Perpetuals.com Ltd 20-F for FY2024
Perpetuals.com Ltd (PDC)
About this 20-F
Perpetuals.com Ltd filed this 20-F on August 26, 2024, covering the fiscal year ended April 30, 2024 (FY2024).
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
For the fiscal year ended
OR
OR
Date of event requiring this shell company report
For the transition period from to
Commission file number:
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Telephone: +
Email:
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 | ||
representing five ordinary shares | The | |||
| The |
| * | 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:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
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 ☐
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.
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).
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 | ☐ | |
| ☒ | 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:
| 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
i
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.
ii
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.
iii
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.
1
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.
2
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.
3
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.
4
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.
5
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.
6
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.
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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.
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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; |
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| ● | 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.
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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.
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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.
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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.
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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.
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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.
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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.”
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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. |
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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.
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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.
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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.
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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.
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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. |
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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. |
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| ● | 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.
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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.
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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.
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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.
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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 | % | ||||||||||||||
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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.
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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.
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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 | % | ||||||||||||||||||
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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.
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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.
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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).
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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 | - | ||||||||||||||
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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.
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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.
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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.
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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 | |||
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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.
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| 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.
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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.”
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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. |
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| (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.
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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.
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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.
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“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.
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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.
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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.
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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:
| ● | banks; |
| ● | financial institutions; |
| ● | insurance companies; |
| ● | regulated investment companies; |
| ● | real estate investment trusts; |
| ● | broker-dealers; |
| ● | 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; |
| ● | tax-exempt entities; |
| ● | 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.
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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.
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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”). |
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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.
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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.
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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.
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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 |
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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.
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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.
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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.
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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; |
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| ● | 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.
61
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
| * | Filed with this annual report on Form 20-F |
| ** | Furnished with this annual report on Form 20-F |
62
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 | ||
63
EARLYWORKS CO., LTD.
INDEX TO FINANCIAL STATEMENTS
TABLE OF CONTENTS
F-1
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.
Certified Public Accountants
PCAOB ID:
We have served as the Company’s auditor since 2022.
August 26, 2024
F-2
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 | ||||||||||||
| Time deposit | ||||||||||||
| Digital assets | ||||||||||||
| Accounts receivable, net | ||||||||||||
| Contract assets | ||||||||||||
| Prepayments | ||||||||||||
| Short-term deposits | ||||||||||||
| Income tax receivable | ||||||||||||
| Other current assets, net | ||||||||||||
| TOTAL CURRENT ASSETS | ||||||||||||
| Property and equipment, net | ||||||||||||
| Operating lease right-of-use assets | ||||||||||||
| Deferred initial public offering (“IPO”) costs | ||||||||||||
| Long-term deposits | ||||||||||||
| Restricted cash | ||||||||||||
| TOTAL ASSETS | ||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: | ||||||||||||
| Bank loans – current portion, net | ||||||||||||
| Other payables and accrued liabilities | ||||||||||||
| Operating lease liabilities, current | ||||||||||||
| Income taxes payable | ||||||||||||
| Contract liabilities | ||||||||||||
| TOTAL CURRENT LIABILITIES | ||||||||||||
| Bank loans – non-current, net | ||||||||||||
| Operating lease liabilities, non-current | ||||||||||||
| Deferred tax liabilities – non-current | ||||||||||||
| TOTAL LIABILITIES | ||||||||||||
| COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY: | ||||||||||||
| Ordinary shares, | ||||||||||||
| Additional paid-in capital | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||
The accompanying notes are an integral part of these financial statements.
F-3
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, | For the year ended April 30, | |||||||||||||
| JPY | JPY | JPY | USD | |||||||||||||
| OPERATING REVENUES | ||||||||||||||||
| Software and system development services | ||||||||||||||||
| Consulting and solution services | ||||||||||||||||
| Sale of NFTs | ||||||||||||||||
| TOTAL OPERATING REVENUES | ||||||||||||||||
| COST OF REVENUES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling and marketing expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Share-based compensation expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Research and development expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| TOTAL OPERATING EXPENSES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on digital assets | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign exchange gain, net | ||||||||||||||||
| Other (expense) income, net | ( | ) | ||||||||||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Current | ( | ) | ||||||||||||||
| Deferred | ( | ) | ( | ) | ||||||||||||
| Total provision for income taxes | ( | ) | ||||||||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS PER SHARE | ||||||||||||||||
| Basic | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Diluted | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING* | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| * |
The accompanying notes are an integral part of these financial statements.
F-4
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 | ( | ) | ||||||||||||||||||||||
| Issuance of ordinary shares for cash | ||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Share based compensation | — | |||||||||||||||||||||||
| Balance, April 30, 2022 | ( | ) | ||||||||||||||||||||||
| Capital reduction to cover deficit | — | ( | ) | |||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance, April 30, 2023 | ( | ) | ||||||||||||||||||||||
| Issuance of ordinary shares for cash | ( | ) | ||||||||||||||||||||||
| Exercise of share options | ( | ) | ||||||||||||||||||||||
| Capital reduction | — | ( | ) | |||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Share based compensation | — | |||||||||||||||||||||||
| Balance, April 30, 2024 | ( | ) | ||||||||||||||||||||||
| * |
The accompanying notes are an integral part of these financial statements.
F-5
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 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Adjustment to reconcile net loss to net cash generated from operating activities: | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Loan origination fee | ||||||||||||||||
| Deferred tax expense | ( | ) | ( | ) | ||||||||||||
| Foreign currency exchange gain | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized loss on digital assets | ||||||||||||||||
| Share-based compensation expense | ||||||||||||||||
| Changes in assets and liabilities | ||||||||||||||||
| Accounts receivable | ( | ) | ( | ) | ( | ) | ||||||||||
| Contract assets | ( | ) | ( | ) | ||||||||||||
| Prepayments | ( | ) | ( | ) | ( | ) | ||||||||||
| Short-term deposits | ( | ) | ||||||||||||||
| Digital assets | ( | ) | ||||||||||||||
| Other current assets, net | ( | ) | ||||||||||||||
| Long-term deposits | ( | ) | ||||||||||||||
| Income taxes, net | ( | ) | ||||||||||||||
| Contract liabilities | ( | ) | ( | ) | ( | ) | ||||||||||
| Other payables and accrued liabilities | ( | ) | ||||||||||||||
| Lease obligations net cash | ( | ) | ( | ) | ( | ) | ||||||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | ( | ) | ( | ) | ( | ) | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Purchases of time deposit | ( | ) | ( | ) | ||||||||||||
| Proceeds from liquidation of equity method investments | ||||||||||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Refund of security deposit | ||||||||||||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ( | ) | ( | ) | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Issuance of ordinary shares for cash | ||||||||||||||||
| Proceeds from exercise of share options | ||||||||||||||||
| Proceeds from loans | ||||||||||||||||
| Repayment of loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Payments on deferred initial public offering (“IPO”) costs | ( | ) | ( | ) | ( | ) | ||||||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | ( | ) | ||||||||||||||
| EFFECT OF EXCHANGE RATE | ||||||||||||||||
| CHANGE IN CASH AND RESTRICTED CASH | ( | ) | ||||||||||||||
| CASH AND RESTRICTED CASH, AT BEGINNING OF PERIOD | ||||||||||||||||
| CASH AND RESTRICTED CASH, AT PERIOD END | ||||||||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||
| Cash paid (received) for: | ||||||||||||||||
| Interest | ||||||||||||||||
| Income taxes | ( | ) | ( | ) | ||||||||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||||
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | ||||||||||||||||
| RECONCILIATION OF CASH AND RESTRICTED CASH REPORTED IN THE BALANCE SHEETS: | ||||||||||||||||
| Cash | ||||||||||||||||
| Restricted cash | ||||||||||||||||
| Total cash and restricted cash shown in the statements of cash flows | ||||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-6
EARLYWORKS CO., LTD.
NOTES TO FINANCIAL STATEMENTS
Note 1 – Nature of business and organization
Earlyworks Co., Ltd. (the “Company”) is a stock company incorporated in Japan pursuant to the laws of Japan on May 1, 2018. The Company builds products, delivers services, and develops solutions based on its proprietary Grid Ledger System to leverage blockchain technology in various business settings, including advertisement tracking, online visitor management, and sales of non-fungible tokens. The Company primarily generates revenue from software and system development services, consulting and solution services, and sale of NFTs.
Note 2 – Liquidity and going concern
In accordance with Accounting Standards Update
(“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40),
the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the
Company’s ability to continue as a going concern within
The Company’s accounts have been prepared assuming that the company will continue as a going concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. The Company’s ability to continue as a going concern depends upon aligning its sources of funding (debt and equity) with the expenditure requirements of the Company and repayment of the short-term debt facilities as and when they fall due.
The Company has considered whether there is a
substantial doubt about its ability to continue as a going concern. Cash flow from operations and capital contributions and loans from
shareholders have been utilized to finance the working capital requirements of the Company. For the year ended April 30, 2024, the Company
had negative cash flow from operating activities of JPY
To sustain its ability to support the Company’s operating activities, the Company considered supplementing its sources of funding through the following:
If necessary, the Company will consider additional financings through the issuance of ordinary shares or debt financings and look into refinancing the Company’s existing debt obligations. However, there can be no assurances that the Company will be successful in securing any debt on terms favorable to the Company, or at all, and it is not possible to predict whether any financing efforts will be successful or if the Company will obtain the necessary financing.
Management has commenced a strategy to raise debt and equity. However, there can be no certainty that these additional financings will be available on acceptable terms or at all. If management is unable to execute this plan, there would likely be a material adverse effect on the Company’s business. All of these factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements for the years ended April 30, 2023 and 2024 have been prepared on a going concern basis and do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Note 3 – Summary of significant accounting policies
Basis of presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for information pursuant to the rules and regulations of the SEC.
Use of estimates and assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and revenues and expenses during the reporting periods. Significant accounting estimates reflected in the Company’s financial statements include, but not limited to, estimates for useful lives and impairment of property and equipment, impairment of long-lived assets, allowance for expected credit loss, revenue recognition, and deferred taxes. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates, and as such, differences may be material to the financial statements.
F-7
Foreign currency translation and transaction
The Company uses Japanese yen (“JPY”) as its reporting currency. The functional currency of the Company which is incorporated in Japan is JPY, which is its respective local currency based on the criteria of ASC 830, “Foreign Currency Matters”.
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the applicable exchange rates at the balance sheet dates. Net gains and losses resulting from foreign exchange transactions are included in exchange gain (loss), net on the statements of operations.
Convenience Translation
Translations of balances in the balance sheets,
statements of operations, statements of changes in shareholders’ equity and statements of cash flows from JPY into USD as of April
30, 2024 are solely for the convenience of the readers and are calculated at the rate of USD
Reclassifications
Certain reclassifications to previously reported financial information have been made to conform to the current period presentation.
Cash
Cash includes currency on hand and deposits held by banks that can be added or withdrawn without limitation. The Company maintains its bank accounts in Japan and the United States. Cash balances in bank accounts in Japan are insured by the Deposit Insurance Corporation of Japan subject to certain limitations. Cash balances in bank accounts in the United States are insured by the Federal Deposit Insurance Corporation up to per insured bank. The Company considers all highly liquid investment instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. As of April 30, 2023 and 2024, the Company did not have any cash equivalents.
Restricted cash
Restricted cash is cash legally restricted as to withdrawal or usage due to an order by the Tokyo District Court as a result of a lawsuit filed by certain shareholders of the Company.
Time deposit
Time deposit is a deposit in a bank account with
original maturity of over three months.
Digital assets
Digital assets such as Ethereum, Binance Coin and Polygon are included in current assets in the balance sheets as an indefinite live intangible asset. Digital assets are initially recognized based on the fair value of the digital assets on the date of receipt. The Company recognized realized gains or losses when digital assets are sold for other digital assets, or for cash consideration using a first-in first-out method of accounting and the Company accounts for received and disbursements as cash flows from operating activities.
An intangible asset with an indefinite useful life is not amortized but assessed for impairment whenever events or changes in circumstances occur indicating that it is more likely than not that the indefinite-life asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital assets in the principal market at the time its fair value is being measured, and the Company recognized an impairment loss in an amount equal to that excess. The Company monitors and evaluates the quality and relevance of the available information, such as pricing information from the asset’s principal (or most advantageous) market or from other digital asset exchanges or markets, to determine whether such information is indicative of a potential impairment. The Company recognizes an impairment loss at any time the fair value of the digital asset is below its carrying value. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Accounts receivable and allowance for expected credit losses accounts
Accounts receivable include trade accounts due from clients. As of
May 1, 2022, accounts receivable, net was JPY
F-8
Prepayments
Prepayments are mainly payments made to vendors or services providers for future services that have not been provided. These amounts are refundable and bear no interest. Management reviews its prepayments on a regular basis to determine if the allowance is adequate and adjusts the allowance when necessary. As of April 30, 2023 and 2024, no allowance was deemed necessary.
Deferred initial public offering (“IPO”) costs
Pursuant to ASC 340-10-S99-1, IPO costs directly
attributable to an offering of equity securities were deferred and charged against the gross proceeds of the offering as a reduction
of additional paid-in capital. These costs included legal fees, consulting fees, underwriting fees, the SEC filing and printing expenses
related to the IPO. On July 27, 2023, the Company closed its IPO and gross proceeds of JPY
Short-term deposits and long-term deposits
Short-term deposits and long-term deposits are mainly for rent and money deposited with certain service providers. These amounts are refundable and bear no interest. The short-term deposits usually have one year term and are refundable upon contract termination. The long-term deposits are refunded from service providers when term and conditions set forth in the agreements have been satisfied.
Other current assets, net
Other current assets, net, primarily consists of other receivables from third parties. These other receivables are unsecured and are reviewed periodically to determine whether their carrying value has become impaired.
Property and equipment, net
Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
| Leasehold improvements | lesser of lease term or expected useful life | |
| Office furniture and fixtures |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statements of operations. Expenditures for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized.
Impairment for long-lived assets
Long-lived assets, including property and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. We assess the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, we would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. For the years ended April 30, 2022, 2023 and 2024 no impairment of long-lived assets was recognized.
F-9
Fair value of financial instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. |
| ● | Level 3 – inputs to the valuation methodology are unobservable. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash, time deposit, digital assets, accounts receivable, contract assets, prepayments, short-term deposits, income tax receivable and other current assets, current portion of long-term bank loans, other payables and accrued liabilities, current operating lease liabilities, income tax payable, and contract liabilities approximate the fair value of the respective assets and liabilities as of April 30, 2023 and 2024 based upon the short-term nature of the assets and liabilities.
