コロプラ（3668） – FY2021 Annual Report（Annual Securities Report）

Note: This document is a translation from the Japanese original for reference purposes only. In the event of any discrepancy between this translation and the Japanese original, the Japanese original shall prevail. COLOPL, Inc. assumes no responsibility for this translation or for direct, indirect or any other forms of damages arising from the translation. Annual Securities Report (Report under Article 24, Paragraph 1 of the Financial Instruments and Exchange Act) Fiscal year: 13th term October 1, 2020 to September 30, 2021 COLOPL, Inc. 4-20-3 Ebisu, Shibuya-ku, Tokyo (E27062) – 2 – Contents Cover Page Part 1. Corporate Information …………………………………………………………………………………………………………………………………… I. Company Overview …………………………………………………………………………………………………………………………………………. 1. Trends in Major Management Indicators, Etc. ………………………………………………………………………………………………. 2. Corporate History …………………………………………………………………………………………………………………………………….. 3. Business Summary …………………………………………………………………………………………………………………………………… 4. Subsidiaries and Associates ……………………………………………………………………………………………………………………….. 5. Employees ………………………………………………………………………………………………………………………………………………. II. Business Overview …………………………………………………………………………………………………………………………………………. 1. Management Policy, Management Environment and Challenges to Address …………………………………………………….. 2. Business Risks …………………………………………………………………………………………………………………………………………. 3. Management’s Analysis of Financial Position, Operating Results and Cash Flows ……………………………………………. 4. Important Contracts Etc. Related to Management …………………………………………………………………………………………. 5. Research and Development ……………………………………………………………………………………………………………………….. III. Facilities ………………………………………………………………………………………………………………………………………………………. 1. Overview of Capital Expenditure, Etc. ………………………………………………………………………………………………………… 2. Major Facilities ………………………………………………………………………………………………………………………………………… 3. Planned Construction and Retirement of Facilities, Etc. ………………………………………………………………………………… IV. Information on the Reporting Company ……………………………………………………………………………………………………………. 1. Stock Information …………………………………………………………………………………………………………………………………….. (1) Total Number of Shares, Etc. ………………………………………………………………………………………………………………… (2) Information on the Share Acquisition Rights, Etc. ……………………………………………………………………………………. (3) Moving Strike Convertible Bonds, Etc. ………………………………………………………………………………………………….. (4) Changes in Number of Shares Issued and Capital, Etc. …………………………………………………………………………….. (5) Shareholders Composition ……………………………………………………………………………………………………………………. (6) Status of Major Shareholders ………………………………………………………………………………………………………………… (7) Information on Voting Rights ………………………………………………………………………………………………………………… 2. Information on Purchase, etc. of Treasury Shares ………………………………………………………………………………………….. 3. Dividend Policy ……………………………………………………………………………………………………………………………………….. 4. Corporate Governance ………………………………………………………………………………………………………………………………. (1) Overview of Corporate Governance ………………………………………………………………………………………………………. (2) Officers ……………………………………………………………………………………………………………………………………………… (3) Audits ………………………………………………………………………………………………………………………………………………… (4) Directors’ Compensation, Etc. ……………………………………………………………………………………………………………….. (5) Information of Shareholdings ……………………………………………………………………………………………………………….. V. Financial Information ………………………………………………………………………………………………………………………………………. 1. Consolidated Financial Statements ……………………………………………………………………………………………………………… (1) Consolidated Financial Statements ………………………………………………………………………………………………………… (2) Other …………………………………………………………………………………………………………………………………………………. 2. Financial Statements, Etc…………………………………………………………………………………………………………………………… (1) Financial Statements ……………………………………………………………………………………………………………………………. (2) Details of Major Assets and Liabilities …………………………………………………………………………………………………… (3) Other …………………………………………………………………………………………………………………………………………………. VI. Stock Information of the Reporting Company …………………………………………………………………………………………………… VII. Reference Information on the Reporting Company …………………………………………………………………………………………… 1. Information on Parent Entities of the Reporting Company …………………………………………………………………………….. 2. Other Reference Information ……………………………………………………………………………………………………………………… Part II. Information Concerning Guarantors of the Reporting Company …………………………………………………………………………. Audit Report Page 5 5 5 7 8 10 11 12 12 15 20 25 25 26 26 26 26 27 27 27 28 30 30 31 31 33 34 34 35 35 40 44 47 49 51 52 52 82 83 83 96 96 97 98 98 98 99 100 – 3 – Cover Page Document filed: Applicable law: Filed with: Filing date: Fiscal year: Company: Phone number: Contact person: Contact address: Phone number: Contact person: Annual Securities Report Article 24, Paragraph 1 of the Financial Instruments and Exchange Act Director, Kanto Local Finance Bureau December 20, 2021 13th business term (From October 1, 2020 to September 30, 2021) Company name in English: Name and title of representative: Takashi Miyamoto, President and Representative Director Address of head office: 4-20-3 Ebisu, Shibuya-ku, Tokyo COLOPL, Inc. COLOPL, Inc. 03-6721-7770 Yoshiaki Harai, Executive Director and Head of the Corporate Division 4-20-3 Ebisu, Shibuya-ku, Tokyo 03-6721-7770 Yoshiaki Harai, Executive Director and Head of the Corporate Division Place for public inspection: Tokyo Stock Exchange, Inc. (2-1 Nihonbashikabutocho, Chuo-ku, Tokyo) – 4 – Part 1. Corporate Information I. Company Overview 1. Trends in Major Management Indicators, Etc. (1) Consolidated management indicators, etc. Fiscal term 9th term 10th term 11th term 12th term 13th term End of fiscal year September 2017 September 2018 September 2019 September 2020 September 2021 Net sales Ordinary profit Profit attributable to owners of parent (Million yen) (Million yen) 52,246 12,901 (Million yen) 8,691 Comprehensive income (Million yen) Net assets Total assets (Million yen) (Million yen) Net assets per share Basic earnings per share Diluted earnings per share Equity ratio Return on equity (Yen) (Yen) (Yen) (%) (%) Price-earnings ratio (Times) 9,165 69,293 75,744 551.34 69.32 67.80 91.5 13.2 18.73 4,957 45,776 6,097 4,192 3,770 70,625 77,244 555.65 33.08 32.70 91.4 6.0 22.27 9,421 38,920 1,655 1,070 937 69,433 74,740 544.53 8.40 8.35 92.9 1.5 212.26 45,128 11,790 7,977 8,461 75,779 85,833 592.81 62.45 62.22 88.3 11.0 14.38 37,125 7,843 3,047 3,148 75,751 80,814 591.86 23.82 23.77 93.7 4.0 33.80 Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Cash and cash equivalents at end of period Number of employees [Average number of temporary employees, which is not included in the number of employees] (Million yen) 53 15,010 (3,104) (Million yen) (4,545) 1,979 (2,768) (2,640) (10,588) (Million yen) (2,018) (2,518) (2,118) (2,780) (3,200) (Million yen) 51,409 1,248 60,400 1,283 55,822 1,368 65,308 1,565 49,052 1,449 (Persons) [123] [129] [123] [95] [60] (Note) Net sales do not include consumption tax, etc. – 5 – (2) Management indicators, etc. of the company that has submitted the report Fiscal term 9th term 10th term 11th term 12th term 13th term End of fiscal year September 2017 September 2018 September 2019 September 2020 September 2021 (Shares) 127,457,000 