | | |
| — | | |
| — | | |
| — | |
Purchases of property and equipment | |
| (984,370 | ) | |
| (1,627,539 | ) | |
| (336,193 | ) | |
| (2,131 | ) |
|