Revenue recognition
The Company recognizes revenue as it satisfies a performance obligation when its client obtains control of promised goods or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the client.
The Company applied practical expedient when sales taxes were collected from clients, meaning sales tax is recorded net of revenue, instead of cost of revenue, which are subsequently remitted to governmental authorities and are excluded from the transaction price. The Company does not offer rights of refund of previously paid or delivered amounts, rebates, rights of return or price protection. In all instances, the Company limits the amount of revenue recognized to the amounts for which it has the right to bill its clients.
The Company is a principal and records revenue on a gross basis when the Company is primarily responsible for fulfilling the service, has discretion in establishing pricing and controls the promised service before transferring that service to clients. Otherwise, the Company is an agent and records revenue on a net basis.
F-10
The Company derives its revenues from three sources: (1) software and system development services, (2) consulting and solution services, and (3) sale of NFTs. All of the Company’s contracts with clients do not contain cancellable and refund-type provisions.
(1) Software and system development services
The contract is typically fixed priced and does not provide any post contract client support or upgrades. The Company designs software and system based on clients’ specific needs which require the Company to perform services including design, development, and integration. These services also require significant customization. Upon delivery of the services, client acceptance is generally required. The Company assesses that software and system development services is considered as one performance obligation as the clients do not obtain benefit for each separate service. The duration of the development period is short, usually less than one year.
The Company’s software and system development service revenue is generated primarily from contracts with medium and large-sized enterprises. The contracts contain negotiated billing terms which generally include multiple payment phases throughout the contract term and a portion of contract amount usually is billed upon the completion of the related projects. Pursuant to the contract terms, the Company has enforceable right on payments for the work performed.
The Company’s revenue from software and system development contracts is generally recognized over time as the Company’s performance creates or enhances the project controlled by the clients and the control is transferred continuously to the Company’s clients. The Company uses an input method based on cost incurred as the Company believes that this method most accurately reflects the Company’s progress toward satisfaction of the performance obligation, which usually takes less than one year. Under this method, the Company could appropriately measure the fulfillment of a performance obligation. Assumptions, risks and uncertainties inherent in the estimates used to measure progress could affect the amount of revenues, receivables and contract liabilities at each reporting period.
Incurred costs include all direct material, labor and subcontract costs, and those indirect costs related to application development performance, such as indirect labor, supplies, and tools. Cost-based input method requires the Company to make estimates of revenues and costs to complete the service. In making such estimates, significant judgment is required to evaluate assumptions related to the costs to complete the application development, including materials, labor, and other system costs. The Company’s estimates are based upon the professional knowledge and experience of the Company’s engineers and project managers to assess the contract’s schedule, performance, and technical matters. The Company has adequate cost history and estimating experience, and with respect to which management believes it can reasonably estimate total development costs. If the estimated costs are greater than the related revenues, the Company recognizes the entire estimated loss in the period the loss becomes known and can be reasonably estimated. Changes in estimates for software development services include but are not limited to cost forecast changes and change orders. The cumulative effect of changes in estimates is recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. To date, the Company has not incurred a material loss on any contracts. However, as a policy, provisions for estimated losses on such engagements will be made during the period in which a loss becomes probable and can be reasonably estimated. If contract modifications result in additional goods or services that are distinct from those transferred before the modification, they are accounted for prospectively as if the Company entered into a new contract. If the goods or services in the modification are not distinct from those in the original contract, sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values.
(2) Consulting and solution services
Revenue from consulting and solution services is primarily comprised of fixed-fee contracts, which require the Company to provide professional consulting and solution services over contract terms beginning on the commencement date of each contract, which is the date its service is made available to clients. Billings to the clients are generally on a monthly or quarterly basis over the contract term, which is typically 1 to 12 months. The consulting and solution services contracts typically include a single performance obligation. The revenue from consulting and solution services is recognized over the contract term as clients receive and consume benefits of such services as provided.
Revenue includes reimbursements of travel and out-of-pocket expense, with equivalent amounts of expense recorded in cost of revenue.
F-11
(3) Sale of NFTs
The Company engages in sale of NFTs, or non-fungible tokens. NFTs are assets that have been tokenized via a blockchain and are assigned unique identification codes and metadata that distinguish them from other tokens. The Company typically enters into contracts with its customers where the rights of the parties, including payment terms, are identified and sales prices to the customers are fixed with no separate sales rebate, discount, or other incentive and no right of return exists on sales of NFTs. The Company’s performance obligation is to deliver products according to contract specifications. The Company recognizes product revenue at a time when the control of products is transferred to customers.
Contract balances
The timing of revenue recognition may differ from the timing of invoicing to customers. For certain services, customers are required to pay before the services are transferred. The Company recognizes contract assets or contract liabilities in the balance sheets, depending on the relationship between the Company’s performance and the customer’s payment.
Contract assets are rights to consideration in
exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the
passage of time. As of May 1, 2022, April 30, 2023 and 2024, the Company recorded contract assets of , , and JPY
Contract liabilities are recorded when consideration
is received from a customer prior to transferring the services to the customer or other conditions under the terms of a sales contract.
As of May 1, 2022, April 30, 2023 and 2024, the Company recorded contract liabilities of , JPY
Operating leases
The Company determines if an arrangement is a lease at inception. Leases are classified as operating or finance leases in accordance with the recognition criteria in ASC 842-20-25. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.
At the commencement date of a lease, the Company determines the classification of the lease based on the relevant factors present and records a right-of-use (“ROU”) asset and lease liability for operating lease. ROU assets acquired through lease represent the right to use an underlying asset for the lease term, and operating lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are calculated as the present value of the lease payments not yet paid. If the rate implicit in the Company’s leases is not readily available, the Company uses an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. This incremental borrowing rate reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. ROU assets include any lease prepayments and are reduced by lease incentives. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease terms are based on the non-cancellable term of the lease.
Leases with an initial lease term of 12 months or less are not recorded on the balance sheets. Lease expense for these leases is recognized on a straight-line basis over the lease term.
Cost of revenues
Cost of revenues mainly consist of salaries and benefits of our staff and outsourced staff, and related expenses including telecommunication cost and rental costs.
Selling and marketing expenses
Selling and marketing expenses mainly consist of payroll, promotion expenses, and related expenses for personnel engaged in selling and marketing activities.
F-12
Advertising expenses
Advertising costs are expensed as incurred and
included in selling, general, and administrative expenses in the statements of operations. Advertising expenses amounted to JPY
Research and development expenses
Research and development costs are expensed as incurred. These costs primarily consist of payroll, outsourced development cost, and related expenses for personnel engaged in research and development activities.
Income taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized as a benefit
only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized
is the largest amount of tax benefit that is greater than
Loss per share
Basic loss per share is computed by dividing net loss attributable to the holders of ordinary shares by the weighted average number of ordinary shares outstanding during the period presented. Diluted loss per share is calculated by dividing net loss attributable to the holders of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. However, ordinary share equivalents are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti- dilutive, such as in a period in which a net loss is recorded.
F-13
Share-based compensation
The Company applies ASC 718, Compensation – Stock Compensation (“ASC 718”), to account for its employee share-based payments. In accordance with ASC 718, the Company determines whether an award should be classified and accounted for as a liability award or equity award. All the Company’s share-based awards to employees were classified as equity awards and are recognized in the financial statements based on their grant date fair values. In accordance with ASC 718, the Company recognizes share-based compensation cost for equity awards to employees with a performance condition based on the probable outcome of that performance condition. Compensation cost is recognized using the accelerated method if it is probable that the performance condition will be achieved. The Company accounts for forfeitures as they occur in accordance with ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting.
Segment reporting
ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major clients in financial statements for detailing the Company’s business segments. Based on the criteria established by ASC 280, the Company’s chief operating decision maker (“CODM”) has been identified as the Chief Executive Officer, who reviews results when making decisions about allocating resources and assessing performance of the Company. As a whole and hence, the Company has only one reportable segment. The Company does not distinguish between markets or segments for the purpose of internal reporting. As the Company’s long-lived assets are substantially located in Japan, no geographical segments are presented.
Related party transactions
A related party is generally defined as (i) any
person and or their immediate family who hold
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
Commitments and Contingencies
In the normal course of business, the Company is subject to contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, such as government investigations and tax matters. The Company recognizes a liability for such contingency if it determines it is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Company may consider many factors in making these assessments including historical performance and the specific facts and circumstances of each matter.
F-14
Risks and uncertainties
Political and economic risk
All of the Company’s assets were located in Japan and all of the Company’s revenue was generated in Japan. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in Japan, as well as by the general state of Japan economy. The Company’s results may be adversely affected by changes in the political, regulatory, and social conditions in Japan. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations, including its organization and structure disclosed in Note 1, such experience may not be indicative of future results.
Foreign currency exchange risk
The functional currency of the Company is JPY. Exposure to foreign currency risk is derived from a bank account denominated in US dollars. Our financial position, results of operations and cash flow are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign currency exchange rates.
To date, we have not engaged in hedging our foreign currency exchange risk. In the future, we may enter into formal currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect us from the adverse effects of such fluctuations.
Credit risk
As of April 30, 2023 and 2024, JPY
Accounts receivables are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risks. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances.
Concentration of credit risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and account receivable. The Company places its cash with financial institutions with high-credit ratings and quality.
Accounts receivable primarily comprise of amounts receivable from the service clients. To reduce credit risk, the Company performs on-going credit evaluations of the financial condition of these service clients. The Company establishes a provision for credit losses based upon estimates, factors surrounding the credit risk of specific service clients and other information.
Concentration of demand
As of April 30, 2023, one client accounted for
As of April 30, 2024, one client accounted for
For the year ended April 30, 2022, two major clients
accounted for
Concentration of supply
As of April 30, 2023, three vendors accounted
for
For the year ended April 30, 2022, three vendors
accounted for
F-15
Recent accounting pronouncements
The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), the Company meets the definition of an emerging growth company, or EGC, and has elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of these accounting standards until they would apply to private companies.
In June 2016, the FASB amended guidance related to the impairment of financial instruments as part of ASU2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be effective January 1, 2020. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which clarified that receivables from operating leases are not within the scope of Topic 326 and instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842. On May 15, 2019, the FASB issued ASU 2019-05, which provides transition relief for entities adopting the Board’s credit losses standard, ASU 2016-13. Specifically, ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of the credit losses guidance in ASC 326-20, (3) are eligible for the fair value option under ASC 825-10, and (4) are not held-to-maturity debt securities. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods therein. An entity may early adopt the ASU in any interim period after its issuance if the entity has adopted ASU 2016-13. For all other entities, the effective date will be the same as the effective date of ASU 2016-13. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU 2019-11 amendment provides clarity and improves the codification to ASU 2016-03. The pronouncement would be effective concurrently with the adoption of ASU 2016-03. The pronouncement is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. In February 2020, the FASB issued ASU No. 2020-02, which provides clarifying guidance and minor updates to ASU No. 2016-13 – Financial Instruments – Credit Loss (Topic 326) (“ASU 2016-13”) and related to ASU No. 2016-02 – Leases (Topic 842). ASU 2020-02 amends the effective date of ASU 2016-13, such that ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company adopted this update on May 1, 2023. The adoption of this update had no material impact on the Company’s results of operations and financial position.
On December 18, 2019, the FASB issued ASU No. 2019-12, Income taxes (Topic 740), Simplifying the Accounting for Income Taxes. This guidance amends ASC Topic 740 and addresses several aspects including 1) evaluation of step-up tax basis of goodwill when there is not a business combination, 2) policy election to not allocate taxes on a separate entity basis to entities not subject to income tax, 3) accounting for tax law changes or rates during interim periods, 4) ownership changes from equity method investment to subsidiary or vice versa, 5) elimination of exception to intrapetrous allocation when there is gain in discontinued operations and a loss from continuing operations, and 6) treatment of franchise taxes that are partially based on income. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company adopted this update on May 1, 2022. The adoption of this update had no material impact on the Company’s results of operations and financial position.
In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs”. The amendments in this Update represent changes to clarify the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. ASU 2020-08 is effective for the Company for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. All entities should apply the amendments in this Update on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. These amendments do not change the effective dates for Update 2017-08. The Company adopted this update on May 1, 2022. The adoption of this update had no material impact on the Company’s results of operations and financial position.
F-16
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements”. The amendments in this Update represent changes to clarify the Codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments in this Update affect a wide variety of Topics in the Codification and apply to all reporting entities within the scope of the affected accounting guidance. ASU 2020-10 is effective for the Company for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. The amendments in this Update should be applied retrospectively. The Company adopted this update on May 1, 2022. The adoption of this update had no material impact on the Company’s results of operations and financial position.
In December 2023, the FASB issued ASU 2023-08, Intangibles – Goodwill and other – crypto assets (Subtopic 350-60): Accounting for and disclosure of crypto assets. This guidance addresses the accounting and disclosure requirements for certain crypto assets. The new guidance requires entities to subsequently measure certain crypto assets at fair value, with changes in fair value recorded in net income in each reporting period. In addition, entities are required to provide additional disclosures about the holdings of certain crypto assets. The ASU’s amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact this ASU will have on its financial statements and related disclosures.
The Company has reviewed all other recently issued accounting pronouncements and concluded that they are either not applicable or not expected to have a material impact on the Company’s financial statements.
Note 4 – Revenues
| April 30, 2022 | April 30, 2023 | April 30, 2024 | April 30, 2024 | |||||||||||||
| JPY | JPY | JPY | USD | |||||||||||||
| OPERATING REVENUES | ||||||||||||||||
| Software and system development services | ||||||||||||||||
| Consulting and solution services | ||||||||||||||||
| Sale of NFTs | ||||||||||||||||
| TOTAL OPERATING REVENUES | ||||||||||||||||
Note 5 – Accounts receivable, net
| April 30, 2023 | April 30, 2024 | |||||||||||
| JPY | JPY | USD | ||||||||||
| Accounts receivable | ||||||||||||
| Less: Allowance for expected credit loss | ||||||||||||
| Add: Consumption tax receivable | ||||||||||||
| Accounts receivable, net | ||||||||||||
F-17
Note 6 – Property and equipment, net
| April 30, 2023 | April 30, 2024 | |||||||||||
| JPY | JPY | USD | ||||||||||
| At cost: | ||||||||||||
| Office equipment | ||||||||||||
| Total | ||||||||||||
| Accumulated depreciation | ( | ) | ( | ) | ( | ) | ||||||
| Property and equipment, net | ||||||||||||
Depreciation expense for the years ended April
30, 2022, 2023 and 2024 amounted to JPY
Note 7 – Other payables and accrued expenses
| April 30, 2023 | April 30, 2024 | |||||||||||
| JPY | JPY | USD | ||||||||||
| Salary and benefit payables | ||||||||||||
| Outsourced development costs | ||||||||||||
| Professional service fee | ||||||||||||
| Communication costs | ||||||||||||
| Withholding tax | ||||||||||||
| Corporate business tax | ||||||||||||
| Sales proceeds temporarily received for others | ||||||||||||
| Resident tax for employees | ||||||||||||
| Others | ||||||||||||
Others mainly consist of other payables related to operating activities including outsourced design costs and handling fee.