128,882,000 129,288,500 129,607,536 129,766,034 Net sales Ordinary profit Profit Share capital Number of shares outstanding Net assets Total assets (Million yen) (Million yen) (Million yen) (Million yen) (Million yen) (Million yen) Net assets per share Dividends per share (Interim dividends per share) Basic earnings per share Diluted earnings per share Equity ratio Return on equity Price-earnings ratio Dividend payout ratio Number of employees [Average number of temporary employees, which is not included in the number of employees] Total shareholder return (Comparison index: TOPIX including dividends) Stock price high Stock price low (Yen) (Yen) (Yen) (Yen) (%) (%) (Times) (%) (Persons) (%) (%) (Yen) (Yen) 50,692 14,629 8,634 6,433 71,471 77,547 568.67 21.00 68.86 67.35 92.2 12.7 18.85 30.5 792 43,666 6,422 3,145 6,491 71,483 77,326 562.40 17.00 24.82 24.53 92.4 4.4 29.69 68.5 840 35,880 1,097 594 6,510 69,822 74,324 547.58 17.00 (-) 4.66 4.63 93.9 0.8 382.62 364.8 935 39,061 11,045 7,346 6,536 75,382 84,270 589.71 25.00 57.51 57.30 89.5 10.1 15.61 43.5 954 27,900 5,616 1,196 6,556 73,566 76,982 574.79 20.00 9.35 9.33 95.6 1.6 86.10 213.9 885 (-) (-) (-) (-) [43] [43] [57] [41] [8] 84.3 49.5 117.4 62.5 57.8 (129.3) (143.3) (128.4) (134.7) (171.7) 1,607 937 1,318 650 1,783 589 1,681 717 1,054 761 (Notes) 1. Net sales do not include consumption tax, etc. 2. Dividends per share in the 10th term, 17.00 yen, include commemorative dividends of 5.00 yen per share. 3. The stock price high and stock price low are stock prices on the Tokyo Stock Exchange (First Section). – 6 – 2. Corporate History In May 2003, Naruatsu Baba, Chairman of the Board of the Company, began providing Colony Life, a game app using the mobile phone’s function of sending position information, as a sole proprietorship. Colony Life was improved and renamed Colony Life Plus (Note 1), and was released in May 2005. In October 2008, COLOPL, Inc. (“the Company”) was established to systematically develop Colony Life Plus. Month and year Event October 2008 COLOPL, Inc. established in Kitaueno, Taito-ku, Tokyo with capital of ¥3 million. The Colony Life Plus business acquired from Naruatsu Baba, Chairman of the Board. Operations of Colony Life Plus were transferred to the Company. February 2009 June 2009 The head office moves to Ebisunishi, Shibuya-ku, Tokyo. Starts COLOCA (specialty shop), the Company’s first collaboration service that sends customers to real stores, in collaboration with Ishidaya Co., Ltd. and three other companies. November 2009 The head office moves to Ebisuminami, Shibuya-ku, Tokyo. Starts COLOCA (public transport operators) service in collaboration with Kyushu Railway Company (JR Kyushu) as a “Trip around Kyushu location-based game” campaign. February 2010 September 2010 The head office moves to Ebisuminami, Shibuya-ku, Tokyo. Starts Colotabi service in collaboration with a number of tour operators. November 2010 Launches COLOPL+ (Note 2), a location-based game open platform. Launches au one COLOPL+ (Note 3) in alliance with KDDI CORPORATION for mobile phone users of KDDI. March 2011 Launches a COLOPL Outing Research Lab project for surveys and analyses of people’s movements (the project was transferred in July 2021). April 2011 June 2011 Forms a capital alliance with KDDI CORPORATION. Holds a COLOPL Bussan Exhibition of specialties nationwide at Tokyu Department Store Kichijoji, bringing together COLOCA member stores. September 2011 Launches smartphone game brand Kuma the Bear and starts an app dedicated to smartphones. September 2012 The head office moves to Ebisu, Shibuya-ku, Tokyo. December 2012 Listed on the Tokyo Stock Exchange Mothers Exchange March 2013 July 2013 Acquires Social Game Info Inc. (present gamebiz, Inc.) in September 2020. Overclock Inc. established (liquidated in September 2020) April 2014 December 2014 Listed on the First Section of the Tokyo Stock Exchange Acquires Indigo Game Studios, Inc. (absorption-type merger in May 2021). February 2015 March 2015 COLOPL NEXT, Inc. (a subsidiary) established COLOPL NEXT No. 1 Fund Investment Partnership established April 2015 June 2015 COLOPL.NI, Inc. established (liquidated in February 2017) in California, USA Acquires RealStyle Co., Ltd. (a subsidiary). September 2015 November 2015 Acquires Pyramid, Inc. (a subsidiary). 360Channel, Inc. (a subsidiary) and Kuma’s Musical Band, Inc. (a subsidiary) established January 2016 May 2016 December 2016 January 2017 COLOPL NEXT No. 2 Fund Investment Partnership established Acquires EIGHTING Co., Ltd. (a subsidiary). COLOPL NEXT No. 3 Fund Investment Partnership established COLOPL NEXT No. 4 Fund Investment Partnership established April 2017 October 2017 COLOPL NEXT No. 5 Fund Investment Partnership established COLOPL NEXT No. 6 Fund Investment Partnership established November 2018 COLOPL NEXT No. 7 Fund Investment Partnership and COLOPL NEXT Listed Shares No. 1 Fund Investment Partnership established April 2020 May 2020 Acquires MAGES. Inc. (a subsidiary). Acquires the online game planning and operation business and consultation business of Coreedge Inc. (Notes) 1. Game app Colony Life Plus was renamed Colony Life in July 2011. 2. COLOPL+, a location-based game open platform, was renamed COLOPL in July 2011. 3. The name of au one COLOPL+ changed to au one COLOPL in July 2011. – 7 – 3. Business Summary The Group (the Company and its subsidiaries and associates) consists of the Company (COLOPL, Inc.) and 13 consolidated subsidiaries. The Group’s businesses and relationships between its businesses and major Group companies are described below. The Group positioned the Investment and Development Business as one of its main businesses in the fiscal year under review. The details are stated in V. Financial Information, 1. Consolidated Financial Statements, (1) Consolidated Financial Statements – Notes (Segment information etc.). (1) Entertainment Business The Entertainment Business is responsible primarily for the development and operation of games for smartphones. The mainstay games are native apps for smartphones, including Shironeko Project and Quiz RPG Wizard and Black Cat Wiz. The Group plans and develops software for home consoles and PC game software. It also provides contract development of game software that other companies in the industry sell, using the development technology that the Group has developed. In this way, we provide multiple games having different characteristics, which is one of the features and strengths of the Group. We release numerous titles each year, producing many hit titles from among them. We aim for an “accumulating sales model” in which layers of sales are piled on top of one another each year. (2) Investment and Development Business In the Investment and Development Business, we aim to build an optimal portfolio by investing in a wide range of domestic and overseas companies, particularly IT companies and entertainment companies, at all stages from the seed stage to the later stage. – 8 – The figure below shows the Group’s operating structure. Operating Structure (Note) The following is major affiliated businesses: (1) Shops selling specialties nationwide that collaborate with the Company (COLOCA (specialty