システナ（2317） – [Delayed] Consolidated Financial Results for the Fiscal Year Ended March 31, 2022 (Under Japanese GAAP)

Note: This document has been translated from the Japanese original for reference purposes only. In the event of any discrepancy between this translated document and the Japanese original, the original shall prevail. May 11,2022 Consolidated Financial Results for the Fiscal Year Ended March 31, 2022 (Under Japanese GAAP) Systena Corporation Company name: Tokyo Stock Exchange Listing: 2317 Securities code: https://www.systena.co.jp/ URL: Kenji Miura, Representative Director and President Representative: Takafumi Kai, Managing Director Inquiries: Telephone: +81-3-6367-3840 Scheduled date of annual general meeting of shareholders: Scheduled date to commence dividend payments: Scheduled date to file annual securities report: Preparation of supplementary material on financial results: Holding of financial results briefing: June 23, 2022 June 9, 2022 June 23, 2022 Yes Yes (for institutional investors and analysts) 1. Consolidated financial results for the fiscal year ended March 31, 2022 (from April 1, 2021 to March 31, (Yen amounts are rounded down to millions, unless otherwise noted.) 2022) (1) Consolidated operating results (Percentages indicate year-on-year changes.) Net sales Operating profit Ordinary profit Profit attributable to owners of parent Fiscal year ended March 31, 2022 March 31, 2021 Millions of yen % Millions of yen % Millions of yen % Millions of yen % 65,272 60,871 7.2 (5.7) 9,106 8,006 13.7 (1.9) 8,578 7,507 14.3 (4.6) 5,992 4,974 20.5 (9.1) Note: Comprehensive income For the fiscal year ended March 31, 2022: For the fiscal year ended March 31, 2021: ¥6,089 million ¥5,018 million [21.3%] [(8.9)%] Basic earnings per share Diluted earnings per share Return on equity Ratio of ordinary profit to total assets Ratio of operating profit to net sales Fiscal year ended March 31, 2022 March 31, 2021 Yen 15.47 12.84 Yen – – % % % 21.6 20.6 20.8 20.1 14.0 13.2 Reference: Share of profit (loss) of entities accounted for using equity method For the fiscal year ended March 31, 2022: For the fiscal year ended March 31, 2021: ¥(144) million ¥(748) million Note: The Company implemented a four-for-one common stock split effective December 1, 2021. Basic earnings per share has been calculated assuming the stock split was conducted at the beginning of the previous fiscal year. (2) Consolidated financial position As of March 31, 2022 March 31, 2021 Reference: Equity Total assets Net assets Equity-to-asset ratio Net assets per share Millions of yen Millions of yen 43,477 38,886 30,173 25,996 % 68.5 65.9 Yen 76.83 66.17 As of March 31, 2022: As of March 31, 2021: ¥29,762 million ¥25,632 million Note: The Company implemented a four-for-one common stock split effective December 1, 2021. Net assets per share has been calculated assuming the stock split was conducted at the beginning of the previous fiscal year. (3) Consolidated cash flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Cash and cash equivalents at end of period Fiscal year ended March 31, 2022 March 31, 2021 Millions of yen Millions of yen Millions of yen Millions of yen 5,544 7,205 (559) (1,562) (1,905) (1,983) 21,964 18,875 2. Cash dividends Annual dividends per share First quarter-end Second quarter-end Third quarter-end Fiscal year-end Total Total cash dividends (Total) Payout ratio (Consolidated) Ratio of dividends to net assets (Consolidated) Fiscal year ended March 31, 2021 Fiscal year ended March 31, 2022 Fiscal year ending March 31, 2023 (Forecast) Yen Yen Yen Yen Yen Millions of yen – – – 10.00 10.00 4.00 – – – 10.00 20.00 1,945 3.50 – 2,334 4.00 8.00 % 38.9 38.8 44.3 Note: The Company implemented a four-for-one common stock split effective December 1, 2021. The stated year-end dividend per share for the fiscal year ended March 31, 2022 takes the said stock split into account. The total annual dividend for the fiscal year ended March 31, 2022 is not shown because a simple total cannot be calculated due to the implementation of the stock split. The annual dividend per share for the fiscal year ended March 31, 2022 that does not take the stock split into account is 24 yen (the interim dividend of 10 yen per share and year-end dividend of 14 yen per share). % 8.0 8.4 3. Consolidated earnings forecasts for the fiscal year ending March 31, 2023 (from April 1, 2022 to March 31, 2023) Net sales Operating profit Ordinary profit Millions of yen % Millions of yen % Millions of yen (Percentages indicate year-on-year changes.) Basic earnings per share Profit attributable to owners of parent Millions of yen % % Yen 18.07 Fiscal year