F-18
Note 8 – Loans
| As of April 30, 2023 | Balance | Balance | Maturity Date | Effective Interest Rate | Collateral/ Guarantee | |||||||||||
| JPY | USD | |||||||||||||||
| Kiraboshi Bank | % | |||||||||||||||
| Kiraboshi Bank | % | |||||||||||||||
| Resona Bank | % | |||||||||||||||
| Shoko Chukin Bank | % | |||||||||||||||
| Total loans | ||||||||||||||||
| Less: Loan origination fee | ( | ) | ( | ) | ||||||||||||
| Current portion of long – term loan | ( | ) | ( | ) | ||||||||||||
| Long-term loan – due over one year | ||||||||||||||||
| As of April 30, 2024 | Balance | Balance | Maturity Date | Effective Interest Rate | Collateral/ Guarantee | |||||||||||
| JPY | USD | |||||||||||||||
| Kiraboshi Bank | % | |||||||||||||||
| Kiraboshi Bank | % | |||||||||||||||
| Resona Bank | % | |||||||||||||||
| Shoko Chukin Bank | % | |||||||||||||||
| Total loans | ||||||||||||||||
| Less: Loan origination fee | ( | ) | ( | ) | ||||||||||||
| Current portion of long – term loan | ( | ) | ( | ) | ||||||||||||
| Long-term loan – due over one year | ||||||||||||||||
F-19
Interest expense for the year ended April 30,
2022, 2023 and 2024 amounted to JPY
| JPY | USD | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| Thereafter | ||||||||
| Total | ||||||||
Note 9 – Commitments and contingencies
Lease commitments
The Company entered into an operating lease agreement for office space. The minimum lease payment commitments under the operating lease as of April 30, 2024 are set forth in the Note 11 – Operating leases – right-of-use assets
Litigation
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 USD2,
Note 10 – Income taxes
(a) Corporate Income Taxes
The Company is in Japan and is subject to Japanese
national and local income taxes, inhabitant tax, and enterprise tax, which, in the aggregate, represent a statutory income tax rate of
approximately
Reconciliation of the differences between statutory income tax rate and the effective tax rate
| April 30, 2023 | April 30, 2024 | |||||||
| Japanese statutory income tax rate | % | % | ||||||
| Deferred IPO costs | % | % | ||||||
| Non-taxable income | % | % | ||||||
| Valuation allowance | ( | )% | ( | )% | ||||
| Share based compensation | % | ( | )% | |||||
| Non-deductible expenses | ( | )% | % | |||||
| Others | ( | )% | ( | )% | ||||
| % | % | |||||||
| April 30, 2022 | April 30, 2023 | April 30, 2024 | April 30, 2024 | |||||||||||||
| JPY | JPY | JPY | USD | |||||||||||||
| Current income tax expense (benefit) | ( | ) | ||||||||||||||
| Deferred tax (benefit) expense | ( | ) | ( | ) | ||||||||||||
| Total provision for income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
F-20
For the purpose of presentation in the balance sheets, deferred income
tax assets and liabilities have been offset.
| April 30, 2023 | April 30, 2024 | |||||||||||
| JPY | JPY | USD | ||||||||||
| Net operating loss carry forward | ||||||||||||
| Write off of other receivable | ||||||||||||
| Lease liabilities | ||||||||||||
| Write off of guarantee money deposited | ||||||||||||
| Temporary difference in depreciation | ||||||||||||
| Bonus accrual | ||||||||||||
| Research and development costs – capitalized for tax purposes | ||||||||||||
| Others | ||||||||||||
| Valuation allowance | ( | ) | ( | ) | ( | ) | ||||||
| Deferred tax assets | ||||||||||||
| Right-of-use assets – operating lease | ( | ) | ( | ) | ( | ) | ||||||
| Accrued business tax receivable | ( | ) | ||||||||||
| Others | ( | ) | ||||||||||
| Deferred tax liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Total | ( | ) | ||||||||||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the cumulative earnings and projected future taxable income in making this assessment. Recovery of substantially all of the Company’s deferred tax assets is dependent upon the generation of future income, exclusive of reversing taxable temporary differences.
(b) Consumption tax
Consumption tax collected and remitted to tax
authorities is excluded from revenue, cost of sales, and expenses in the statements of operations. The Company has been subject to the
applicable consumption tax rate of
Note 11 – Operating leases – right-of-use assets
The Company entered into an operating lease agreement for office space. None of the amounts disclosed below for these leases contain variable payments, residual value guarantees or options that were recognized as part of the right-of-use assets and lease liabilities. As the Company’s leases did not provide an implicit discount rate, the Company used an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
As of April 30, 2024, the Company recognized operating lease liabilities,
including current and noncurrent, in the amount of JPY
As of April 30, 2023, the Company recognized operating
lease liabilities, including current and noncurrent, in the amount of JPY
Rent expenses for the year ended April 30, 2022,
2023 and 2024 was JPY
F-21
Lease commitments
| Operating Leases | ||||||||
| JPY | USD | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Total lease payment | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Present value of operating lease liabilities | ||||||||
| Less: current obligation | ( | ) | ( | ) | ||||
| Long-term obligation on April 30, 2024 | ||||||||
For the year ended April 30, 2024 | ||||||||
| JPY | USD | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows for operating leases | ||||||||
| Weighted average remaining lease term of operating leases | ||||||||
| Weighted average discount rate of operating leases | % | % | ||||||
Note 12 – Shareholders’ equity
Ordinary shares
The Company is a stock company incorporated in Japan pursuant to the laws of Japan on May 1, 2018.
As of April 30, 2023 and 2024, the number of outstanding
shares is
On April 26, 2024, the Company’s shareholders
approved an amendment to its equity structure whereby the Company reduced capital associated with ordinary shares with a corresponding
increase to additional paid-in capital of JPY
Note 13 – Share-based compensation
Share option plan (the “2019 Plan”)
On February 5, 2019, the shareholders and Board
of Directors of the Company approved the 2019 Plan, which is administered by the Board of Directors and has a term of
The options granted under the 2019 Plan have a contractual term of
The fair value of each option award is estimated on the grant date
using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of -
F-22
| Number of options | Weighted- average exercise price | Weighted- average remaining contractual term | Aggregate intrinsic Value | |||||||||||||
| JPY | Years | JPY | ||||||||||||||
| Outstanding, April 30, 2022 | ||||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | — | |||||||||||||||
| Outstanding, April 30, 2023 | ||||||||||||||||
| Vested at April 30, 2023 | ||||||||||||||||
| Exercisable at April 30, 2023 | ||||||||||||||||
| Number of options | Weighted- average exercise price | Weighted- average remaining contractual term | Aggregate intrinsic Value | |||||||||||||
| USD | Years | USD | ||||||||||||||
| Outstanding, April 30, 2023 | ||||||||||||||||
| Granted | — | |||||||||||||||
| Forfeited | ( | ) | — | |||||||||||||
| Outstanding, April 30, 2024 | ||||||||||||||||
| Vested at April 30, 2024 | ||||||||||||||||
| Exercisable at April 30, 2024 | ||||||||||||||||
| Number of options | Weighted- average exercise price | Weighted- average remaining contractual term | Aggregate intrinsic Value | |||||||||||||
| JPY | Years | JPY | ||||||||||||||
| Outstanding, April 30, 2023 | ||||||||||||||||
| Granted | — | |||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding, April 30, 2024 | ||||||||||||||||
| Vested at April 30, 2024 | ||||||||||||||||
| Exercisable at April 30, 2024 | ||||||||||||||||
The aggregate intrinsic value in the table above represents the difference between the fair value of the Company’s ordinary share as of fiscal year end and the option’s respective exercise price.
For the year ended April 30, 2024, the Company recognized share-based
compensation expense of JPY
F-23
Trust-Type Share Option Plan (the “2019 Trust-Type Plan”)
On July 1, 2019, the shareholders and Board of
Directors of the Company approved the 2019 Trust-Type Share Option Plan (the “2019 Trust-Type Plan”); 2019 Trust-Type Plan
is administered by the Board of Directors, and has a term of
The trust-type share option (trust for market value-issue stock acquisition rights) is a scheme of where the option holder is granted the right to acquire the Company’s stock in the open market at pre-determined price, which can be lower than the fair market value; therefore, generating immediate benefit to the holder to option. The trust type plan was initiated and created by the trustor (Mr. Kobayashi, the Company’s Chief Executive Officer) when he deposited funds into the trust with the intention to reward the beneficiaries of the plan. The trustee is entrusted with the responsibility to grant to beneficiaries (officers and employees, etc.) the options.
The fair value of each option award is estimated on the grant date
using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of -
| Number of options | Weighted- average exercise price | Weighted- average remaining contractual term | Aggregate intrinsic Value | |||||||||||||
| JPY | Years | JPY | ||||||||||||||
| Outstanding, April 30, 2022 | ||||||||||||||||
| Granted | — | |||||||||||||||
| Forfeited | — | |||||||||||||||
| Exercised | — | |||||||||||||||
| Outstanding, April 30, 2023 | ||||||||||||||||
| Vested at April 30, 2023 | ||||||||||||||||
| Exercisable at April 30, 2023 | ||||||||||||||||
F-24
| Number of options | Weighted- average exercise price | Weighted- average remaining contractual term | Aggregate intrinsic Value | |||||||||||||
| JPY | Years | JPY | ||||||||||||||
| Outstanding, April 30, 2023 | ||||||||||||||||
| Granted | — | |||||||||||||||
| Forfeited | ( | ) | — | |||||||||||||
| Exercised | ( | ) | — | |||||||||||||
| Outstanding, April 30, 2024 | ||||||||||||||||
| Vested at April 30, 2024 | ||||||||||||||||
| Exercisable at April 30, 2024 | ||||||||||||||||
| Number of options | Weighted- average exercise price | Weighted- average remaining contractual term | Aggregate intrinsic Value | |||||||||||||
| USD | Years | USD | ||||||||||||||
| Outstanding, April 30, 2023 | ||||||||||||||||
| Granted | — | |||||||||||||||
| Forfeited | ( | ) | — | |||||||||||||
| Exercised | ( | ) | — | |||||||||||||
| Outstanding, April 30, 2024 | ||||||||||||||||
| Vested at April 30, 2024 | ||||||||||||||||
| Exercisable at April 30, 2024 | ||||||||||||||||
For the fiscal year ended April 30, 2022, the Company recognized an
expense of JPY
Note 14 – Subsequent events
On August 12, 2024, allocated share options of
The Company has assessed all events from April 30, 2024 up through August 26, 2024, which is the date that these financial statements are available to be issued, and, except as disclosed above, there are not any material subsequent events that require disclosure in these financial statements.
F-25
Exhibit 1.2
Articles of Incorporation
of
Earlyworks Co., Ltd.
(Translation)
Chapter 1. General Provisions
Article 1. Name of the Company
The name of the Company shall be “Kabushiki Kaishya Earlyworks.” It shall be written in English as “Earlyworks Co., Ltd.”
Article 2. Objectives of the Company
The purpose of the Company shall be to engage in the following businesses:
| (i) | business related to contracting, development and maintenance of systems; |
| (ii) | construction and consulting business related to IT systems; |
| (iii) | planning, development and sales of computer systems and software; |
| (iv) | planning, production, and advertising agency business for advertising and publicity, as well as consulting related thereto; |
| (v) | planning and production of illustrations, graphic design and computer graphics |
| (vi) | acquisition, holding, management and sale of securities; |
| (vii) | management consulting for beauty salons, chiropractic clinics, personal gym offices and other stores |
| (viii) | sales of content, assets, etc. using blockchain technology; or |
| (ix) | any and all businesses incidental to the above items. |
Article 3. Location of Head Office
The head office of the Company shall be located in Taito-ku, Tokyo.
Article 4. Organizational Bodies
The Company shall have the following organizational bodies in addition to the General Meeting of Shareholders and Directors:
| (i) | Board of Directors; |
| (ii) | Company Auditors; and |
| (iii) | Board of Company Auditors. |
Article 5. Method of Public Notices
Public notices by the Company shall be issued electronically; provided, however, that if, owing to accident or any other unavoidable reason, it is not possible to issue public notices electronically, they shall be inserted in the Nihon Keizai Shimbun.
Chapter 2. Shares
Article 6. Total Number of Shares
The total number of shares authorized to be issued by the Company shall be 55,300,000 shares.
Article 7. Acquisition of Treasury Shares
The Company may purchase treasury shares based on a resolution of its Board of Directors pursuant to Article 165, Paragraph 2 of the Companies Act.
Article 8. Share Certificate
| (1) | The Company issues share certificates relating to its shares. |
| (2) | The share certificates of the Company shall be issued in the following 5 denominations: 1, 100, 1,000, 10,000 and 100,000 shares. |
Article 9. Transfer Agent
| (1) | The Company shall have a transfer agent. |
| (2) | The transfer agent and its office at which the Company shares are handled shall be determined by the Board of Directors. |
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| (3) | Maintaining and custody of the register of shareholders and the original register of Stock Acquisition Rights of the Company shall be entrusted to the transfer agent and the Company shall not implement these activities. |
Article 10. Handling of Shares
Unless otherwise provided by laws or ordinances or in these Articles of Incorporations, the procedures and the fees in connection with the handling of shares of the Company shall be governed by the Share Handling Regulations.
Chapter 3. General Meeting of Shareholders
Article 11. Convening of General Meeting of Shareholders
An ordinary General Meeting of Shareholders shall be convened within 3 months from the last day of each fiscal year, and an extraordinary General Meeting of Shareholders shall be convened from time to time, whenever necessary.