shop)) (2) Public transport (railways, ferries, airlines) operators nationwide that are in alliance with the Company (COLOCA (public transport operators)) – 9 – 4. Subsidiaries and Associates Name Address Main business Relationship Share capital or contribution (Million yen) Percent of voting rights held by the Company (%) (Consolidated subsidiaries) COLOPL NEXT No. 2 Fund Investment Partnership (Note 3) COLOPL NEXT No. 4 Fund Investment Partnership (Note 3) COLOPL NEXT No. 7 Fund Investment Partnership (Note 3) COLOPL NEXT Listed Shares No. 1 Fund Investment Partnership (Note 3) MAGES. Inc. (Note 4) Eight other companies indirectly held. Shibuya-ku, Tokyo Shibuya-ku, Tokyo Shibuya-ku, Tokyo Shibuya-ku, Tokyo Minato-ku, Tokyo Investment and Development Business Investment and Development Business Investment and Development Business Investment and Development Business 1,154 1,589 2,049 2,417 100.00 [0.25] – 100.00 [0.25] – 100.00 [0.04] – 99.95 [0.01] – 295 Entertainment Business 100.00 [-] Officers serving concurrent positions Loans of funds (Notes) 1. The numbers in parentheses in the column “Percent of voting rights held by the Company” are the percent of voting rights 2. In the Main business column, segment names are entered. 3. They are specified subsidiaries. 4. Net sales (excluding internal net sales between consolidated companies) at MAGES. Inc. exceeds 10% of consolidated net sales. Major items of profits and losses (1) Net sales (2) Ordinary profit (loss) (3) Profit (loss) (4) Net assets (liabilities) (5) Total assets 4,546 million yen (152) million yen (307) million yen (14) million yen 2,085 million yen – 10 – 5. Employees (1) On a consolidated basis Segment Entertainment Business Investment and Development Business Annual As of September 30, 2021 Number of employees 1,446 3 1,449 [56] [4] [60] (Note) The number of employees is the number of full-time employees (excluding employees temporarily transferred from the Group and including employees temporarily transferred to the Group). The average number of part-time employees and employees on a short-time contract in the past year, which is not included in the number of employees, is stated in parentheses. (2) Company that has submitted the report Number of employees Average age As of September 30, 2021 Average length of service (years) Average annual salary (thousand yen) 885 [8] 33.3 4.2 6,163 Segment Entertainment Business As of September 30, 2021 Number of employees 885 [8] (Notes) 1. The number of employees is the number of full-time employees (excluding employees temporarily transferred from the Company and including employees temporarily transferred to the Company). The average number of part-time employees and employees on a short-time contract in the past year, which is not included in the number of employees, is stated in the parentheses. 2. Bonuses and non-standard wages are included in the calculation of the average annual salary. (3) Labor union No labor unions have been formed. Nevertheless, labor-management relations are stable. – 11 – II. Business Overview 1. Management Policy, Management Environment and Challenges to Address The forward-looking statements below are based on judgments of the Group as of the end of the fiscal year under review. The Group’s mission is “Entertainment in Real Life”: Making each day more enjoyable and wonderful through entertainment. To accomplish this mission, the Group has set the vision of delivering “New Experiences” with the latest technology and creative (1) The Company’s basic management policy ideas. The Group’s principles are as follows: – Try We will continue to try achieving innovation using the latest technologies and creative ideas without fearing failure and making necessary changes. – Value We will create new entertainment and new values with our creative ideas. We will pursue customer’s value and will not easily compromise to achieve it. – Believe Many difficulties come with the creation of new experiences. We will face these difficulties properly and overcome them by believing in ourselves and our team. (2) Target management indicators Aiming to increase profitability and capital efficiency, the Group pays particular attention to ROE (return on equity) as a management indicator. (3) Business environment and the Company’s medium- to long-term management strategies The Group will implement a diverse portfolio strategy to reduce ups and downs in results and achieve continued stable growth. Focusing on entertainment, and investment and development, we will appropriately allocate resources and diversify investments to expand the portfolio. 1) Entertainment Business (i) Content portfolio strategy In the Entertainment Business, the Group will endeavor to reach diverse users and stabilize revenue by providing games having multiple motifs in different genres and providing services in multiple entertainment categories other than the game. In the domestic mobile game market, we will continue to consider increasing engagement with users and provide games in a wide range of genres, including highly developed games that core customers are sure to like, sports games that both young people and middle-aged and elderly people will likely prefer, and games using other companies’ IP titles, to build an optimal content portfolio. (ii) Regional portfolio strategy The Group operates in different regions of the world. They are different from each other in values and development stage, among other aspects. They are different in terms of what kinds of entertainment people are interested in and in terms of communications infrastructure and income level. In this way, the Group will seek to reach diverse users and stabilize revenue. In the overseas mobile game market, we aim to develop operations worldwide by delivering games directly from the Company or commissioning local partners to deliver games or by other methods that are optimal in different regions. We aim to build a more sophisticated geographical area portfolio by bolstering marketing and development systems overseas and ultimately developing and providing unique services according to user characteristics in different regions. (iii) Device portfolio strategy We will reach diverse users by paying attention to the future possibilities of new devices and platforms that are created one after the other against the backdrop of technological progress and changes in the user environment, and by promptly responding to changing situations. We will thereby seek to stabilize earnings. We are conducting many different experiments to develop services for HMDs (head mounted displays), which enable users – 12 – to experience virtual reality (“VR”), which is seen as having great future potential. We expect the smartphone market to continue to expand and will prepare to respond steadily to this expansion in anticipation of the growth of the VR market, In the Investment and Development Business, we aim to build an optimal portfolio by investing in a wide range of domestic and overseas companies, particularly IT companies and entertainment companies, at all stages from the seed stage to the later stage. etc., which will provide innovative user experiences. 