ending March 31, 2023 71,450 9.5 10,280 12.9 10,280 19.8 7,000 16.8 * Notes (1) Changes in significant subsidiaries during the period (changes in specified subsidiaries resulting in the change in scope of consolidation): None (2) Changes in accounting policies, changes in accounting estimates, and restatement (i) Changes in accounting policies due to revisions to accounting standards and other regulations: Yes (ii) Changes in accounting policies due to other reasons: None (iii) Changes in accounting estimates: None (iv) Restatement: None (3) Number of issued shares (common shares) (i) Total number of issued shares at the end of the period (including treasury shares) (ii) Number of treasury shares at the end of the period As of March 31, 2022 As of March 31, 2021 As of March 31, 2022 As of March 31, 2021 (iii) Average number of shares outstanding during the period Fiscal year ended March 31, 2022 Fiscal year ended March 31, 2021 450,880,000 shares 450,880,000 shares 63,483,788 shares 63,505,356 shares 387,386,464 shares 387,371,768 shares Notes: 1. The Company has introduced a stock compensation plan, and in calculating the number of common treasury shares at the end of the period and the average number of shares outstanding during the period, the number of treasury shares includes shares of the Company held by Japan Custody Bank, Ltd. (the Trust Account) as trust assets for the “Trust for Granting Shares to Directors and Executive Officers” and the “Trust for Granting Shares to Executive Officers.” The number of treasury shares held by the Trust Account included in the number of treasury shares at the end of the fiscal years ended March 31, 2022 and March 31, 2021 was 1,612,300 shares and 1,634,000 shares, respectively, and the number of treasury shares held by the Trust Account excluded from the calculation of the average number of shares outstanding during the fiscal years ended March 31, 2022 and March 31, 2021 is as follows: the average number of common treasury shares held by the Trust Account for the years ended March 31, 2022 and March 31, 2021 were 1,622,086 shares and 1,636,938 shares, respectively. 2. The Company implemented a four-for-one common stock split effective December 1, 2021. Number of shares has been calculated assuming the stock split was conducted at the beginning of the previous fiscal year. [Reference] Overview of non-consolidated financial results 1. Non-consolidated financial results for the fiscal year ended March 31, 2022 (from April 1, 2021 to March 31, 2022) (1) Non-consolidated operating results (Percentages indicate year-on-year changes.) Net sales Operating profit Ordinary profit Profit Fiscal year ended March 31, 2022 March 31, 2021 Millions of yen % Millions of yen % Millions of yen % Millions of yen % 58,110 54,794 6.1 (6.9) 8,500 7,483 13.6 (4.1) 8,455 7,705 9.7 (0.4) 5,566 4,510 23.4 (11.6) Fiscal year ended March 31, 2022 March 31, 2021 Basic earnings per share Diluted earnings per share Yen 14.37 11.64 Yen – – Note: The Company implemented a four-for-one common stock split effective December 1, 2021. Basic earnings per share has been calculated assuming the stock split was conducted at the beginning of the previous fiscal year. (2) Non-consolidated financial position Total assets Net assets Equity-to-asset ratio Net assets per share Millions of yen Millions of yen 39,797 35,891 27,684 24,062 % 69.6 67.0 Yen 71.46 62.12 As of March 31, 2022 March 31, 2021 Reference: Equity As of March 31, 2022: As of March 31, 2021: ¥27,684 million ¥24,062 million Note: The Company implemented a four-for-one common stock split effective December 1, 2021. Net assets per share has been calculated assuming the stock split was conducted at the beginning of the previous fiscal year. * Financial results reports are exempt from audit conducted by certified public accountants or an audit corporation. * Proper use of earnings forecasts, and other special matters Forward-looking statements in this material, including earnings forecasts, are based on information currently available to the Company and on certain assumptions deemed reasonable. Actual results may differ significantly due to various factors. For assumptions underlying the forecast and cautions regarding the use of earnings forecasts, please refer to “1. Overview of operating results, etc., (1) Overview of operating results for the period under review, (ii) Forecast for the next fiscal year” on page 6 of the Attached Materials. Attached Materials Table of Contents 1. Overview of operating results, etc. ………………………………………………………………………………………………………………………………….. 2 (1) Overview of operating results for the period under review ………………………………………………………………………………………….. 