Article 12. Record Date
The shareholders who are entitled to exercise shareholders’ rights at an Ordinary General Meeting of Shareholders for settlement of accounts for each business year shall be those entered or recorded on the final shareholder registry as of April 30 of each year.
Article 13. Convener and Chairperson of the General Meeting of Shareholders
| (1) | The President and Chief Executive Officer shall act as the convener and assume chairmanship of a General Meeting of Shareholders. |
| (2) | In case the President and Chief Executive Officer is prevented by unavoidable circumstances from so acting or in case the post of the Chairman of the Board of Directors is vacant, a surrogate shall act as convener and chairman according to the order as decided by the Board of Directors. |
Article 14. Measures, etc. for Providing Information in Electronic Format
When the Company convenes a General Meeting of Shareholders, it shall take measures for providing information that constitutes the content of reference materials for the General Meeting of Shareholders, etc. in electronic format. Among items for which the measures for providing information in electronic format will be taken, the Company may exclude all or some of those items designated by the Ministry of Justice Order from statements in the paper-based documents to be delivered to shareholders who requested the delivery of paper-based documents by the record date of voting rights.
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Article 15. Method of Resolution
| (1) | Except where otherwise provided for by laws and regulations or these Articles of Incorporation, resolutions at General Meeting of Shareholders shall be adopted by a majority vote of the shareholders present who hold the exercisable voting rights. |
| (2) | The quorum for a General Meeting of Shareholders to adopt resolutions as provided for in Article 309, Paragraph 2 of the Companies Act require the presence of shareholders representing 1/3 of the exercisable voting rights, and such resolutions shall be adopted by 2/3 vote of the shareholders present. |
Article 16. Exercise of Voting Right by Proxy
| (1) | A shareholder may exercise voting rights by a proxy who is also a shareholder of the Company with voting rights. |
| (2) | When voting under the provisions of the preceding paragraph, the shareholder or the proxy shall submit documentation certifying the concerned proxy rights to the Company for each General Meeting of Shareholders. |
Article 17. Minutes
A minutes shall be prepared in writing or by an electronic or magnetic record with respect to the business of a shareholders meeting pursuant to the provisions of the Companies Act.
Chapter 4. Directors and Board of Directors
Article 18. Number
The number of the Directors of the Company shall be 10 Directors or less.
Article 19. Election
| (1) | Directors shall be elected at a General Meeting of Shareholders |
| (2) | Directors shall be elected by a majority vote of the shareholders present and holding at least 1/3 of all shareholders’ voting rights. |
| (3) | The election of Directors shall not be made by cumulative voting. |
4
Article 20. Term of Office
| (1) | The term of office of a Director shall expire at the conclusion of the Ordinary General Meeting of Shareholders for the last business year that ends within 2 years were elected. |
| (2) | The term of office of a Director who is elected as substitute for a Director who retired before expiry of its term of office shall expire by the time when the term of office of the retired Director expires. The terms of office of a Director who is elected with increasing the number of Directors shall expire by the time when the term of office of the other Director(s) expires. |
Article 21. Representative Director and Executive Director
| (1) | By resolution of the Board of Directors, Representative Directors shall be elected. |
| (2) | The Board of Directors may appoint the Chairperson of the Board of Directors and the President of the Company, some Executive Deputy President(s), Senior Managing Director(s) and Managing Director(s) by resolution. |
Article 22. Convening of Meeting of the Board of Directors
| (1) | The President of the Company shall convene a meeting of the Board of Directors and shall assume its chairmanship. |
| (2) | In case, however, the President of the Company is prevented by unavoidable circumstances from so acting, or in case the post of the Chairman of the Board of Directors is vacant, a surrogate shall act as convener and chairman, according to the order as decided by the Board of Directors. |
Article 23. Notice Convening Meetings
| (1) | A notice convening Meetings of the Board of Directors shall be dispatched to each Director at least 3 days prior to the date of the meeting. In the event of an urgency, however, this period may be shortened. |
| (2) | In the event that all Directors and Company Auditors have given consent, the notice provided for in the preceding paragraph may be omitted. |
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Article 24. Method of Resolution
| (1) | All resolutions of the Board of Directors shall be adopted at a meeting of the Board of Directors at which a majority of the Directors are present by a majority of the Directors present. |
Article 25. Omission of Adoption of Resolutions
The Company may deem the Board of Directors to have adopted a resolution on the said issue pursuant to Article 370 of the Companies Act.
Article 26. Minutes
Minutes shall be prepared with respect to the business of the board of Directors meeting pursuant to the provisions of the Companies Act. The Directors and Company Auditors present at the meeting shall sign or affix the names and seals to it.
Article 27. Board of Directors Regulations
In addition to the case where otherwise provided for by laws and regulations and in these Articles of Incorporation, matters regarding the Board of Directors shall be governed by the Board of Directors Regulations established by the Board of Directors.
Article 28. Remuneration for Directors
Remuneration for Directors and other financial benefits received from the Company as a consideration for the execution of the duties shall be decided by resolution of a General Meeting of Shareholders.
Article 29. Limitation of Liability of Directors
| (1) | In accordance with the provisions of Article 426, Paragraph 1 of the Companies Act, the Company may, by resolution of the Board of Directors, exempt any Director (including any former Director) from the liability to the extent permitted by laws and regulations. |
| (2) | In accordance with the provisions of Article 427, Paragraph 1 of the Companies Act, the Company may enter into an agreement with a Director (excluding an Executive Director, etc.) to limit the liability, provided that the amount of the liability limitation under said agreement is the minimum liability amount provided for by the Companies Act. |
6
Chapter 5. Company Auditors and Board of Company Auditors
Article 30. Number
The number of Company Auditors of the Company shall be 5 Auditors or less.
Article 31. Election
| (1) | Company Auditors shall be elected at a General Meeting of Shareholders |
| (2) | Company Auditors shall be elected by a majority vote of the shareholders present and holding at least 1/3 of all shareholders’ voting rights. |
Article 32. Term of Office
| (1) | The term of office of a Company Auditor shall expire at the conclusion of the Ordinary General Meeting of Shareholders for the last business year that ends within 4 years were elected. |
| (2) | The term of office of a Company Auditor who is elected as substitute for a Company Auditor who retired before expiry of its term of office shall expire by the time when the term of office of the retired Company Auditor expires. |
Article 33. Full-time Company Auditor
Full-time Company Auditor shall be elected by the Board of Company Auditors from among Company Auditors
Article 34. Convening of Meeting of Board of Company Auditors
| (1) | Each of Company Auditors shall be notified of a meeting of the Board of the Company Auditors at least 3 days before the date set for such meeting. In the event of an urgency, however, this period may be shortened. |
| (2) | In the event that all Company Auditors have given consent, the notice may be omitted. |
Article 35. Method of Resolution
Except where otherwise provided for by laws and regulations, a resolution of the Board of Company Auditors shall be adopted by a majority of the Company Auditors present.
Article 36. Minutes
Minutes shall be prepared with respect to the business of the Board of Company Auditors meeting pursuant to the provisions of the Companies Act. The Company Auditors present at the meeting shall sign or affix the names and seals to it.
7
Article 37. Board of Company Auditors Regulations
In addition to the case where otherwise provided for by laws and regulations and in these Articles of Incorporation, matters regarding the Board of Company Auditors shall be governed by the Board of Company Auditors Regulations established by the Board of Company Auditors.
Article 38. Remuneration for Company Auditors
Remuneration for Company Auditors and other financial benefits received from the Company as a consideration for the execution of the duties shall be decided by resolution of a General Meeting of Shareholders.
Article 39. Limitation of Liability of Company Auditors
| (1) | In accordance with the provisions of Article 426, Paragraph 1 of the Companies Act, the Company may, by resolution of the Board of Directors, exempt any Company Auditor from the liability to the extent permitted by laws and regulations. |
| (2) | In accordance with the provisions of Article 427, Paragraph 1 of the Companies Act, the Company may enter into an agreement with a Company Auditor to limit the liability, provided that the amount of the liability limitation under said agreement is the minimum liability amount provided for by the Companies Act. |
Chapter 6. Accounts
Article 40. Business Year
The business year of the Company shall begin on May 1 of each year and end on April 30 of the following year.
Article 41. Record Date for Dividend Payment from Surplus, etc
| (1) | The Company may distribute dividends from surplus to shareholders or registered stock pledgees whose names have been entered or recorded in the final shareholder registry as of April 30 of each year. |
| (2) | In addition to the arrangement in the preceding paragraph, the Company may distribute dividends from surplus to those shareholders or pledgees who are entered or recorded in the register of shareholders as of the record date decided by the Board of Directors. |
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Article 42. Record Date for Interim Dividends
The Company may, by a resolution of the Board of Directors, distribute interim dividends to those shareholders or pledgees who are entered or recorded in the register of shareholders as of the close of business on October 30 of each year.
Article 43. Period of Exclusion of Payment of Dividends and Interim Dividends
If dividends or interim dividends are not received within three (3) full years from the date of commencement of payment thereof, the Company shall be relieved of the obligation to pay such dividends or interim dividends.
(Changes)
Enforced on April 11, 2018
Partially amended and enforced on
May 1, 2018
May 14, 2018
October 1, 2018
July 1, 2019
October 28, 2019
July 28, 2020
July 29, 2021
October 25, 2021
May 6, 2022
July 28, 2022
June 22, 2023
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Exhibit 11.2
Insider Trading Compliance Manual
Earlyworks Co., Ltd.
Adopted March 21, 2024
In order to take on an active role in the prevention of insider trading violations by its officers, directors, employees, consultants, advisors, and other related individuals, the Board of Directors (the “Board”) of Earlyworks Co., Ltd., a joint-stock corporation with limited liability organized under Japanese law (the “Company”), has adopted the policies and procedures described in this Insider Trading Compliance Manual.
I. Adoption of Insider Trading Policy.
Effective as of the date written above, the Company has adopted the Insider Trading Policy (the “Policy”), attached hereto as Exhibit A, which prohibits trading based on material, non-public information regarding the Company and its subsidiaries (“Inside Information”). The Policy covers all officers and directors of the Company and its subsidiaries, all other employees of the Company and its subsidiaries, all secretaries and assistants supporting such officers, directors, or employees and consultants or advisors to the Company or its subsidiaries who have or may have access to Inside Information and members of the immediate family or household of any such person. The Policy (and/or a summary thereof) is to be delivered to all new officers, directors, employees, consultants, advisors and related individuals who are within the categories of covered persons upon the commencement of their relationships with the Company, and is to be circulated to all covered personnel at least annually.
II. Designation of Certain Persons.
A. Insiders Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), prohibits “short-swing” profits by all directors and executive officers of the Company, and any direct or indirect beneficial owner of 10% or more of any of the Company’s equity security of any class (collectively, the “Insiders”) and such Insiders, in addition to any beneficial owners of 5% or more of the Company’s registered securities of any class, are subject to the reporting and liability provisions of Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder (collectively, the “Section 13(d) Individuals”). Rule 3a12-3 under the Exchange Act exempts securities registered by a Foreign Private Issuer, or FPI from Section 16 of the Exchange Act. Accordingly, Section 13(d) Individuals of an FPI are not subject to the short-swing profit limits set forth in Section 16(b), nor are they required to comply with the Section 16(a) reporting requirements.
Under Sections 13(d) and 13(g) of the Exchange Act, and the U.S. Securities and Exchange Commission (“SEC”) related rules, subject to certain exemptions, any person who after acquiring, directly or indirectly the beneficial ownership of a certain class of equity securities, becomes, either directly or indirectly, the beneficial owner of more than 5% of such class must deliver a statement to the issuer of the security and to each exchange where the security is traded. Delivery to each exchange can be satisfied by making a filing on EDGAR (as defined below). In addition, Section 13(d) Individuals must file with the SEC a statement containing certain information, as well as any additional information that the SEC may deem necessary or appropriate in the public interest or for the protection of investors. Attached hereto as Exhibit B is a separate memorandum which discusses the relevant terms of Section 13.
B. Other Persons Subject to Policy. In addition, certain employees, consultants, and advisors of the Company as described in Section I above have, or are likely to have, from time to time access to Inside Information and together with the Insiders, are subject to the Policy.
III. Appointment of Chief Compliance Officer.
The Company has appointed [ ] (Corporate Manager) as the Company’s Chief Compliance Officer (the “Compliance Officer”).
IV. Duties of the Compliance Officer.
The Compliance Officer has been designated by the Board to handle any and all matters relating to the Company’s Insider Trading Compliance Program. Certain duties may be delegated to outside counsel with special expertise in securities issues and relevant law. The duties of the Compliance Officer shall include the following:
A. Pre-clearing all transactions involving the Company’s securities by the Insiders and those individuals having regular access to Inside Information, defined for these purposes to include all officers, directors, and employees of the Company and its subsidiaries and members of the immediate family or household of any such person, in order to determine compliance with the Policy, insider trading laws, Section 13 and Section 16 of the Exchange Act and Rule 144 promulgated under the Securities Act of 1933, as amended. Attached hereto as Exhibit C is a Pre-Clearance Checklist to assist the Compliance Officer in the performance of his or her duties hereunder.
B. Assisting in the preparation and filing of Section 13(d) reports for all Section 13(d) Individuals although the filings are their individual obligations.
C. Serving as the designated recipient at the Company of copies of reports filed with the SEC by Section 13(d) Individuals under Section 13(d) of the Exchange Act.
D. Performing periodic reviews of available materials, which may include Schedule 13D, Schedule 13G, Form 144, officers’ and directors’ questionnaires, as applicable, and reports received from the Company’s stock administrator and transfer agent, to determine trading activity by officers, directors and others who have, or may have, access to Inside Information.
E. Circulating the Policy (and/or a summary thereof) to all covered employees, including the Insiders, on an annual basis, and providing the Policy and other appropriate materials to new officers, directors and others who have, or may have, access to Inside Information.
F. Assisting the Board in implementing the Policy and Sections I and II of this memorandum.
G. Coordinating with Company counsel regarding all securities compliance matters.
H. Retaining copies of all appropriate securities reports, and maintaining records of his or her activities as Compliance Officer.
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Exhibit A
EARLYWORKS CO., LTD.
Insider Trading Policy
and Guidelines with Respect to Certain Transactions in the Company’s Securities
Section I
APPLICABILITY OF POLICY
This Policy applies to all transactions in the Company’s securities, including ordinary shares, options and warrants to purchase ordinary shares, and any other securities the Company may issue from time to time, such as preferred shares, and convertible debentures, as well as derivative securities relating to the Company’s shares, whether issued by the Company, such as exchange-traded options. It applies to all officers and directors of the Company, all other employees of the Company and its subsidiaries, all secretaries and assistants supporting such directors, officers, and employees, and consultants or advisors to the Company or its subsidiaries who have or may have access to Material Non-public Information (as defined below) regarding the Company and members of the immediate family or household of any such person. This group of people is sometimes referred to in this Policy as “Insiders.” This Policy also applies to any person who receives Material Non-public Information from any Insider.