2) Investment and Development Business (4) Priority business and financial issues to be addressed 1) Enhancing corporate brand value In order to succeed the vision of the Group, we will need to continue providing services our customers will enjoy and become a company many look upon with fondness. As such, the Group will practice proper information disclosure to stakeholders while conducting proactive PR and CSR activities in order to enhance the Group’s corporate brand value. 2) Expanding user numbers and enhancing user engagement In order to achieve continuous growth for the Group, the Group recognizes the necessity of improving name recognition for the Group and the Group’s services, acquiring new users in an ongoing manner, and expanding user numbers. The Group is working to expand its user base by improving the name recognition of the Group through effective advertising, and by actively engaging in measures aimed at gaining more customers through the development of a diverse range of services. With the goal of encouraging customers to use the Group’s services for the long-term, we will identify the needs of current users and continue providing high-quality services while using a variety of media to speak with our customers, thereby improving their engagement with us. 3) Expanding our portfolio The overall management strategy of the Group involves executing strategies towards achieving a portfolio that combines businesses supported by different customers and continually investing in new business domains. In order to achieve our vision “Delivering ‘New Experiences’ with the latest technology and creative ideas,” based on our mission of “‘Entertainment in Real Life’: Making everyday more enjoyable and wonderful through entertainment,” we will work to expand our portfolio by allocating resources and diversifying investments as appropriate, centered on entertainment and investment and development. 4) Ensuring service safety and integrity out our mission to ensure service safety and integrity. Some of the services provided by the Group allow users to communicate with each other. To ensure that our customers can use these services without worry, it is essential to ensure service safety and integrity. The Group has established a guideline that lays 5) Stable system operation As the Group’s applications and platform are web-based, we believe it is necessary to ensure stable system operation and be prompt in resolving issues that arise in order to ensure our customers have a pleasant experience when using our services. To this end, we strive to acquire the necessary personnel and server equipment needed to ensure stable system operation. 6) Services for overseas markets 7) Addressing new technologies The Group is planning to continue to actively bring its services to overseas customers by taking advantage of smartphones’ characteristics. In our pursuit of expanded overseas business and improved profitability, we will be learning user preferences in each region and then developing and providing our own services tailored to regional user characteristics. In the industry to which the Group belongs, technological innovation proceeds unabated with the market for related products and services growing alongside. With an eye to achieving continued business expansion amid these market conditions, the Group sees a need to address these various new technologies in a timely manner and take ongoing action. – 13 – 8) Enhancing internal control system and corporate governance The Group thinks that in order to aim at further business expansion and increase in the corporate value, it is essential to earn the trust of society. To this end, the Group is working to enhance the internal control system and strengthen corporate governance by developing a sound and transparent control system in addition to ensuring that all officers and employees have a common understanding on business ethics and compliance and fostering a culture where fair and right decisions are made. 9) Ensuring organizational flexibility The business environment for the entertainment industry surrounding the Group is changing faster than for any other industry, and a rapid response to these changes is critical. To eliminate the factors that compromise flexibility as the organization grows, we will see to ensuring flexibility in decision-making by recruiting and appointing suitable personnel and establishing an organizational structure to support business expansion. 10) Recruiting and developing highly-capable people For the further business growth, the Group is primarily focused on recruiting and developing people. In order to recruit competent people that resonate with the Group’s philosophy and to develop them into people capable of achieving sustainable growth, we will continually improve our recruiting and training programs. – 14 – 2. Business Risks Major risks that are related to what is stated primarily in the Business Overview and Financial Status chapters of this Annual Securities Report, which management thinks could significantly affect the financial position, operating results and cash flows of the consolidated companies are as follows. If the level of possibility of a risk materializing, the timing of a risk materializing, or its effects on the Group’s financial position, operating results and cash flows if it does materialize are not reasonably foreseeable, they are not specifically stated. The Group believes that it has reduced the level of possibility of the risks materializing to a certain level through its risk management (the identification and evaluation of risk and the development of countermeasures). The Group is fully aware of the possibility of the risks materializing and will strive to prevent them from materializing and take countermeasures against them if they do materialize. Having said that, we think that what is stated in this section and other sections of this Securities Report need to be taken into consideration before decisions to invest in shares in the Company are made. The forward-looking statements below are based on judgments of the Group as of the end of the fiscal year under review. Risks that may materialize are not limited to the risks below. (1) Strategy and plan 1) Mobile market businesses and results. 2) Competition The Group expects that the mobile market will continue to grow with a deeper penetration of smartphones and other high-performance terminals. However, a significant slowdown in growth in the market could adversely affect the Group’s businesses and results. Even if the market expands, the Group may not grow at the same pace as the market. The market is not mature, and any rapid change in the market breakdown resulting from the entry into the market of major companies could adversely affect the Group’s The Group provides distinctive services using position information, content-rich, expressive, high-quality game applications and enhanced customer support to increase competition. Intensifying competition with companies that provide applications using position information on the Internet and for the mobile phone as the Group does and applications dedicated to the smartphone, among other services, and new competitors in the market could adversely affect the Group’s businesses and results. 