2 (2) Overview of financial position for the period under review …………………………………………………………………………………………. 8 (3) Basic policy on profit distribution and dividends for the fiscal year under review and the next fiscal year …………………… 10 (4) Business and other risks ………………………………………………………………………………………………………………………………………….. 10 (5) Issues to be addressed ……………………………………………………………………………………………………………………………………………… 11 2. Corporate group ………………………………………………………………………………………………………………………………………………………….. 13 3. Basic approach to the selection of accounting standards ………………………………………………………………………………………………… 13 4. Consolidated financial statements …………………………………………………………………………………………………………………………………. 14 (1) Consolidated balance sheet ……………………………………………………………………………………………………………………………………… 14 (2) Consolidated statement of income and consolidated statement of comprehensive income ……………………………………………. 16 Consolidated statement of income ……………………………………………………………………………………………………………………………… 16 Consolidated statement of comprehensive income ………………………………………………………………………………………………………. 17 (3) Consolidated statement of changes in equity …………………………………………………………………………………………………………….. 18 (4) Consolidated statement of cash flows ……………………………………………………………………………………………………………………….. 20 (5) Notes to the consolidated financial statements ………………………………………………………………………………………………………….. 22 (Notes on premise of going concern) …………………………………………………………………………………………………………………………….. 22 (Significant matters that serve as the basis for preparing consolidated financial statements) …………………………………………………. 22 (Significant accounting estimates) ………………………………………………………………………………………………………………………………… 24 (Changes in accounting policies) ………………………………………………………………………………………………………………………………….. 25 (Unapplied accounting standards, etc.) ………………………………………………………………………………………………………………………….. 26 (Additional information)……………………………………………………………………………………………………………………………………………… 26 (On the consolidated balance sheet) ……………………………………………………………………………………………………………………………… 27 (On the consolidated statements of income) …………………………………………………………………………………………………………………… 27 (On the consolidated statement of comprehensive income) ………………………………………………………………………………………………. 28 (On the consolidated statement of changes in equity) ……………………………………………………………………………………………………… 29 (On the consolidated statement of cash flows) ……………………………………………………………………………………………………………….. 31 (Lease transactions) ……………………………………………………………………………………………………………………………………………………. 31 (Financial instruments) ……………………………………………………………………………………………………………………………………………….. 32 (Securities) ……………………………………………………………………………………………………………………………………………………………….. 35 (Retirement benefits) ………………………………………………………………………………………………………………………………………………….. 36 (Tax effect accounting) ……………………………………………………………………………………………………………………………………………….. 37 (Revenue recognition) ………………………………………………………………………………………………………………………………………………… 38 (Segment information, etc.) …………………………………………………………………………………………………………………………………………. 39 (Information on related parties) ……………………………………………………………………………………………………………………………………. 43 (Per share information) ……………………………………………………………………………………………………………………………………………….. 43 (Significant subsequent events) ……………………………………………………………………………………………………………………………………. 44 5. Non-consolidated financial statements …………………………………………………………………………………………………………………………… 45 (1) Non-consolidated balance sheet ……………………………………………………………………………………………………………………………….. 45 (2) Non-consolidated statement of income ……………………………………………………………………………………………………………………… 48 (3) Non-consolidated statement of changes in equity ………………………………………………………………………………………………………. 50 (4) Notes to the non-consolidated financial statements ……………………………………………………………………………………………………. 52 (Notes on premise of going concern) …………………………………………………………………………………………………………………………….. 52 (Significant accounting policies) ………………………………………………………………………………………………………………………………….. 52 (Significant accounting estimates) ………………………………………………………………………………………………………………………………… 54 (Changes in accounting policies) ………………………………………………………………………………………………………………………………….. 54 (Additional information)……………………………………………………………………………………………………………………………………………… 55 (On the non-consolidated balance sheet) ……………………………………………………………………………………………………………………….. 55 (On the non-consolidated statements of income) …………………………………………………………………………………………………………….. 55 (Securities) ……………………………………………………………………………………………………………………………………………………………….. 55 (Tax effect accounting) ……………………………………………………………………………………………………………………………………………….. 56 (Significant subsequent events) ……………………………………………………………………………………………………………………………………. 56 6. Other ………………………………………………………………………………………………………………………………………………………………………….. 