Any person who possesses Material Non-public Information regarding the Company is an Insider for so long as such information is not publicly known.
Section II
DEFINITION OF MATERIAL NON-PUBLIC INFORMATION
It is not possible to define all categories of material information. However, information should be regarded as “material” if there is a reasonable likelihood that it would be considered important to an investor in making an investment decision regarding the purchase or sale of the Company’s securities. Material information may be positive or negative. “Non-public Information” is information that has not been previously disclosed to the general public and is otherwise not available to the general public.
While it may be difficult to determine whether any particular information is material, there are various categories of information that are particularly sensitive and, as a general rule, should always be considered material. Examples of such information may include:
| ● | Financial results; |
| ● | Entry into a material agreement or discussions regarding entry into a material agreement; |
| ● | Projections of future earnings or losses; |
| ● | Major contract awards, cancellations or write-offs; |
| ● | Joint ventures or commercial ventures with third parties; |
| ● | News of a pending or proposed merger or acquisition; |
| ● | News of the disposition of material assets; |
A-1
| ● | Impending bankruptcy or financial liquidity problems; |
| ● | Gain or loss of a significant line of credit; |
| ● | Significant breach of a material agreement; |
| ● | New business or services announcements of a significant nature; |
| ● | Share splits; |
| ● | New equity or debt offerings; |
| ● | Significant litigation exposure due to actual or threatened litigation; |
| ● | Changes in senior management or the Board; |
| ● | Capital investment plans; and |
| ● | Changes in dividend policy. |
All of the foregoing categories of information and any similar information should be considered “Material Non-public Information” for purposes of this Policy. If there are any questions regarding whether a particular item of information is Material Non-public Information, please consult the Compliance Officer or the Company’s legal counsel before taking any action with respect to such information.
Section III
CERTAIN EXCEPTIONS
For purposes of this Policy, the Company considers that the exercise of stock options under the Company’s stock option plan (but not the sale of any such shares) is exempt from this Policy, since the other party to the transaction involving only the Company itself and the price does not vary with the market but is fixed by the terms of the option agreement or the plan.
Section IV
STATEMENT OF POLICY
General Policy
It is the policy of the Company to prohibit the unauthorized disclosure of any non-public information acquired in the workplace and the misuse of Material Non-public Information in securities trading.
Specific Policies
1. Trading on Material Non-public Information. With certain exceptions, no officer or director of the Company, no employee of the Company or its subsidiaries and no consultant or advisor to the Company or any of its subsidiaries and no members of the immediate family or household of any such person, shall engage in any transaction involving a purchase or sale of the Company’s securities, including any offer to purchase or offer to sell, during any period commencing with the date that he or she possesses Material Non-public Information concerning the Company, and ending at the close of business on the second Trading Day (as defined below) following the date of public disclosure of that information, or at such time as such non-public information is no longer material. However, see “Permitted Trading Period” below for a full discussion of trading pursuant to a pre-established plan or by delegation.
As used herein, the term “Trading Day” shall mean a day on which national stock exchanges are open for trading.
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2. Tipping. No Insider shall disclose (“tip”) Material Non-public Information to any other person (including family members) where such information may be used by such person to his or her profit by trading in the securities of companies to which such information relates, nor shall such Insider or related person make recommendations or express opinions on the basis of Material Non-public Information as to trading in the Company’s securities.
Regulation FD (Fair Disclosure) (“Disclosure Regulation”) is an issuer disclosure rule implemented by the SEC that addresses selective disclosure. The Disclosure Regulation provides that when the Company, or person acting on its behalf, discloses Material Non-public Information to certain enumerated persons (in general, securities market professionals and holders of the Company’s securities who may well trade on the basis of the information), it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or unintentional; for an intentional selective disclosure, the Company must make public disclosures simultaneously; for a non-intentional disclosure, the Company must make public disclosure promptly. Under the Disclosure Regulation, the required public disclosure may be made by filing or furnishing a Form 6-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
It is the Company’s policy that all communications with the press be handled through our Chief Executive Officer (CEO) or investor/public relations firm. Please refer all press, analyst or similar requests for information to the Company’s CEO and do not respond to any inquiries without prior authorization from the Company’s CEO. If the Company’s CEO is unavailable, the Company’s Chief Financial Officer will fill this role.
3. Confidentiality of Non-public Information. Non-public information relating to the Company is the property of the Company and the unauthorized disclosure of such information (including, without limitation, via email or by posting on Internet message boards or blogs, anonymously or otherwise) is strictly forbidden.
4. Duty to Report Inappropriate and Irregular Conduct. All employees, and particularly executives, managers and/or supervisors, have a responsibility for maintaining financial integrity within the Company, and being consistent with generally accepted accounting principles and both federal and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or irregularities, whether by witnessing the incident or being told of it, must report it to their immediate supervisor and to the chairman of the Company’s Audit Committee of the Board (or to the Chairman of the Board, if an Audit Committee has not been established). For a more complete understanding of this issue, employees should consult their employee manual and or seek the advice of the Company’s general counsel or outside counsel. Our outside securities counsel is Hunter Taubman Fischer & Li LLC, attention: Ying Li, Esq. at (212) 530-2206, email yli@htflawyers.com.
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Section V
POTENTIAL CRIMINAL AND CIVIL LIABILITY
AND/OR DISCIPLINARY ACTION
1. Liability for Insider Trading. Insiders may be subject to penalties of up to $5,000,000 and up to twenty (20) years in jail for engaging in transactions in the Company’s securities at a time when they possess Material Non-public Information regarding the Company, regardless of whether such transactions were profitable. In addition, the SEC has the authority to seek a civil monetary penalty of up to three times the amount of profit gained or loss avoided by illegal insider trading. “Profit gained” or “loss avoided” generally means the difference between the purchase or sale price of the Company’s shares and its value as measured by the trading price of the shares a reasonable period after public dissemination of the non-public information.
2. Liability for Tipping. Insiders may also be liable for improper transactions by any person (commonly referred to as a “tippee”) to whom they have disclosed Material Non-public Information regarding the Company or to whom they have made recommendations or expressed opinions on the basis of such information as to trading in the Company’s securities. The SEC has imposed large penalties even when the disclosing person did not profit from the trading. The SEC, the stock exchanges and the Financial Industry Regulatory Authority, Inc. use sophisticated electronic surveillance techniques to monitor all trades and uncover insider trading.
3. Possible Disciplinary Actions. Individuals subject to the Policy who violate this Policy shall also be subject to disciplinary action by the Company, which may include suspension, forfeiture of perquisites and ineligibility for future participation in the Company’s equity incentive plans and/or termination of employment.
Section VI
PERMITTED TRADING PERIOD
1. Black-Out Period and Trading Window.
To ensure compliance with this Policy and applicable federal and state securities laws, the Company requires that all officers, directors, employees, and all members of the immediate family or household of any such person refrain from conducting any transactions involving the purchase or sale of the Company’s securities, other than during the period within ten Trading Days commencing at the close of business on the second Trading Day following the date of public disclosure of the Material Non-public Information (the “Trading Window”). The Trading Window shall close either when it is five business days prior to the Company’s fiscal year end or the Company’s Interim fiscal year end. Notwithstanding the foregoing, persons subject to this Policy may submit a request to the Company to purchase or sell the Company’s securities outside the Trading Window on the basis that they do not possess any Material Non-public Information. The Compliance Officer shall review all such requests and may grant such requests on a case-by-case basis if he or she determines that the person making such request does not possess any Material Non-public Information at that time.
If such public disclosure occurs on a Trading Day before the markets close, then such date of disclosure shall be considered the first Trading Day following such public disclosure. For example, if such public disclosure occurs at 1:00 p.m. EST on June 10, then June 10 shall be considered the first Trading Day following such disclosure.
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Please be advised that these guidelines are merely estimates. The actual trading window may be different because the Company’s interim report or annual report may be filed earlier or later. The filing date of an interim report or annual report may fall on a weekend or the Company may delay filing an annual report due to an extension. Please check with the Compliance Officer to confirm whether the trading window is open.
It is the Company’s policy that the period when the Trading Window is “closed” is a particularly sensitive period of time for transactions in the Company’s securities from the perspective of compliance with applicable securities laws. This is because the officers, directors and certain other employees are, as any half-year period progresses, increasingly likely to possess Material Non-public Information about the expected financial results for the period. The purpose of the Trading Window is to avoid any unlawful or improper transactions or even the appearance of any such transactions.
It should be noted that even during the Trading Window any person possessing Material Non-public Information concerning the Company shall not engage in any transactions involving the Company’s securities until such information has been known publicly for at least two Trading Days. The Company has adopted the policy of delaying trading for “at least two Trading Days” because the securities laws require that the public be informed effectively of previously undisclosed material information before Insiders trade in the Company’s shares. Public disclosure may occur through a widely disseminated press release or through filings, such as Form 6-K, with the SEC. Furthermore, in order for the public to be effectively informed, the public must be given time to evaluate the information disclosed by the Company. Although the amount of time necessary for the public to evaluate the information may vary depending on the complexity of the information, generally two Trading Days is sufficient.
From time to time, the Company may also require that directors, officers, selected employees, and others suspend trading because of developments known to the Company and not yet disclosed to the public. In such event, such persons may not engage in any transaction involving the purchase or sale of the Company’s securities during such period and may not disclose to others the fact of such suspension of trading.
Although the Company may from time to time require during a Trading Window that directors, officers, selected employees, and others suspend trading because of developments known to the Company and not yet disclosed to the public, each person is individually responsible at all times for compliance with the prohibitions against insider trading. Trading in the Company’s securities during the Trading Window should not be considered a “safe harbor,” and all directors, officers and other persons should use good judgment at all times.
Notwithstanding these general rules, Insiders may trade outside of the Trading Window provided that such trades are made pursuant to a pre-established plan or by delegation. These alternatives are discussed in the next section.
| 2. | Trading According to a Pre-established Plan or by Delegation. |
Trading which is not “on the basis of” Material Non-public Information may not give rise to insider trading liability. The SEC has adopted Rule 10b5-1 under which insider trading liability can be avoided if Insiders follow very specific procedures. In general, such procedures involve trading according to pre-established instructions (a “Pre-established Trade”).
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Pre-established Trades must:
(a) Be documented by a contract, written plan, or formal instruction which provides that the trade take place in the future. For example, an Insider can contract to sell his or her shares on a specific date, or simply delegate such decisions to an investment manager, 401(k) plan administrator or a similar third party. This documentation must be provided to the Compliance Officer;
(b) Include in its documentation the specific amount, price and timing of the trade, or the formula for determining the amount, price and timing. For example, the Insider can buy or sell shares in a specific amount and on a specific date each month, or according to a pre-established percentage (of the Insider’s salary, for example) each time that the share price falls or rises to pre-established levels. In the case where trading decisions have been delegated, the specific amount, price and timing need not be provided;
(c) Include additional representation in its documentation for Directors and Officers. If the person who entered into the pre-established contract, written plan, or formal instruction (discussed in Section VI.2(a) above) is a director or officer of the Company, such director or officer shall include a representation certifying that, on the date of adoption of the pre-established contract, plan, or instruction, (i) he or she is not aware of any material nonpublic information about the Company or its securities, and (ii) he or she is adopting the pre-established contract, plan, or instruction in good faith and not as part of a plan or scheme to evade prohibitions on inside trading;
(d) Be implemented at a time when the Insider does not possess Material Non-public Information and Upon the Expiration of a Cooling-Off Period. As a practical matter, this means that the Insider may set up Pre-established Trades, or delegate trading discretion, only during a “Trading Window” (discussed in Section VI.1 above); provided that (i) any director or officer of the Company may not conduct a Pre-established Trade until the expiration of a cooling-off period, consisting of the later of (A) 90 days after the adoption or modification of the pre-established contract, plan, or instruction, and (B) two business days following the disclosure of the Company’s financial results in a Form 20-F or Form 6-K (but, in any event, this required cooling period is subject to a maximum of 120 days after adoption of the pre-established contract, plan, or instruction), and (ii) any other persons, who are covered by the Policy (as discussed in Section I above) and are not directors or officers, may not conduct a Pre-established Trade until the expiration of a cooling-off period that is 30 days after the adoption of the pre-established contract, plan, or instruction; and,
(e) Remain beyond the scope of the Insider’s influence after implementation. In general, the Insider must allow the Pre-established Trade to be executed without changes to the accompanying instructions, and the Insider cannot later execute a hedge transaction that modifies the effect of the Pre-established Trade. An Insider wishing to change the amount, price or timing of a Pre-established Trade, or terminate a Pre-established Trade, can do so only during a “Trading Window” (discussed in Section 1, above). If the Insider has delegated decision-making authority to a third party, the Insider cannot subsequently influence the third party in any way and such third party must not possess material non-public information at the time of any of the trades.
Prior to implementing a pre-established plan for trading, all officers and directors must receive the approval for such plan from the Compliance Officer. In addition, Insiders are generally prohibited from having more than one pre-established contract, plan, or instruction covering the same time period for open market purchase of sales of the Company’s securities, unless one of the exceptions under 17 C.F.R 240.10b5-1(c)(1)(ii)(D) is met. Furthermore, Issuers are prohibited from entering into more than one pre-established contract, plan, or instruction, which is designed to effect open-market purchase or sale of the Company’s securities as a single transaction, for any given 12-month period.
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3. Pre-Clearance of Trades.
Even during a Trading Window, all officers, directors, employees, as well as members of the immediate family or household of such individuals, must comply with the Company’s “pre-clearance” process prior to trading in the Company’s securities, implementing a pre-established plan for trading, or delegating decision-making authority over the Insider’s trades. To do so, each officer and director must contact the Compliance Officer prior to initiating any of these actions. Trades executed pursuant to a properly implemented Pre-Established Trade approved by the Compliance Officer do not need to be pre-cleared. The Company may also find it necessary, from time to time, to require compliance with the pre-clearance process from certain individuals other than those mentioned above.