3) Response to technological innovation The Group operates based on Internet-related technologies. In Internet-related fields, new technologies are developed, and based on them, a series of new services are introduced. They are rapidly changing fields. On the hardware front, smartphones and other high-performance terminals are in widespread use, and a series of new services are being launched on them in response to new technologies. In this environment, the Group is focusing on recruiting and cultivating engineers, developing creative work environments, and acquiring technologies, knowledge and expertise related particularly to the smartphone. However, any difficulty in acquiring knowledge and expertise or any delay in the Group’s response to technological innovations could lead to a decline in the Group’s competitiveness. Responses to new technologies may result in an increase in expenses for additional systems and personnel expenses, among other expenses. In that case, the Group’s technological capabilities may decline, which may lead to a decline in the quality of services and competitiveness, which could adversely affect the Group’s businesses and results. 4) Services overseas able to develop operations as expected. 5) Risk related to M&A etc. The Group plans to take advantage of the characteristics of the smartphone and continue to actively offer the Group’s services overseas. However, user preference and laws and regulations overseas are very different from those in Japan, and the Group may not be The Group will endeavor to expand its size through investments and loans, including M&A, if it thinks they will contribute to increasing growth potential. When the Group makes investments and loans, including M&A, it makes a detailed preliminary examination of the financial condition and contractual relationships of the target companies and fully examines risks. However, problems that are not detected in the preliminary examination, including contingent liabilities and unrecognized liabilities at target companies, and – 15 – progress in business development that is slower than planned could have adverse effects on the Group’s businesses and results, including difficulty in recouping invested capital. If new businesses are added to the Group through M&A, etc., risk factors inherent in the new businesses could be added. 6) Risks related to the Investment and Development Business The Group makes investments in IT-related and entertainment companies in Japan and overseas as part of its growth strategies. When the Group makes investments, it makes a detailed preliminary examination of the target companies, including their financial condition, and fully examines risks. Nevertheless, the businesses of the companies in which the Group does invest may not make progress as planned and investments may not be recouped due to business downturns and trends in share prices, which in turn could adversely affect the Group’s businesses and results. 7) Risk of damage to the corporate brand The Group believes that maintaining and enhancing the value of its corporate brand is important for gaining the trust of users and expanding and using the user base. The Group thus discloses information appropriately to stakeholders and actively conducts PR activities and CSR activities. However, if the Group experiences the spread of a negative reputations and evaluation, the Group’s brand value may decline, which in turn could adversely affect the Group’s businesses, results and financial position. (2) Business operation 1) Planning, development and operation of game applications The Group plans, develops and operates a variety of game applications and operates platforms. The number of downloads of the Group’s game applications and the number of platform members are increasing steadily, and we think we have achieved a certain level of reputation among users. However, the preferences of users of our services change rapidly. Any difficulty in accurately identifying user needs and introducing content that meets the needs for whatever reason may lead to a decline in appeal to users, which in turn could adversely affect the Group’s businesses and results. 2) Risks related to systems The Group’s businesses are dependent entirely on communication networks and systems that connect mobile phones, personal computers, and computer systems. Although The Group takes measures, including the development of appropriate security measures, the installation of servers at data centers, etc., and the use of cloud services, systems going down due to unpredictable events, including natural disasters, accidents (including accidents caused by human factors in Japan and overseas), rapid increases in access to the sites operated by the Group, the suspension of power supply to data centers and cloud services, and system failures caused by computer viruses and hacker raids, among other causes, could adversely affect the Group’s businesses and results. Due to these factors, system processing related to sales aggregation may not function as expected, which may affect the Group’s financial reporting system. 3) Changes and trends at Apple Inc. and Google Inc. The game application services exclusively for the smartphone are accounting for an increasing share of sales at the Group, and our dependence on two platformers, Apple Inc. and Google Inc., is increasing. Changes and trends in the business strategies of the platformers may lead to changes in commission rates and other changes, which could adversely affect the Group’s businesses and results. 4) Services involving copyrights The Group pays royalties to use in game applications characters etc. to which a third party has rights. Significantly lower sales of applications using those characters, etc. than expected and a failure to introduce more influential characters, etc. than those of competitors could adversely affect the Group’s businesses and results. 5) Natural disasters, accidents, etc. In anticipation of natural disasters and accidents, the Group regularly takes backup measures and continuously monitors operating conditions to prevent or avoid trouble. However, major earthquakes and other natural disasters near the business sites of the Group and events that interfere with the Group’s business continuity, including damage to the Group’s facilities and restricted power supplies, could seriously affect the Group’s businesses and results. Responding to the COVID-19 pandemic, the Group takes preventive measures, including cancellations and postponements of – 16 – events organized by the Group and the introduction of working from home, and is developing systems in case of emergency. However, events that will interfere with the Group’s business continuity could occur due to the spread of COVID-19 and could significantly affect the Group’s businesses and results. (3) Organization, governance 1) Human resources The Group has been operating its own platforms and developing and providing its own content and has been expanding its business domains rapidly. To expand and diversify its operations, the Company will need to increase personnel in certain divisions of the Group, including the technology development, advertising and marketing, and administration divisions. Failure to make progress in human resource development within the Group or the recruitment of human resources from outside the Group as planned in response to the expansion of its business scale and far more outflows of human resources than expected or outflows of capable human resources could lead to a decline in competitiveness and constraints on the expansion of operations, which in turn could adversely affect the Group’s businesses and results. 