57 The Company will hold a briefing session for investors as follows. The materials distributed at the briefing will be posted on the Company’s website immediately after the briefing. ・May 16, 2022 (Monday): Company Information Briefing for Institutional Investors and Analysts – 1 – 1. Overview of operating results, etc. Matters discussed here that are not historical fact reflect judgments made as of the end of the fiscal year under review. (1) Overview of operating results for the period under review (i) Operating results for the period under review During the fiscal year under review (April 1, 2021 to March 31, 2022), the Japanese economy saw exports continue to increase against the backdrop of recovery in overseas economies, but domestic demand was affected by restrictions on economic activities due to the COVID-19 pandemic, with only a moderate recovery mainly in individual consumption. Toward the end of the period, amid rising inflationary pressures worldwide, the high prices of resources and raw materials following Russia’s military invasion of Ukraine and the rapid weakening of the yen became further risk factors for the economy. Amid this environment, the Group continued to promote its business activities, focusing on IT support and software development support through remote sales and teleworking. With regard to the launch of new projects, the Group pursued aggressive sales development, including development of new clients through inbound sales utilizing web content and gradually increasing face-to-face meetings due to a rise in physical commute ratios among clients. In the Solution Design Business, the Group focused on expansion in the in-vehicle, Internet business, IoT, robotics/AI, and DX fields, where significant growth is expected. Here, the Group worked to further increase orders and improve profitability by further utilizing near-shore development at regional bases and off-shore development in Vietnam. In the Framework Design Business, the Group deployed its system development expertise from the financial sector to customers in the public and distribution/services sectors, and worked to expand orders in the business application development and infrastructure (cloud) architecture operations. In the IT Service Business, the Group grew its customer pool and sales volumes by further strengthening alliances with Group companies and partner companies, as well as by promoting the development of IT service products through the use of inbound sales. In the Business Solution Business (renamed from the Solution Sales Business), the Group actively pursued orders for projects to respond to the shift to digital technologies, as well as orders for system development and maintenance and operation projects by strengthening cooperation with the DX Promotion Department, which handles robotic process automation (RPA) and data linkage tools integrated at the beginning of the fiscal year under review. In the Cloud Business, which is responsible for promoting the subscription business model, the Group extended the functionality of its Canbus. and Cloudstep in-house products, actively promoting sales through web marketing. In addition, the Group is developing commercial products with keywords such as IoT, security, and blockchain, and promoting collaboration with subsidiaries and venture companies in Japan and overseas to achieve sales globally. As a result of the above, consolidated results for the period under review were net sales of ¥65,272 million (up 7.2% year-on-year), operating profit of ¥9,106 million (up 13.7% year-on-year), ordinary profit of ¥8,578 million (up 14.3% year-on-year), and profit attributable to owners of parent of ¥5,992 million (up 20.5% year-on-year). In the fiscal year under review, the Company reviewed its business management categories and changed the classification of its reportable segments as follows. The business of ProVision Co., Ltd., which had been classified under the Solution Design Business, was reclassified into the IT Service Business, and the business of IDY Corporation, which had also been classified under the Solution Design Business, was reclassified into the Business Solution Business. In addition, new service areas such as RPA, which had been classified under the Framework Design Business, have been reclassified into the Business Solution Business. The following describes performance by segment. Note that net sales for each segment include inter-segment sales or transfers. For comparisons with the previous fiscal year, figures for the previous fiscal year have been reclassified into the new reportable segments. – 2 – a. Solution Design Business The Solution Design Business is divided into five categories: In-Vehicle, Social