4. Individual Responsibility.
As Insiders, every person subject to this Policy has the individual responsibility to comply with this Policy against insider trading, regardless of whether the Company has established a Trading Window applicable to that Insider or any other Insiders of the Company. Each individual, and not necessarily the Company, is responsible for his or her own actions and will be individually responsible for the consequences of their actions. Therefore, appropriate judgment, diligence and caution should be exercised in connection with any trade in the Company’s securities. An Insider may, from time to time, have to forego a proposed transaction in the Company’s securities even if he or she planned to make the transaction before learning of the Material Non-public Information and even though the Insider believes he or she may suffer an economic loss or forego anticipated profit by waiting.
5. Exceptions to the Policy.
Any exceptions to this Policy may only be made by advance written approval of each of: (i) the CEO, (ii) the Compliance Officer and (iii) the Chairman of the Audit Committee of the Board (or the Chairman of the Board if an Audit Committee has not been established). Any such exceptions shall be immediately reported to the remaining members of the Board.
Section VII
APPLICABILITY OF POLICY TO INSIDE INFORMATION
REGARDING OTHER COMPANIES
This Policy and the guidelines described herein also apply to Material Non-public Information relating to other companies, including the Company’s customers, vendors or suppliers or potential acquisition targets (“business partners”), when that information is obtained in the course of employment or performance of other services on behalf of the Company. Civil and criminal penalties, as well as the termination of employment, may result from trading on inside information regarding the Company’s business partners. All employees should treat Material Non-public Information about the Company’s business partners with the same care as is required with respect to the information relating directly to the Company.
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Section VIII
PROHIBITION AGAINST BUYING AND SELLING
COMPANY ORDINARY SHARES WITHIN A SIX-MONTH PERIOD
Insiders
Generally, purchases and sales (or sales and purchases) of Company ordinary shares occurring within any six-month period in which a mathematical profit is realized result in illegal “short-swing profits”. The prohibition against short-swing profits is found in Section 16 of the Exchange Act. Section 16 was drafted as a rather arbitrary prohibition against profitable “insider trading” in a company’s securities within any six-month period regardless of the presence or absence of Material Non-public Information that may affect the market price of those securities. Each executive officer, director and 10% or greater shareholder of the Company is subject to the prohibition against short-swing profits under Section 16. The measure of damages is the profit computed from any purchase and sale or any sale and purchase within the short-swing (i.e., six-month) period, without regard to any setoffs for losses, any first-in or first-out rules, or the identity of the ordinary shares. This approach sometimes has been called the “lowest price in, highest price out” rule and can result in a realization of “profits” for Section 16 purposes even when the Insider has suffered a net loss on his or her trades. Rule 3a12-3 under the Exchange Act exempts securities registered by an FPI from Section 16 of the Exchange Act. Accordingly, Section 13(d) Individuals of an FPI are not subject to the short-swing profit limits set forth in Section 16(b), nor are they required to comply with the Section 16(a) reporting requirements.
Section IX
INQUIRIES
Please direct your questions as to any of the matters discussed in this Policy to the Compliance Officer.
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Exhibit B
Section 13 Memorandum
| To: | All Officers, Directors and 5% or greater Shareholders (“Insider”) |
| Re: | Overview of Section 13 under the Exchange Act of 1934, as amended |
A. Introduction.
This Memorandum provides an overview of Section 13 of the Exchange Act of 1934, as amended (the “Exchange Act”), and the related rules promulgated by the SEC.
Each executive officer, director and 5% or greater shareholder (commonly called an “Insider”) of Earlyworks Co., Ltd. (the “Company”) is personally responsible for complying with the provisions of Section 13, and failure by an Insider to comply strictly with his or her reporting requirements will result in an obligation by the Company to publicly disclose such failure. Moreover, Congress has granted the SEC authority to seek monetary court-imposed fines on Insiders who fail to timely comply with their reporting obligations.
Under Section 13 of the Exchange Act, reports made to the SEC are filed on Schedule 13D, Schedule 13G, Form 13F, and Form 13H. A securities firm (and, in some cases, its parent company or other control persons) generally will have a Section 13 reporting obligation if the firm directly or indirectly:
| ● | beneficially owns, in the aggregate, more than 5% of a class of the voting, equity securities (the “Section 13(d) Securities”): |
| ● | registered under Section 12 of the Exchange Act, |
| ● | issued by any closed-end investment company registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”), or |
| ● | issued by any insurance company that would have been required to register its securities under Section 12 of the Exchange Act but for the exemption under Section 12(g)(2)(G) thereof (see Schedules 13D and 13G: Reporting Significant Acquisition and Ownership Positions below); |
| ● | manages discretionary accounts that, in the aggregate, hold equity securities trading on a national securities exchange with an aggregate fair market value of $100 million or more; or |
| ● | manages discretionary accounts that, in the aggregate, purchase or sell any NMS securities (generally exchange-listed equity securities and standardized options) in an aggregate amount equal to or greater than (i) 2 million shares or shares with a fair market value of over $20 million during a day, or (ii) 20 million shares or shares with a fair market value of over $200 million during a calendar month. |
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B. Reporting Requirements Under Section 13(d) and 13(g).
1. General. Sections 13(d) and 13(g) of the Exchange Act require any person or group of persons1 who directly or indirectly acquires or has beneficial ownership2 of more than 5% of a class of an issuer’s Section 13(d) Securities (the “5% threshold”) to report such beneficial ownership on Schedule 13D or Schedule 13G, as appropriate. Both Schedule 13D and Schedule 13G require background information about the reporting persons and the Section 13(d) Securities listed on the schedule, including the name, address, and citizenship or place of organization of each reporting person, the amount of the securities beneficially owned and aggregate beneficial ownership percentage, and whether voting and investment power is held solely by the reporting persons or shared with others. Reporting persons that must report on Schedule 13D are also required to disclose a significant amount of additional information, including certain disciplinary events, the source and amount of funds or other consideration used to purchase the Section 13(d) Securities, the purpose of the acquisition, any plans to change or influence the control of the issuer, and a list of any transactions in the securities effected in the last 60 days. A reporting person may use the less burdensome Schedule 13G if it meets certain criteria described below.
In general, Schedule 13G is available to any reporting person that falls within one of the following three categories:
| ● | Exempt Investors. A reporting person is an “Exempt Investor” if the reporting person beneficially owns more than 5% of a class of an issuer’s Section 13(d) Securities at the end of a calendar year, but its acquisition of the securities is exempt under Section 13(d)(6) of the Exchange Act. For example, a person that acquired all of its Section 13(d) Securities prior to the issuer’s registration of such securities (or class of securities) under the Exchange Act, or acquired no more than 2% of the Section 13(d) Securities within a 12-month period, is considered to be an Exempt Investor and would be eligible to file reports on Schedule 13G. |
| ● | Qualified Institutions. Along with certain other institutions listed under the Exchange Act3, a reporting person that is a registered investment adviser or broker-dealer may file a Schedule 13G as a “Qualified Institution” if it (a) acquired its position in a class of an issuer’s Section 13(d) Securities in the ordinary course of its business, (b) did not acquire such securities with the purpose or effect of changing or influencing control of the issuer, nor in connection with any transaction with such purpose or effect (such purpose or effect, an “activist intent”), and (c) promptly notifies any discretionary account owner on whose behalf the firm holds more than 5% of the Section 13(d) Securities of such account owner’s potential reporting obligation. |
| ● | Passive Investors. A reporting person is a “Passive Investor” if it beneficially owns more than 5% but less than 20% of a class of an issuer’s Section 13(d) Securities and (a) the securities were not acquired or held with an activist intent, and (b) the securities were not acquired in connection with any transaction having an activist intent. There is no requirement that a Passive Investor limit its acquisition of Section 13(d) Securities to purchases made in the ordinary course of its business. In addition, a Passive Investor does not have an obligation to notify discretionary account owners on whose behalf the firm holds more than 5% of such Section 13(d) Securities of such account owner’s potential reporting obligation. |
| 1 | A “group” is defined in Rule 13d-5 as “two or more persons [that] agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer.” See, for example, the persons described above in Reporting Obligations of “Control Persons”. An agreement to act together does not need to be in writing and may be inferred by the SEC or a court from the concerted actions or common objective of the group members. |
| 2 | Under Rule 13d-3, “beneficial ownership” of a security exists if a person, directly or indirectly, through any contract, arrangement, understanding, or relationship or otherwise, has or shares voting power and/or investment power over a security. “Voting power” means the power to vote or direct the voting of a security. “Investment power” means the power to dispose of or direct the disposition of a security. Under current SEC rules, a person holding securities-based swaps or other derivative contracts may be deemed to beneficially own the underlying securities if the swap or derivative contract provides the holder with voting or investment power over the underlying securities. Please contact us if you would like guidance regarding the application of Section 13 to securities-based swaps or other derivative contracts. |
| 3 | Under Rule 13d-1, a reporting person also qualifies as a Qualified Institution if it is a bank as defined in Section 3(a)(6) of the Exchange Act, an insurance company as defined in Section 3(a)(19) of the Exchange Act, an investment company registered under the Investment Company Act, or an employee benefit plan, savings association, or church plan. The term “Qualified Institution” also includes a non-U.S. institution that is the functional equivalent of any of the foregoing entities and the control persons and parent holding companies of an entity that qualifies as a Qualified Institution. |
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2. Method of Filing.
(a) An Insider must file Section 13 schedules in electronic format via the Commission’s Electronic Data Gathering Analysis and Retrieval System (“EDGAR”) in accordance with EDGAR rules set forth in Regulation S-T.
(b) Filing Date. Schedules are deemed filed with the SEC or the applicable exchange on the date recognized by EDGAR. For Section 13 purposes, filings may be made up to 10 p.m. EST. In the event that a due date falls on a weekend or SEC holiday, the filing will be deemed timely filed if it is filed on EDGAR by the next business day after such weekend or holiday. An Insider must first obtain several different identification codes from the SEC before the filings can be submitted. In order to receive such filing codes, the Insider first submits a Form ID to the SEC. The Form ID must be signed, notarized, and submitted electronically through the SEC’s Filer Management website, which can be accessed at https://www.filermanagement.edgarfiling.sec.gov. The Insider is required to retain a manually signed hard copy of all EDGAR filings (and related documents like powers of attorney) in its records available for SEC inspection for a period of five years after the date of filing.
(c) Company. In addition, the rules under Section 13 require that a copy of the applicable filing be sent to the issuer of the security at its principal executive office by registered or certified mail. A copy of Schedules filed pursuant to §§ 240.13d-1(a) and 240.13d-2(a) shall also be sent to each national securities exchange where the security is traded.
(d) Securities to be Reported. A person who is subject to Section 13 must only report as beneficially owned those securities in which he or she has a pecuniary interest. See the discussion of “beneficial ownership” below at Section D.
3. Initial Report of Ownership – Schedule 13D or 13G. Under Section 13, Insiders are required to make an initial report on Schedule 13D or Schedule 13G to the SEC of their holdings of all equity securities of the corporation (whether or not such equity securities are registered under the Exchange Act). This would include all traditional types of securities, such as ordinary shares, preferred shares and junior shares, as well as all types of derivative securities, such as warrants to purchase shares, options to purchase shares, puts and calls. Even Insiders who do not beneficially own any equity securities of the Company must file a report to that effect.
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(a) Initial Filing Deadline. An Insider who is not eligible to use Schedule 13G must file a Schedule 13D within five business days of such reporting person’s direct or indirect acquisition of beneficial ownership of more than 5% of a class of an issuer’s Section 13(d) Securities.
| ● | A reporting person that is an Exempt Investor is required to file its initial Schedule 13G within 45 days after the calendar quarter-end in which the person exceeds the 5% threshold. |
| ● | A reporting person that is a Qualified Institution also is required to file its initial Schedule 13G within 45 days after the calendar quarter-end in which the person exceeds the 5% threshold. However, a Qualified Institution that acquires direct or indirect beneficial ownership of more than 10% of a class of an issuer’s Section 13(d) Securities must file an initial Schedule 13G within five business days after the first month in which the person exceeds the 10% threshold. |
| ● | A reporting person that is a Passive Investor must file its initial Schedule 13G within five business days of the date on which it exceeds the 5% threshold. |
(b) Switching from Schedule 13G to Schedule 13D. If an Insider that previously filed a Schedule 13G no longer satisfies the conditions to be an Exempt Investor, Qualified Institution, or Passive Investor, the person must switch to reporting its beneficial ownership of a class of an issuer’s Section 13(d) Securities on a Schedule 13D (assuming that the person continues to exceed the 5% threshold). This could occur in the case of (1) an Insider that changes from acquiring or holding Section 13(d) Securities for passive investment to acquiring or holding such securities with an activist intent, (2) an Insider that is a Qualified Institution that deregisters as an investment adviser pursuant to an exemption under the Investment Advisers Act of 1940, as amended, or applicable state law, or (3) an Insider that is a Passive Investor that acquires 20% or more of a class of an issuer’s Section 13(d) Securities. In each case, the Insider must file a Schedule 13D within five business days of the event that caused it to no longer satisfy the necessary conditions.
An Insider who is required to switch to reporting on a Schedule 13D will be subject to a “cooling off” period from the date of the event giving rise to a Schedule 13D obligation (such as the change to an activist intent or acquiring 20% of a class of an issuer’s Section 13(d) Securities) until 10 calendar days after the filing of Schedule 13D. During the “cooling off” period, the reporting person may not vote or direct the voting of the Section 13(d) Securities or acquire additional beneficial ownership of such securities. Consequently, a person should file a Schedule 13D as soon as possible once he is obligated to switch from a Schedule 13G to reduce the duration of the “cooling off” period.
The Insider will thereafter be subject to the Schedule 13D reporting requirements with respect to the Section 13(d) Securities until such time as the former Schedule 13G reporting person once again qualifies as a Qualified Institution or Passive Investor with respect to the Section 13(d) Securities or has reduced its beneficial ownership interest below the 5% threshold. However, only a reporting person that was originally eligible to file a Schedule 13G and was later required to file a Schedule 13D may switch to reporting on Schedule 13G.4
| 4 | See Question 103.07 (September 14, 2009), Regulation 13D-G C&DIs. |
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4. Changes in Ownership – Amendments to Schedule 13D or 13G.
Amendments to Schedule 13D. If there has been any material change to the information in a Schedule 13D previously filed by an Insider5, the person must file an amendment to such Schedule 13D within two business days. A material change includes, without limitation, a reporting person’s acquisition or disposition of 1% or more of a class of the issuer’s Section 13(d) Securities, including as a result of an issuer’s repurchase of its securities. An acquisition or disposition of less than 1% may be considered a material change depending on the circumstances. A disposition that reduces a reporting person’s beneficial ownership interest below the 5% threshold, but is less than a 1% reduction, is not necessarily a material change that triggers an amendment to Schedule 13D. However, an amendment in such a circumstance is recommended to eliminate the reporting person’s filing obligations if the reporting person does not in the near term again expect to increase its ownership above 5%.