2) Internal control system The Group believes that effective corporate governance is indispensable for a sustainable increase in corporate value and thinks that it needs to ensure the appropriateness of business operations and the reliability of financial reporting and strictly comply with laws and regulations based on sound ethics. Although the Group stives to enhance its internal control system, failure to build an adequate internal control system in response to a rapid expansion of businesses could make proper business operation difficult and adversely affect the Group’s businesses and results. 3) Information management system The Group handles users’ e-mail addresses and other important information. It has thus formulated an information security policy and provides training related to information security. The Group has achieved ISO27001 certification and actively enhances its information management system. However, any leaks of important information for whatever reason could lead to compensation for the people affected, a loss of social trust in the Group, and additional expenses for bolstering the information management system, which in turn could adversely affect the Group’s businesses and results. 4) Dependence on specific persons Chairman of the Board and Chief Creator Naruatsu Baba, who is also the founder of the Company, has the technology to develop mobile content and services for the Internet, mobile phone and smartphone and extensive experience and knowledge in these areas. He plays a very important role in making technological decisions and in deciding on and implementing management policies and business strategies. The Group is making changes in its management system, including the replacement of the president, while promoting information sharing among officers and executives at meetings of the Board of Directors and management meetings, among other meetings, to create a strong management system that is not too dependent on one person. However, any difficulty in Chairman Baba continuing to work for the Group for any reason could adversely affect the Group’s businesses and results. (4) Compliance 1) Risk related to the safety and soundness of services Certain services provided by the Group are based on the assumption that a large number of unspecified individual members communicate with each other independently. To develop sound communities, the Group’s terms of use clearly prevent improper use that may lead to social problems. The Group continuously monitors users, etc. and strives to take steps, including requesting users who have violated the terms of use to take corrective action or cancel their membership. To encourage the proper use of services, we continue to take steps to maintain the soundness of our services. We state more clearly appropriate manners and considerations in the use of content. We also intensify monitoring in terms of systems and human resources. We bolster monitoring systems, etc. and increase the number of personnel patrolling the site, etc. However, it will be difficult to fully monitor members’ activities in a service if the number of members of the service increases rapidly. Any trouble caused by inappropriate activities of members could cause the Group to be held legally liable regardless of the terms of use. Even if the Group is not held legally liable, a reputation risk could adversely affect the Group’s businesses and results. As the scale of the business expands, the Group will continue to take measures necessary to maintain and improve the soundness of its services. However, any delay in systems’ responses to the expansion or reinforcement of systems, or a greater- – 17 – than-expected increase in expenses for responding to the expansion could adversely affect the Group’s businesses and results. In the online game industry, some users practice real money trading (RMT) (Note), in which in-game items, etc. are sold on auction sites or by other means. To make games more fun to play, the Group’s services have a function by which users can swap in-game items with each other. Nevertheless, a fraction of users sell in-game items on auction sites. The Group ‘s terms of use clearly prohibit RMT. The Group monitors auction sites in a timely manner. The Group’s guidelines on safety and soundness clearly state that the Group will take strict measures against violators, including terminating their membership. However, a large volume of RMT or the expansion of RMT related to the Group may lead to a decline in the reliability of the Group’s service, which in turn could adversely affect the Group’s businesses and results. (Note) Real money trading (RMT) is a practice in which characters and items on the Web and in-game virtual currencies, etc. are sold for real money. 2) Risks related to intellectual property The Group strives to obtain intellectual property rights related to the services that it operates. It takes every care not to infringe on the intellectual property rights of third parties. However, any right of a third party in the business fields where the Group operates could lead to a third party filing a lawsuit claiming damages or seeking an injunction to suspend use, etc. or the payment of a consideration, such as royalties. Any infringement of the Group’s intellectual property rights could significantly affect the Group’s businesses and results. 3) Legal regulations related to the Internet The Act on the Protection of Personal Information applies to the personal information of users of the services that the Group operates. The Act on Prohibition of Unauthorized Computer Access prohibits the unauthorized use of the IDs and passwords of others. Under the Act on Specified Commercial Transactions and the Act on Regulation of Transmission of Specified Electronic Mail, the Group may be required to display legal matters when it sends advertising e-mails. The Telecommunications Business Act applies to the Group as a telecommunications operator. The Group provides a social media (Note) function for certain services. Those services are based on the assumption that communication among users is healthy communication and are not Internet dating services defined in the Act on Regulation on Soliciting Children by Using Opposite Sex Introducing Service on Internet. Under the Act on Development of an Environment that Provides Safe and Secure Internet Use for Young People, which came into effect in April 2009, mobile phone operators, etc. are required to provide filtering services. As stated above, the Group continues to make stronger efforts to maintain the soundness of services. In certain smartphone native games, paid virtual currencies are used, and the Payment Services Act applies to those virtual currencies. The Group has been registered with the Kanto Local Finance Bureau and complies with the act and related regulations including the Cabinet Office ordinance. The Group actively works to comply with these laws. However, any administrative measures against the Group due to violations of the laws under unexpected circumstances or any restrictions on the Group’s services resulting from the tightening of the laws or the establishment of new laws and regulations could adversely affect the Group’s businesses and results. (Note) Social media are membership-based, community-based services that facilitate and support interactions between users using e-mails and bulletin boards. 