Infrastructure, Internet Business, Products, and DX Services. Net sales in this business amounted to ¥20,663 million (up 7.8% year-on-year), and operating profit was ¥4,132 million (up 14.0%). (In-Vehicle) In the in-vehicle category, featuring development of elements such as Mobility as a Service (MaaS), autonomous driving, in-vehicle infotainment, telematics,1 and the development of electronic control units (ECUs), the Group achieved significant sales growth in MaaS-related services thanks to differentiation from competitors owing to technological capabilities that leverage the Group’s experience in the in-vehicle business and telecommunications business. In particular, there is a rising number of projects seeking commercialization through proof of concept (PoC), and this is expected to grow further. In addition, in-vehicle infotainment and telematics are also on a recovery track, and the Group will continue to take aggressive actions to advance these areas. Furthermore, the Group has positioned these areas as long-term priority focus areas, and through its participation in the MONET Consortium,2 the Group will aim to further enhance its business value in the mobility field. 1 Telematics is a term created from the combination of “telecommunication” and “informatics.” It is a generic term for the provision of services using mobile communication systems, such as mobile phones, to automobiles and other mobile objects. 2 MONET Consortium is a consortium established by MONET Technologies Inc., a joint venture between SoftBank Corp. and Toyota Motor Corporation, to promote next-generation mobility services, solve social issues in mobility, and create new value. (Social Infrastructure) In the social infrastructure category, the Group supports the mechanisms of society, including telecommunications infrastructure, payment infrastructure, transportation infrastructure, power grids, and more, and enriches people’s lives. Here, sales grew significantly, especially in services related to the development of 5G infrastructure. In addition, with the spread of 5G infrastructure, orders for service development utilizing this network have been brisk. As demand for the development of services utilizing 5G is expected to increase in the future, the Group will closely monitor trends in projects related to 5G infrastructure. (Internet Business) In fields related to the Internet Business, such as Internet services and e-commerce, sales remained steady in service development for 5G, cashless payment in e-commerce, and system development and verification related to the utilization of personal data. Orders from companies seeking to further strengthen their cashless payment ecosystems were particularly strong. This area is expected to continue to grow due to rising demand amid the COVID-19 pandemic. (Products) In fields related to product development, including smartphones, home appliances, and robotics, development and quality verification associated with smart home appliances experienced steady growth with the keywords “AI” and “IoT,” strengths of the Group. In addition to product development and quality verification, the Group’s ability to provide one-stop support throughout the product lifecycle, including environment construction and support, also differentiates the Group from its competitors and has helped it achieve steady results. The Group will continue to expand orders received further by flexibly resolving both emergent and latent issues through its one-stop services. (DX Services) In the DX Services field, the Group has received many inquiries thanks to its offerings utilizing in-house services and open source software (OSS) in addition to conventional system development service as demand increases for achieving digital transformation (or DX, the concept of improving all aspects of life and business through permeation of information technologies). The Group will continue to focus on – 3 – expanding its in-house services while strengthening its sales capabilities and aggressively developing new clients in this field. Regarding the status of the Group’s response to COVID-19 and its impact on activities within this business, the Group has shifted to telecommuting in many business areas, successfully mitigating risks facing the continuation of business activities. The Group will continue to promote business by taking rigorous infection control measures. b. Framework Design Business In this business, the Group harnessed its track record in application development in the financial sector to expand the scope of its offerings to customers in the public sector, distribution/services, and in social infrastructure, leading