Amendments to Schedule 13G.
| ● | Quarterly. If a reporting person previously filed a Schedule 13G and there has been any material change to the information reported in such Schedule 13G as of the end of a calendar quarter, then an amendment to such Schedule 13G must be filed within 45 days of the calendar quarter end. A reporting person is not required to make a quarterly amendment to Schedule 13G if there has been no change since the previously filed Schedule 13G or if the only change results from a change in the person’s ownership percentage as a result of a change in the aggregate number of Section 13(d) Securities outstanding (e.g., due to an issuer’s repurchase of its securities). |
| ● | Other than Quarterly (Qualified Institutions). A reporting person that previously filed a Schedule 13G as a Qualified Institution reporting beneficial ownership of less than 10% of a class of an issuer’s Section 13(d) Securities, must file an amendment to its Schedule 13G within five business days of the end of the first month such Qualified Institution is the direct or indirect beneficial owner of more than 10% of a class of the issuer’s Section 13(d) Securities. Thereafter, within five business days after the end of any month in which the person’s direct or indirect beneficial ownership of such securities increases or decreases by more than 5% of the class of securities (computed as of the end of the month), the person must file an amendment to Schedule 13G. |
| ● | Other than Quarterly (Passive Investors). A reporting person that previously filed a Schedule 13G as a Passive Investor must file an amendment within two business days after it directly or indirectly acquires more than 10% of a class of an issuer’s Section 13(d) Securities. Thereafter, the reporting person must file an amendment to Schedule 13G within two business days after its direct or indirect beneficial ownership of such securities increases or decreases by more than 5%. |
5. Reporting Identifying Information for Large Traders - Form 13H. Rule 13h-1 of the Exchange Act requires a Form 13H to be filed with the SEC by any individual or entity (each, a “Large Trader”) that, directly or indirectly, exercises investment discretion over one or more accounts and effects transactions in NMS Securities (as defined below) for those accounts through one or more registered broker-dealers that, in the aggregate, equal or exceed (a) 2 million shares or $20 million in fair market value during any calendar day, or (b) 20 million shares or $200 million in fair market value during any calendar month (each, an “identifying activity level”). Under Regulation NMS, an “NMS Security” is defined to include any U.S. exchange-listed equity securities and any standardized options, but does not include any exchange-listed debt securities, securities futures, or shares of open-end mutual funds that are not currently reported pursuant to an effective transaction reporting plan under the Exchange Act. A Large Trader must file an initial Form 13H promptly after effecting aggregate transactions equal to or greater than one of the identifying activity levels. The SEC has indicated that filing within 10 days will be deemed a prompt filing. Amendments to Form 13H must be filed within 45 days after the end of each full calendar year and then promptly following the end of a calendar quarter if any of the information on Form 13H becomes inaccurate.
| 5 | This includes a change in the previously reported ownership percentage of a reporting person even if such change results solely from an increase or decrease in the aggregate number of outstanding securities of the issuer. |
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Form 13H requires that a Large Trader, reporting for itself and for any affiliate that exercises investment discretion over NMS securities, list the broker-dealers at which the Large Trader and its affiliates have accounts and designate each broker-dealer as a “prime broker,” an “executing broker,” and/or a “clearing broker.” Form 13H filings with the SEC are confidential and exempt from disclosure under the United States Freedom of Information Act. The information is, however, subject to disclosure to Congress and other federal agencies and when ordered by a court. If a securities firm has multiple affiliates in its organization that qualify as Large Traders, Rule 13h-1 permits the Large Traders to delegate their reporting obligation to a control person that would file a consolidated Form 13H for all of the Large Traders it controls. Otherwise, each Large Trader in the organization will be required to file a separate Form 13H.
6. Reporting Obligations of Control Persons and Clients.
The Firm’s Obligations. As discussed above, a securities firm is deemed to be the beneficial owner of Section 13(d) Securities in all accounts over which it exercises voting and/or investment power. Therefore, a firm will be a reporting person if it directly or indirectly acquires or has beneficial ownership of more than 5% of a class of an issuer’s Section 13(d) Securities. Unless a securities firm has an activist intent with respect to the issuer of the Section 13(d) Securities, the firm generally will be able to report on Schedule 13G as either a Qualified Institution or as a Passive Investor.
Obligations of a Firm’s Control Persons. Any control person (as defined below) of a securities firm, by virtue of its ability to direct the voting and/or investment power exercised by the firm, may be considered an indirect beneficial owner of the Section 13(d) Securities. Consequently, the direct or indirect control persons of a securities firm may also be reporting persons with respect to a class of an issuer’s Section 13(d) Securities. The following persons are likely to be considered “control persons” of a firm:
| ● | any general partner, managing member, trustee, or controlling shareholder of the firm; and |
| ● | the direct or indirect parent company of the firm and any other person that indirectly controls the firm (e.g., a general partner, managing member, trustee, or controlling shareholder of the direct or indirect parent company). |
If a securities firm (or parent company) is directly or indirectly owned by two partners, members, trustees, or shareholders, generally each such partner, member, trustee, or shareholder is deemed to be a control person. For example, if a private fund that beneficially owns more than 5% of a class of an issuer’s Section 13(d) Securities is managed by a securities firm that is a limited partnership, the general partner of which is a limited liability company that in turn is owned in roughly equal proportions by two managing members, then each of the private fund, the securities firm, the firm’s general partner, and the two managing members of the general partner likely will have an independent Section 13 reporting obligation.
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Availability of Filing on Schedule 13G by Control Persons. Any direct and indirect control person of a securities firm may file a Schedule 13G as an Exempt Investor, a Qualified Institution or as a Passive Investor to the same extent as any other reporting person as described above. In order for a control person to file a Schedule 13G as a Qualified Institution, however, no more than 1% of a class of an issuer’s Section 13(d) Securities may be held (i) directly by the control person or (ii) directly or indirectly by any of its subsidiaries or affiliates that are not Qualified Institutions. For example, a direct or indirect control person of a securities firm will not qualify as a Qualified Institution if more than 1% of a class of an issuer’s Section 13(d) Securities is held by a private fund managed by the firm or other affiliate because a private fund is not among the institutions listed as a Qualified Institution under the Exchange Act.
A securities firm that has one of its control persons serving on an issuer’s board of directors may not be eligible to qualify as a Passive Investor with respect to such issuer. Even though the securities firm may not otherwise have an activist intent, the staff of the SEC has stated “the fact that officers and directors have the ability to directly or indirectly influence the management and policies of an issuer will generally render officers and directors unable to certify to the requirements” necessary to file as a Passive Investor.6
Obligations of a Firm’s Clients. If a client of a securities firm (including a private or registered fund or a separate account client) by itself beneficially owns more than 5% of a class of an issuer’s Section 13(d) Securities, the client has its own independent Section 13 reporting obligation.
Availability of Joint Filings by Reporting Persons. As discussed above, each reporting person has an independent reporting obligation under Section 13 of the Exchange Act. The direct and indirect beneficial owners of the same Section 13(d) Securities may satisfy their reporting obligations by making a joint Schedule 13D or Schedule 13G filing, provided that:
| ● | each reporting person is eligible to file on the Schedule used to make the Section 13 report (e.g., each person filing on a Schedule 13G is a Qualified Institution, Exempt Investor, or Passive Investor); |
| ● | each reporting person is responsible for the timely filing of the Schedule 13D or Schedule 13G and for the completeness and accuracy of its information in such filing7; and |
| ● | the Schedule 13D or Schedule 13G filed with the SEC (i) contains all of the required information with respect to each reporting person; (ii) is signed by each reporting person in his, her, or its individual capacity (including through a power of attorney); and (iii) has a joint filing agreement attached. |
| 6 | See Question 103.04 (September 14, 2009), Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting Compliance and Disclosure Interpretations of the Division of Corporation Finance of the SEC (the “Regulation 13D-G C&DIs”). |
| 7 | If the reporting persons are eligible to file jointly on Schedule 13G under separate categories (e.g., a private fund as a Passive Investor and its control persons as Qualified Institutions), then the reporting persons must comply with the earliest filing deadlines applicable to the group in filing any joint Schedule 13G. |
B-7
C. Determining Beneficial Ownership.
In determining whether a securities firm has crossed the 5% threshold with respect to a class of an issuer’s Section 13(d) Securities8, it must include the positions held in any proprietary accounts and the positions held in all discretionary client accounts that it manages (including any private or registered funds, accounts managed by or for principals and employees, and accounts managed for no compensation), and positions held in any accounts managed by the firm’s control persons (which may include certain officers and directors) for themselves, their spouses, and dependent children (including IRA and most trust accounts).
1. Determining Who is a Five Percent Holder. Beneficial ownership in the Section 13 context is determined by reference to Rule 13d-3, which provides that a person is the beneficial owner of securities if that person has or shares voting or disposition power with respect to such securities, or can acquire such power within 60 days through the exercise or conversion of derivative securities.
2. Determining Beneficial Ownership for Reporting and Short-Swing Profit Liability. For all Section 13 purposes other than determining who is a five percent holder, beneficial ownership means a direct or indirect pecuniary interest in the subject securities through any contract, arrangement, understanding, relationship or otherwise. “Pecuniary interest” means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities. Discussed below are several of the situations that may give rise to an indirect pecuniary interest.
(a) Family Holdings. An Insider is deemed to have an indirect pecuniary interest in securities held by members of the Insider’s immediate family sharing the same household. Immediate family includes grandparents, parents (and step-parents), spouses, siblings, children (and step-children) and grandchildren, as well as parents-in-laws, siblings-in-laws, children-in-law and all adoptive relationships. An Insider may disclaim beneficial ownership of shares held by members of his or her immediate family, but the burden of proof will be on the Insider to uphold the lack of a pecuniary interest.
(b) Partnership Holdings. Beneficial ownership of a partnership’s securities is attributed to the general partner of a limited partnership in proportion of such person’s partnership interest. Such interest is measured by the greater of the general partner’s share of partnership profits or of the general partner’s capital account (including any limited partnership interest held by the general partner).
(c) Corporate Holdings. Beneficial ownership of securities held by a corporation will not be attributed to its shareholders who are not controlling shareholders and who do not have or share investment control over the corporation’s portfolio securities.
(d) Derivative Securities. Ownership of derivative securities (warrants, share appreciation rights, convertible securities, options and the like) is treated as indirect ownership of the underlying equity securities. Acquisition of derivative securities must be reported. If the derivative securities are acquired pursuant to an employee plan, the timing of such reporting depends upon the Rule 16b-3 status of the employee plan under which the grant was made.
| 8 | In calculating the 5% test, a person is permitted to rely upon the issuer’s most recent interim or annual report for purposes of determining the amount of outstanding voting securities of the issuer, unless the person knows or has reason to believe that such information is inaccurate. |
B-8
D. Delinquent Filings.
1. Correcting Late Filings. In the case of an Insider that has failed to make required amendments to its Schedule 13D or Schedule 13G in a timely manner (i.e., any material changes), the Insider must immediately amend its schedule to disclose the required information. The SEC Staff has explained that, “[r]egardless of the approach taken, the security holder must ensure that the filings contain the information that it should have disclosed in each required amendment, including the dates and details of each event that necessitated a required amendment.” However, the SEC Staff has also affirmed that, irrespective of whether a security holder takes any of these actions, a security holder may still face liability under the federal securities laws for failing to promptly file a required amendment to a Schedule 13D or Schedule 13G.
2. Potential Liability. The SEC may bring an enforcement action, in the context of a Schedule 13D or Schedule 13G filing, for violations of Section 13(d), Section 13(g), Rule 10b-5 and Section 10(b), provided that the SEC specifically shows: (1) a material misrepresentation or omission made by the defendant; (2) scienter on the part of the defendant; and (3) a connection between a misrepresentation or omission and purchase or sale of a security regarding the Rule 10b-5 claim it brings. The SEC may seek civil remedies in the form of injunctive relief, a cease-and-desist order, monetary penalties, and other forms of equitable relief (e.g., disgorgement of profits). Under Section 32 of the Exchange Act, criminal sanctions may also extend to the willful violation of Section 13(d) and Section 13(g). The U.S. Department of Justice, which prosecutes criminal offenses under the Exchange Act, may seek numerous penalties against any person that violates the Exchange Act and any rules thereunder, including a monetary fine of up to $5,000,000, imprisonment for up to 20 years and/or disgorgement.
B-9
Exhibit C
Earlyworks Co., Ltd.
Insider Trading Compliance Program - Pre-Clearance Checklist
Individual Proposing to Trade:_________________________
Number of Shares covered by Proposed Trade:_________________________
Date:_________________________
| ☐ | Trading Window. Confirm that the trade will be made during the Company’s “trading window.” |
| ☐ | Section 13 Compliance. Confirm, if the individual is subject to Section 13, that the proposed trade will not give rise to any potential liability under Section 13 as a result of matched past (or intended future) transactions. Also, ensure that an amendment to Schedule 13D or 13G has been or will be completed and will be timely filed. |
| ☐ | Prohibited Trades. Confirm, if the individual is subject to Section 13, that the proposed transaction is not a “short sale,” put, call or other prohibited or strongly discouraged transaction. |
| ☐ | Rule 144 Compliance. Confirm that: |
| ☐ | Current public information requirement has been met; |
| ☐ | Shares are not restricted or, if restricted, the six-month holding period has been met; |
| ☐ | Volume limitations are not exceeded (confirm that the individual is not part of an aggregated group); |
| ☐ | The manner of sale requirements has been met; and |
| ☐ | The Notice of Form 144 Sale has been completed and filed. |
| ☐ | Rule 10b-5 Concerns. Confirm that (i) the individual has been reminded that trading is prohibited when in possession of any material information regarding the Company that has not been adequately disclosed to the public, and (ii) the Compliance Officer has discussed with the individual any information known to the individual or the Compliance Officer which might be considered material, so that the individual has made an informed judgment as to the presence of inside information. |
| Signature of Compliance Officer |
C-1
Transactions Report
Officer or Director:
| I. | TRANSACTIONS: |
| ☐ | No transactions. | ☐ | The transactions described below. |
Owner of Record |
|
Transaction Date (1) |
|
Transaction Code (2) |
|
Security (Common, Preferred) |
|
Number of Securities Acquired |
|
Number
of Securities |
|
Purchase/ |
(1) (a) Brokerage transactions - trade date
(b) Other purchases and sales - date firm commitment is made
(c) Option and SAR exercises - date of exercise |
(d) Acquisitions under stock bonus plan - date of grant
(e) Conversion - date of surrender of convertible security
(f) Gifts - date on which gift is made | |
(2) Transaction Codes:
(P) Pre-established Purchase or Sale
(N) Purchase or Sale (not “Pre-established”)
(G) Gift
(M) Option exercise (in-the-money option)
|
(Q) Transfer pursuant to marital settlement
(U) Tender of shares
(W) Acquisition or disposition of will
(J) Other acquisition or disposition (specify)
|
C-2
| II. | SECURITIES OWNERSHIP FOLLOWING TRANSACTION |
A. Company Securities Directly or Indirectly Owned (other than stock options noted below):
|
Title of Security (e.g., Preferred, Common, etc.) |
|
Number of Shares/Units |
|
Record Holder (if not Reporting Person) |
|
Relationship to Reporting Person |
B. Stock Option Ownership:
Date of Grant |
|
Number of Shares |
|
Exercise Price |
|
Vesting Dates |
|
Expiration Date |
|
Exercises to Date (Date, No. of Shares) |
C-3
Exhibit D
Earlyworks Co., Ltd.