4) Legal regulations, etc. related to applications Some media outlets have raised questions about excessively encouraging a gambling spirit in the mobile internet industry, where the Group operates. In July 2012, the Consumer Affairs Agency presented the view that the charging method known as complete gacha (Note) violates the Act against Unjustifiable Premiums and Misleading Representations. The Group has already taken measures in response to that and believes that the view has not had a significant effect on the Group’s services. We naturally provide services in compliance with laws and regulations. Nevertheless, as a corporate group that provides services, we think we should voluntarily respond to social demand, which may change, and strive not to impair the health and development of the industry. Meanwhile, new legal regulations, including changes in the interpretations of existing laws and regulations and the enactment of new laws and regulations due to changes in social conditions could significantly restrict the Group’s businesses and adversely affect the Group’s businesses and results. (Note) Complete gacha is a system in which the player can obtain a rare item or card by obtaining common items or cards at random to complete a set of common items or cards. Dilution of stock value caused by the exercise of share acquisition rights The Group grants share acquisition rights to officers and employees as incentives. The Group may grant share acquisition – 18 – (5) Other rights to officers and employees as incentives in the future. If share acquisition rights are exercised, shares in the Group will be issued, which in turn will dilute the value of the shares of existing shareholders and the ratio of the voting rights held by them. – 19 – 3. Management’s Analysis of Financial Position, Operating Results and Cash Flows (1) Overview of operating results, etc. The following is an overview of the operating results and cash flows (hereinafter, “operating results, etc.”) of COLOPL, Inc. and its consolidated subsidiaries (hereinafter, “the Group”) during the fiscal year under review. 1) Financial condition and operating results With the Group’s mission, “‘Entertainment in Real Life’: Making everyday more enjoyable and wonderful through entertainment,” the Group has been working to enrich people’ s everyday lives through entertainment. It has been keeping in mind the need to enhance engagement with users in conjunction with existing games, while also focusing on releasing new games. In addition, it positioned the Investment and Development Business as one of its main businesses in the fiscal year under review. The details are stated in V. Financial InformationStatus, 1. Consolidated Financial Statements Etc., (1) Consolidated Financial Statements – Notes (Additional information). With respect to the lawsuit concerning a patent infringement raised in December 2017, the Company reached a settlement with the plaintiff on August 4, 2021, and consequently recorded settlement package of ¥3,300 million as an extraordinary loss in the fiscal year under review. Meanwhile, although consumption and economic activity continued to be sluggish due to a range of factors such as restrictions on outings and movements in many countries, the impact of the COVID-19 pandemic on the financial results for the fiscal year under review was limited. As a result, consolidated results for the fiscal year under review were net sales of ¥37,125 million (down 17.7％ year on year), operating profit of ¥6,320 million (down 48.4％ year on year), ordinary profit of ¥7,843 million (down 33.5％ year on year), and profit attributable to owners of parent of ¥3,047 million (down 61.8％ year on year). Operating results by business segment are as follows: Effective from the fiscal year under review, the Company revised its reportable segment structure, analyzing the results for the fiscal year under review based on the revised structure. a. Entertainment Business The Entertainment Business is responsible primarily for the development and operation of games for smartphones. In games for smartphones that account for a major portion of sales, the DRAGON QUESTWALK, which is a third company IP title (planning and production: SQUARE ENIX CO., LTD., Development: COLOPL, Inc.), performed well and contributed to the Group’s consolidated financial results. In original IP titles, the Group has been operating services to enhance engagement with users by featuring the 7th and 5th anniversaries of the Shironeko Project and Shironeko Tennis, two mainstay titles, since their releases. In addition, it launched the YOU GENERATION service on a full scale in Japan. As a result, consolidated net sales and operating profit for the fiscal year under review stood at ¥36,953 million and ¥6,447 million, respectively. b. Investment and Development Business The Group conducts the Investment and Development Business with a focus on investments in IT-related and entertainment companies in particular. Consolidated net sales and the operating loss for the fiscal year under review stood at ¥171 million and ¥129 million, respectively. 2) Status of cash flows The balance of cash and cash equivalents (hereinafter, “cash”) at the end of the fiscal year under review decreased ¥16,255 million from the end of the previous fiscal year, to ¥49,052. The status of each of the cash flow segments and contributing factors for changes during the fiscal year under review are as follows. (Cash flows from operating activities) Net cash used in operating activities during the fiscal year under review stood at ¥3,104 million (compared to ¥15,010 million provided during the previous fiscal year). The cash outflow was mainly due to income taxes paid of ¥4,764 million. (Cash flows from investing activities) Net cash used in investing activities during the fiscal year under review came to ¥10,588 million (compared to the cash outflow of ¥2,640 million during the previous fiscal year). The major cash outflow reflected payments into time deposits of ¥10,000 million. (Cash flows from financing activities) Net cash used in financing activities during the fiscal year under review was ¥3,200 million, compared to net cash used in – 20 – financing activities of ¥2,780 million during the previous fiscal year). The cash outflow was mainly attributable to dividends paid of ¥3,192 million. 