to an increase in orders. In the financial sector, the Group provides core system development services for customers in the banking industry and life and non-life insurance businesses. The Group achieved expanded sales not only in long-term development work in areas such as contract management systems and accounts systems, but also by expanding its scope of services to include Internet banking and new systems such as the construction of data utilization infrastructures. In the public sector, sales increased due to the expansion of projects related to taxpayer identification numbers (My Number) and education. New projects are being acquired in the areas of system development, infrastructure construction, and operation and maintenance. Going forward, the Group will continue to actively develop these as new pillars of this business. In addition, for general corporate clients, the Group won commissioned development projects and advanced proposals for business improvement projects using DX solutions. The Group’s total system support proposals, from proof of concept support in the system planning stages to operations after system development, have led to an increase in orders. As a result, net sales in this business amounted to ¥5,143 million (up 14.3% year-on-year) and operating profit was ¥1,014 million (up 31.5% year-on-year). c. IT Service Business As more and more companies, regardless of industry, are promoting DX and reforming work styles, there is movement to restructure and optimize existing IT environments, leading to expanding demand for IT outsourcing, including IT support services for companies that are creating new business models. Under these circumstances, the Group focused its efforts in its core businesses, providing services directly related to accelerating its customers’ business growth. These core businesses consist of not only contract IT support and PMO services, including assessment and consulting, leveraging the Group’s experience in addressing customer demands by responding to changes in the environment, but also IT solution sales for IT training, security services, and more. In the software testing services business, the Group worked to expand orders and improve profitability by offering testing services across all processes, from quality control process consulting to debugging, to customers who provide web content/applications in a B2B2C model. In addition, the Group established a new location to promote engagement of persons with disabilities and actively invested in the hiring and training of talented human resources throughout this business to further expand its business and improve profitability. With regard to its measures against COVID-19 within this business, the Group continues to shift from a full-time, on-site work style to telecommuting and remote service provision, utilizing inbound sales in its sales activities. As a result, net sales in this business amounted to ¥15,690 million (up 14.8% year-on-year) and operating profit was ¥2,197 million (up 17.3% year-on-year). d. Business Solution Business In this business, where the Group is mainly engaged in B2B sales of IT-related products and system integration services mainly for foreign-affiliated and medium-sized companies, projects addressing the shift to digital technologies began to gradually gain traction in the continuing difficult environment amid the COVID-19 pandemic. – 4 – Specifically, the system integration business was able to win a number of orders for virtualized infrastructure replacements with core system functions, server relocations, and lift and shift, a type of cloud migration. In addition, the Group successfully won orders for system development and maintenance and operation projects responding to the shift to digital technologies by strengthening cooperation with the DX Promotion Department, which handles RPA and data linkage tools integrated at the beginning of the fiscal year under review. However, due to the continued difficulty in procuring IT equipment such as PCs, servers, storage, and network equipment due to a worldwide shortage of semiconductors in addition to prolonged business negotiations amid the COVID-19 pandemic, hardware sales declined, resulting in net sales of ¥22,290 million (down 0.2% year-on-year) and operating profit of ¥1,436 million (down 4.2% year-on-year) in this business. e. Cloud Business In this business, where the Group provides cloud solutions and original services to companies and other entities, the Group received many inquiries for its Canbus.3,4 DX platform from companies urgently seeking work style reforms, including telecommuting. In particular, the Group not