Filing Summary
Registrant and period: Earlyworks Co., Ltd., a Japan-based blockchain technology company, filed Form 20-F for the fiscal year ended April 30, 2023. The filing is prepared under U.S. GAAP in Japanese yen; U.S. dollar amounts use JPY135.99 per US$1. The provided metadata identifies Perpetuals.Com Ltd. and “2022 Q4,” but the filing text clearly relates to Earlyworks’ full fiscal year 2023, not a quarterly report.
Business Context and Reporting Period
Earlyworks develops products and systems using its proprietary Grid Ledger System blockchain technology. Revenue primarily comes from software and system development services and consulting and solution services. The company began generating NFT-related revenue in fiscal 2023. It has no subsidiaries, operates principally in Japan, and had 11 full-time employees and one contract employee as of April 30, 2023.
The company’s ADSs began trading on the Nasdaq Capital Market under the symbol ELWS on July 25, 2023, after the fiscal year-end. Each ADS represents one ordinary share.
Financial Performance and Position
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | JPY46.6 million | JPY463.7 million | Down 90.0% |
| Gross profit | JPY16.1 million | JPY355.3 million | Down 95.5% |
| Gross margin | 34.5% | 76.6% | Down 42.1 percentage points |
| Operating loss | JPY388.4 million | JPY572.1 million | Improved by JPY183.7 million |
| Net loss | JPY382.3 million | JPY602.5 million | Improved by JPY220.2 million |
| Operating cash flow | Negative JPY399.7 million | Positive JPY100.3 million | Material deterioration |
| Cash at year-end | JPY177.9 million | JPY657.4 million | Down 72.9% |
- Revenue consisted of JPY21.9 million from software and system development, JPY22.4 million from consulting and solution services, and JPY2.3 million from NFT sales.
- Operating expenses were JPY404.5 million, including JPY240.0 million of general and administrative expense, JPY108.8 million of research and development expense, and JPY55.7 million of selling and marketing expense.
- No share-based compensation expense was recorded in FY2023, compared with JPY670.0 million in FY2022. This non-cash expense materially affected the prior-year loss and operating cash flow.
- FY2023 loss per share was JPY27.62, compared with JPY43.62 in FY2022.
- Assets totaled JPY453.0 million and shareholders’ equity totaled JPY208.5 million at April 30, 2023. Accumulated deficit was JPY1.594 billion.
Debt, Liquidity and Cash Flow
- Total gross bank loans were JPY192.4 million at April 30, 2023, consisting of JPY100.0 million from Resona Bank, JPY45.8 million from Shoko Chukin Bank, and JPY46.7 million from Kiraboshi Bank. Substantially all disclosed borrowings were guaranteed by CEO Satoshi Kobayashi, except where otherwise stated.
- Current bank-loan obligations were JPY123.8 million, while non-current bank loans were JPY68.3 million, net of loan origination fees.
- Contractual obligations totaled JPY195.9 million, including JPY127.5 million due within one year. The filing separately discloses a JPY100.0 million short-term loan and JPY92.4 million of long-term loan obligations.
- FY2023 financing cash flow was negative JPY78.4 million. The company borrowed JPY150.0 million and repaid JPY16.3 million of loans, while paying JPY212.2 million of deferred IPO costs.
- Working capital was JPY58.6 million at year-end. The auditor and management disclosed substantial doubt about the company’s ability to continue as a going concern because of significant losses, negative operating cash flow, short-term debt obligations, and the need for additional financing.
- The company stated that its July 2023 IPO was expected to strengthen liquidity. It subsequently received gross proceeds of US$6.0 million and net proceeds of US$5.1 million from the company’s offering, although those proceeds were received after the fiscal year-end.
Material Changes Versus the Prior Comparable Period
- Revenue declined by JPY417.2 million, primarily because short-term contracts entered into during FY2022 expired and management became more selective in accepting projects while redirecting resources toward research and development.
- Software and system development revenue fell 90.7%, and consulting and solution revenue fell 90.2%.
- NFT sales began contributing revenue in FY2023 but remained small at 4.8% of total revenue.
- Gross margin contracted sharply because revenue declined more rapidly than the company’s cost base.
- Research and development expense increased 322.6% to JPY108.8 million as the company invested in GLS and related projects.
- General and administrative expense increased 18.8%, and selling and marketing expense increased 87.3%, including JPY25.6 million of advertising expense.
- Operating cash flow shifted from a JPY100.3 million inflow to a JPY399.7 million outflow, while year-end cash declined by JPY479.5 million.
- Shareholders’ equity decreased from JPY590.8 million to JPY208.5 million. The company also completed a capital reduction to partially offset its accumulated deficit.
Guidance, Outlook, Commentary and Risks
Management did not provide numerical revenue or profit guidance. It expects to continue investing in GLS research and development, hiring skilled personnel, developing a software development kit, and pursuing applications in areas such as insurance, energy, entertainment, supply chain, trade, financial services, metaverse applications, and NFTs.
- Going concern: The auditor included an emphasis-of-matter paragraph regarding substantial doubt about the company’s ability to continue as a going concern. Management plans to rely on IPO proceeds, additional debt or equity financing, and potential refinancing, but stated that financing may not be available on acceptable terms or at all.
- Customer concentration: The top three customers represented 82.7% of FY2023 revenue. One customer represented 97.7% of accounts receivable at April 30, 2023.
- Technology and market risk: Blockchain remains an emerging and rapidly changing technology. GLS may not achieve market acceptance, commercial scalability, or the claimed performance advantages over competing technologies.
- NFT and regulatory risk: NFT activities may involve securities, virtual-currency, money-transmission, intellectual-property, consumer-protection, and cybersecurity regulation across multiple jurisdictions.
- Cybersecurity and operational risk: The company relies on third-party systems, external engineers, telecommunications infrastructure, and cloud services. Breaches, outages, errors, or unauthorized access could materially harm operations and reputation.
- Internal control: Management and the independent registered public accounting firm identified one material weakness related to insufficient qualified personnel with U.S. GAAP and SEC reporting experience. The company had not yet remediated the weakness as of the filing.
- Governance and ownership: Management and directors beneficially owned approximately 57.97% of outstanding ordinary shares and exercisable options. CEO Satoshi Kobayashi beneficially owned approximately 52.35%, creating significant control over shareholder matters.
- Dividends: The company does not expect to pay dividends for the foreseeable future.
- Legal matters: The company reported no material litigation or threatened litigation as of the filing date and no material off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether the post-year-end IPO proceeds have materially improved liquidity and whether the company can meet the JPY127.5 million of obligations due within one year.
- Whether revenue recovered after the expiration of FY2022 contracts and whether the company’s selective contracting and R&D strategy can produce sustainable future revenue.
- The current status of the substantial doubt about going concern, including access to additional debt or equity financing.
- The extent to which revenue and receivables remain concentrated among a small number of customers.
- Progress in remediating the material weakness in U.S. GAAP and SEC reporting controls.
- Whether GLS and the company’s NFT platforms achieve commercial adoption while remaining compliant with evolving digital-asset regulations.
- The potential dilution from 3.035 million outstanding options relative to 15.039 million ordinary shares outstanding as of the filing date.