3) Results for production, orders received and sales a. Results of production The information is omitted because production at the Group is not significant in financial terms. b. Results of orders received The information is omitted because orders at the Group is not significant in financial terms. c. Results of sales Sales performance by segment for the fiscal year under review is as shown below. Segment Amount (million yen) YoY (%) Entertainment Business Investment and Development Business Consolidated net sales (Notes) 1. The consumption tax is not included in the prices above. 36,953 171 37,125 2. The Company changed the reportable segments, and the changes are effective from the second quarter of the fiscal year under review. The details are stated in V. Financial Information, 1. Consolidated Financial Statements, (1) Consolidated Financial Statements – Notes (Segment information etc.). Consequently, no data are entered in the year-on-year change column. 3. The results of sales by major customer and the ratio of sales by major customer to total sales in the fiscal year are as follows. Previous fiscal year (October 1, 2019 to September 30, 2020) Fiscal year under review (October 1, 2020 to September 30, 2021) Amount (million yen) Percentage (%) Amount (million yen) Percentage (%) Customer SQUARE ENIX Co., Ltd. Apple Inc.* Google Inc.* 15,296 14,139 8,608 33.9 31.3 19.1 10,474 10,348 6,277 * The partners are payment services providers and collect payments from users. ― ― ― 28.2 27.9 16.9 – 21 – (2) Details of analysis and examination concerning the state of operating results, etc. from the perspective of the management The details of understanding, analysis and examination concerning the state of operating results, etc. for the Group from the perspective of the management are as follows. The forward-looking statements below are based on judgments of the Group as of the end of the fiscal year under review. 1) Significant accounting estimates and the assumptions used for them The Group prepares its consolidated financial statements based on Generally Accepted Accounting Principles in Japan. To prepare the consolidated financial statements, management needs to choose and apply accounting policies and make estimates that affect the reported amounts and disclosure of assets, liabilities, revenues, and expenses. The management reasonably determines the estimates in consideration of past results and other factors, but actual results may be different from the estimates because of the uncertainties of the estimates. The important accounting policies are stated in V. Financial Information, 1. Consolidated Financial Statements, (1) Consolidated Financial Statements – Notes (Significant matters that serve as the basis for the preparation of consolidated financial statements). Of the accounting estimates used in the preparation of the consolidated financial statements and the assumptions used for the estimates, important estimates and assumptions are stated in V. Financial InformationStatus, 1. Consolidated Financial Statements Etc., (1) Consolidated Financial Statements – Notes (Significant accounting estimates). 2) Analysis of financial conditions (Assets) Total assets at the end of the fiscal year under review decreased ¥5,019 million from the end of the previous fiscal year (¥85,833 million), to ¥80,814 million. Current assets increased to ¥74,430 million from the end of the previous fiscal year (¥74,180 million). This mainly reflected an increase of ¥7,591 million in operational investment securities due to the reclassification of certain investment securities, which had been posted as non-current assets. This increase more than offset a decrease of ¥6,138 million in cash and deposits. Non-current assets amounted to ¥6,384 million, decreasing from the end of the previous fiscal year (¥11,653 million). This was primarily attributable to a decrease of ¥4,608 million in investment securities due to the reclassification of certain investment securities into operational investment securities in current assets. (Liabilities) Total liabilities at the end of the fiscal year under review decreased ¥4,990 million from the end of the previous fiscal year (¥10,053 million), to ¥5,063 million. Current liabilities totaled ¥4,922 million, down from ¥9,521 million at the end of the previous fiscal year. This is largely due to a decrease of ¥2,981 million in income taxes payable and a fall of ¥1,384 million in accrued consumption taxes. Non-current liabilities amounted to ¥141 million, declining from ¥532 million at the end of the previous fiscal year. This mainly reflected a decrease of ¥323 million in asset retirement obligations. (Net assets) Net assets at the end of the fiscal year under review totaled ¥75,751 million, down ¥28 million from the end of the previous fiscal year (¥75,779 million). This primarily reflected a decrease of ¥147 million in retained earnings chiefly due to profit attributable to owners of parent and dividends paid. – 22 – 3) Analysis of operating results (Net sales) (Cost of sales, gross profit) Net sales in the fiscal year under review stood at ¥37,125 million, down 17.7% year on year, chiefly reflecting a decrease in sales due to the prolonged distribution periods of certain games. Cost of sales came to ¥24,108 million, down 0.7% year on year, chiefly due to a decrease in platform fees. Gross profit was ¥13,016 million, down 37.6% year on year. (Selling, general and administrative expenses, operating profit) Selling, general and administrative expenses stood at ¥6,695 million, down 22.2% year on year, reflecting the optimization of expenses. The resulting operating profit was ¥6,320 million, down 48.4% year on year. (Non-operating income and expenses and ordinary profit) Non-operating income amounted to ¥1,947 million, up 267.0% year on year, chiefly due to an increase in gain on sale of investment securities. Non-operating expenses were ¥424 million, down 57.1% year on year, primarily due to a decrease in loss on valuation of investment securities. The resulting ordinary profit was ¥7,843 million, down 33.5% year on year. (Extraordinary income and losses and profit attributable to owners of parent) Extraordinary losses came to ¥3,591 million, up 321.5% year on year, chiefly reflecting the posting of settlement package. As a result, profit attributable to owners of parent stood at ¥3,047 million, down 61.8% year on year. An overview of cash flows in the fiscal year under review is described in (1) Overview of operating results, etc, 2) Status of cash 4) Analysis of cash flows flows. 5) Factors that have a significant impact on operating results As stated in II. Business Overview, 2. Business Risk, the Group is aware that a variety of risk factors may significantly affect its operating results, including the speed of market growth, competition with competitors, the degree of response to innovation, the ensuring of the soundness of content, network failure, and compliance and internal control systems. The Group will diversify risk factors that may significantly affect its operating results, curb the materialization of risk, and deal with risks appropriately by expanding its business portfolio, which consists primarily of the Entertainment Business and Investment and Development Business, employing capable people, developing new busine