Transaction Reminder
| TO: | [Name of Officer or Director] |
FROM:
DATED:
| RE: | Amendment to Schedule 13D filing |
This is to remind you that if there is a change in your beneficial ownership of ordinary shares or other securities of Earlyworks Co., Ltd. (the “Company”), you must file an amendment to Schedule 13D with the Securities and Exchange Commission (the “SEC”) within 2-5 business days following the transaction.
Our records indicate that on __________ (specify date) you had the transactions in the Company’s securities indicated on the attached exhibit.
1. Please advise us whether the information on the attached exhibit is correct:
| ☐ | The information is complete and correct. |
| ☐ | This information is not complete and correct. I have marked the correct information on the attached exhibit. |
| 2. | Please advise us if we should assist you by preparing the amendment to Schedule 13D for your signature and filing it for you with the SEC based upon the information you provided to us, or if you will prepare and file the amendment to Schedule 13D yourself. (Please note that we have prepared and attached for your convenience an amendment to Schedule 13D reflecting the information we have, which (if it is complete and correct), you may sign and return in the envelope enclosed.) |
| ☐ | The Company should prepare and file the amendment to Schedule 13D on my behalf after receiving my signature on the form. |
| ☐ | I shall prepare and file the amendment to Schedule 13D myself. |
| Signed | |
| Dated |
If you have any questions, contact [ ], the Company’s Compliance Officer.
I understand that my amendment to Schedule 13D must be filed as follows: (i) on EDGAR (the SEC Electronic Data-Gathering, Analysis and Retrieval system) and (ii) one copy with the Company’s Compliance Officer.
D-1
Exhibit 12.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Satoshi Kobayashi, certify that:
1. I have reviewed this annual report on Form 20-F of Earlyworks Co., Ltd. (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
Date: August 26, 2024
| By: | /s/ Satoshi Kobayashi | ||
| Name: | Satoshi Kobayashi | ||
| Title: | Chief Executive Officer | ||
| (Principal Executive Officer) | |||
Exhibit 12.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Kota Kobayashi, certify that:
1. I have reviewed this annual report on Form 20-F of Earlyworks Co., Ltd. (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
Date: August 26, 2024
| By: | /s/ Kota Kobayashi | ||
| Name: | Kota Kobayashi | ||
| Title: | Chief Financial Officer | ||
| (Principal Accounting and Financial Officer) | |||
Exhibit 13.1
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Earlyworks Co., Ltd. (the “Company”) on Form 20-F for the year ended April 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Satoshi Kobayashi, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 26, 2024
| By: | /s/ Satoshi Kobayashi | ||
| Name: | Satoshi Kobayashi | ||
| Title: | Chief Executive Officer | ||
| (Principal Executive Officer) | |||
Exhibit 13.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Earlyworks Co., Ltd. (the “Company”) on Form 20-F for the year ended April 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kota Kobayashi, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 26, 2024
| By: | /s/ Kota Kobayashi | ||
| Name: | Kota Kobayashi | ||
| Title: | Chief Financial Officer | ||
| (Principal Accounting and Financial Officer) | |||
Exhibit 97.1
Earlyworks Co., Ltd.
COMPENSATION RECOVERY POLICY
Effective on November 22, 2023
Earlyworks Co., Ltd. (the “Company”) is committed to strong corporate governance. As part of this commitment, the Company’s Board of Directors (the “Board”) has adopted this Compensation Recovery Policy (the “Policy”). The Policy is intended to further the Company’s pay-for-performance philosophy and to comply with applicable law by providing for the reasonably prompt recovery of certain incentive-based compensation received by Executive Officers in the event of an Accounting Restatement.
Capitalized terms used in the Policy are defined below, and the definitions have substantive impact on its application so reviewing them carefully is important to your understanding. The application of the Policy to Executive Officers is not discretionary, except to the limited extent provided below, and applies without regard to whether an Executive Officer was at fault.
The Policy is intended to comply with, and will be interpreted in a manner consistent with, Section 10D of the Securities Exchange Act of 1934 (the “Exchange Act”), with Exchange Act Rule 10D-1 and with the listing standards of the national securities exchange (the “Exchange”) on which the securities of the Company are listed, including any interpretive guidance provided by the Exchange.
Persons Covered by the Policy
The Policy is binding and enforceable against all Executive Officers. “Executive Officer” means each individual who is or was ever designated as an “officer” by the Board in accordance with Exchange Act Rule 16a-1(f). Each Executive Officer will be required to sign and return to the Company an acknowledgement that such Executive Officer will be bound by the terms and comply with the Policy. The failure to obtain such acknowledgement will have no impact on the applicability or enforceability of the Policy.
Administration of the Policy
The Compensation Committee of the Board (the “Committee”), if any, has full delegated authority to administer the Policy. The Committee is authorized to interpret and construe the Policy and to make all determinations necessary, appropriate, or advisable for the administration of the Policy. In addition, if determined in the discretion of the Board, the Policy may be administered by the independent members of the Board or another committee of the Board made up of independent members of the Board, in which case all references to the Committee will be deemed to refer to the independent members of the Board or the other Board committee. All determinations of the Committee will be final and binding and will be given the maximum deference permitted by law.
Accounting Restatements Requiring Application of the Policy
If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (an “Accounting Restatement”), then the Committee must determine the Excess Compensation, if any, that must be recovered. The Company’s obligation to recover Excess Compensation is not dependent on if or when the restated financial statements are filed.
Compensation Covered by the Policy
The Policy applies to certain Incentive-Based Compensation that is Received on or after October 2, 2023 (the “Effective Date”), during the Covered Period while the Company has a class of securities listed on a national securities exchange. The Incentive-Based Compensation is considered “Clawback Eligible Incentive-Based Compensation” if the Incentive-Based Compensation is Received by a person after such person became an Executive Officer and the person served as an Executive Officer at any time during the performance period to which the Incentive-Based Compensation applies. The “Excess Compensation” that is subject to recovery under the Policy is the amount of Clawback Eligible Incentive-Based Compensation that exceeds the amount of Clawback Eligible Incentive-Based Compensation that otherwise would have been Received had such Clawback Eligible Incentive-Based Compensation been determined based on the restated amounts (this is referred to in the listings standards as “erroneously awarded incentive-based compensation”).
To determine the amount of Excess Compensation for Incentive-Based Compensation based on stock price or total shareholder return, where it is not subject to mathematical recalculation directly from the information in an Accounting Restatement, the amount must be based on a reasonable estimate of the effect of the Accounting Restatement on the stock price or total shareholder return upon which the Incentive-Based Compensation was Received and the Company must maintain documentation of the determination of that reasonable estimate and provide the documentation to the Exchange.
“Incentive-Based Compensation” means any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Financial Reporting Measure. For the avoidance of doubt, no compensation that is potentially subject to recovery under the Policy will be earned until the Company’s right to recover under the Policy has lapsed.
The following items of compensation are not Incentive-Based Compensation under the Policy: salaries, bonuses paid solely at the discretion of the Committee or Board that are not paid from a bonus pool that is determined by satisfying a Financial Reporting Measure, bonuses paid solely upon satisfying one or more subjective standards and/or completion of a specified employment period, non-equity incentive plan awards earned solely upon satisfying one or more strategic measures or operational measures, and equity awards for which the grant is not contingent upon achieving any Financial Reporting Measure performance goal and vesting is contingent solely upon completion of a specified employment period (e.g., time-based vesting equity awards) and/or attaining one or more non-Financial Reporting Measures.
2
“Financial Reporting Measures” are measures that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures. Stock price and total shareholder return are also Financial Reporting Measures. A Financial Reporting Measure need not be presented within the financial statements or included in a filing with the Securities and Exchange Commission.
Incentive-Based Compensation is “Received” under the Policy in the Company’s fiscal period during which the Financial Reporting Measure specified in the Incentive-Based Compensation award is attained, even if the payment, vesting, settlement or grant of the Incentive-Based Compensation occurs after the end of that period. For the avoidance of doubt, the Policy does not apply to Incentive-Based Compensation for which the Financial Reporting Measure is attained prior to the Effective Date.
“Covered Period” means the three completed fiscal years immediately preceding the Accounting Restatement Determination Date. In addition, Covered Period can include certain transition periods resulting from a change in the Company’s fiscal year.
“Accounting Restatement Determination Date” means the earliest to occur of: (a) the date the Board, a committee of the Board, or one or more of the officers of the Company authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement; and (b) the date a court, regulator, or other legally authorized body directs the Company to prepare an Accounting Restatement.
Repayment of Excess Compensation
The Company must recover Excess Compensation reasonably promptly and Executive Officers are required to repay Excess Compensation to the Company. Subject to applicable law, the Company may recover Excess Compensation by requiring the Executive Officer to repay such amount to the Company by direct payment to the Company or such other means or combination of means as the Committee determines to be appropriate (these determinations do not need to be identical as to each Executive Officer). These means may include:
(a) requiring reimbursement of cash Incentive-Based Compensation previously paid;
(b) seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards;
(c) offsetting the amount to be recovered from any unpaid or future compensation to be paid by the Company or any affiliate of the Company to the Executive Officer;
3
(d) cancelling outstanding vested or unvested equity awards; and/or
(e) taking any other remedial and recovery action permitted by law, as determined by the Committee.
The repayment of Excess Compensation must be made by an Executive Officer notwithstanding any Executive Officer’s belief (whether or not legitimate) that the Excess Compensation had been previously earned under applicable law and therefore is not subject to clawback.
In addition to its rights to recovery under the Policy, the Company or any affiliate of the Company may take any legal actions it determines appropriate to enforce an Executive Officer’s obligations to the Company or its affiliate or to discipline an Executive Officer, including (without limitation) termination of employment, institution of civil proceedings, reporting of misconduct to appropriate governmental authorities, reduction of future compensation opportunities or change in role. The decision to take any actions described in the preceding sentence will not be subject to the approval of the Committee and can be made by the Board, any committee of the Board, or any duly authorized officer of the Company or of any applicable affiliate of the Company.
Limited Exceptions to the Policy
The Company must recover Excess Compensation in accordance with the Policy except to the limited extent that the conditions set forth below are met, and the Committee determines that recovery of the Excess Compensation would be impracticable:
(a) The direct expense paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered. Before reaching this conclusion, the Company must make a reasonable attempt to recover the Excess Compensation, document the reasonable attempt(s) taken to so recover, and provide that documentation to the Exchange; or
(b) Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the legal requirements as such.
Other Important Information in the Policy
The Policy is in addition to the requirements of Section 304 of the Sarbanes-Oxley Act of 2002 that are applicable to the Company’s Chief Executive Officer and Chief Financial Officer, as well as any other applicable laws, regulatory requirements, or rules.
4
Notwithstanding the terms of any of the Company’s organizational documents (including, but not limited to, the Company’s bylaws), any corporate policy or any contract (including, but not limited to, any indemnification agreement), neither the Company nor any affiliate of the Company will indemnify or provide advancement for any Executive Officer against any loss of Excess Compensation. Neither the Company nor any affiliate of the Company will pay for or reimburse insurance premiums for an insurance policy that covers potential recovery obligations. In the event that pursuant to the Policy the Company is required to recover Excess Compensation from an Executive Officer who is no longer an employee, the Company will be entitled to seek recovery in order to comply with applicable law, regardless of the terms of any release of claims or separation agreement such individual may have signed.
The Committee or Board may review and modify the Policy from time to time.
If any provision of the Policy or the application of any such provision to any Executive Officer is adjudicated to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provisions of the Policy or the application of such provision to another Executive Officer, and the invalid, illegal or unenforceable provisions will be deemed amended to the minimum extent necessary to render any such provision or application enforceable.
The Policy will terminate and no longer be enforceable when the Company ceases to be a listed issuer within the meaning of Section 10D of the Exchange Act.
5
ACKNOWLEDGEMENT
I acknowledge that I have received and read the Compensation Recovery Policy (the “Policy”) of Earlyworks Co., Ltd. (the “Company”).
I understand and acknowledge that the Policy applies to me, and all of my beneficiaries, heirs, executors, administrators or other legal representatives and that the Company’s right to recovery in order to comply with applicable law will apply, regardless of the terms of any release of claims or separation agreement I have signed or will sign in the future.
I agree to be bound by and to comply with the Policy and understand that determinations of the Committee (as such term is used in the Policy) will be final and binding and will be given the maximum deference permitted by law.
I understand and agree that my current indemnification rights, whether in an individual agreement or the Company’s organizational documents, exclude the right to be indemnified for amounts required to be recovered under the Policy.
I understand that my failure to comply in all respects with the Policy is a basis for termination of my employment with the Company and any affiliate of the Company, as well as any other appropriate discipline.
I understand that neither the Policy, nor the application of the Policy to me, gives rise to a resignation for good reason (or similar concept) by me under any applicable employment agreement or arrangement.
I acknowledge that if I have questions concerning the meaning or application of the Policy, it is my responsibility to seek guidance from the Company’s legal department or my own personal advisers.
I acknowledge that neither this Acknowledgement nor the Policy is meant to constitute an employment contract.
Please review, sign and return this form to the Company.
| Executive Officer | |
| (print name) | |
| (signature) |
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