only sold licenses to companies seeking to shift to data-driven operations, but also received many orders for integration projects, including operational system replacement and system integration. Amid this situation, the Group accelerated its launch of new functions and alliances to help more companies achieve DX. Going forward, the Group will continue to promote aggressive investment and sales reinforcement in this priority offering area. In addition, inquiries for the Cloudstep3 groupware, integrated with Google Workspace and Microsoft 365, have been very strong for rebuilding groupware architecture suited to work styles amid the COVID-19 pandemic. Amid these circumstances, a factor differentiating the Group from its competitors and generating orders is system integration, an area of strength for the Group. As a result, net sales in this business amounted to ¥1,804 million (up 21.6% year-on-year) and operating profit was ¥406 million (up 35.3% year-on-year). 3 Canbus. and Cloudstep are original Systena services. 4 “Canbus.” in the Japanese market is pronounced canbus dot. f. Overseas Business The Company’s U.S. subsidiary enjoyed strong orders for additional development of new DX-based operational improvement application functions, including continuing orders from existing Japanese-affiliated customers in the manufacturing industry, thanks to aggressive sales activities despite the COVID-19 pandemic. AI and IoT projects have also realized operational efficiency improvements at local factories in the United States, etc., and the subsidiary has begun to receive orders under subscription models. The subsidiary has also received repeat orders for proof of concept development and verification where Japanese-affiliated firms check the effectiveness of elemental technologies held by Silicon Valley start-up companies. In addition, Canbus. is earning a track record of implementation thanks to its sales as a DX solution. Furthermore, ONE Tech, Inc., a U.S. company with capital contribution from the subsidiary has entered into a partnership agreement with Renesas Electronics Corporation and others to provide its MicroAI™ proprietary AI, and has formed alliances with several microcontroller unit (MCU) manufacturers and is actively engaged in joint sales. StrongKey, Inc., another U.S.-based company the subsidiary has invested in, is promoting sales activities for Tellaro, its enterprise security product, and is focusing on eliciting new inquiries and winning ongoing orders from client companies based on its capabilities in data encryption and strong authentication. In this business, which is still in the investment stage, net sales amounted to ¥176 million (down 6.5% year-on-year) and operating loss was ¥9 million (versus operating profit of ¥7 million in the previous fiscal year). – 5 – g. Investment & Incubation Business In order to promote sales of U.S.-based ONE Tech, Inc’s MicroAI™ IoT edge computing AI technology, ONE Tech Japan, Inc. worked with the U.S. subsidiary to prepare for online rollout of the MicroAI™ SDK. GaYa Co., Ltd., which provides development and operations for mobile game content, operates social games developed in-house and designs and develops business applications for smartphones and tablets. In the fiscal year under review, development of the new horse racing game application Keiba Densetsu PRIDE proceeded as planned, with a closed beta test conducted in March and development continuing diligently based on the feedback obtained from this test. Commissioned development for business applications has also moved into operation phases, as the organization works to promote horizontal deployment. As a result, net sales in this business amounted to ¥171 million (down 3.6% year-on-year) and operating loss was ¥72 million (versus operating loss of ¥71 million in the previous fiscal year). (ii) Forecast for the next fiscal year The outlook for the next fiscal year by segment is as follows. Within the Solution Design Business, the Group will focus on the In-Vehicle, Social Infrastructure, Internet Business, Smart Devices/Robotics/AI, and DX Services areas, making greater efforts to promote near-shore development using regional bases and off-shore development in Vietnam and working to further expand orders and improve profitability. In the In-Vehicle area, in addition to strengthening relationships with automotive-related companies and developing in-vehicle infotainment, telematics, and electronic control units (ECUs), areas of particular strength, the Group will focus on expanding its mobility services business harnessing the strength of its expertise in 5G and artificial intelligence (AI). In the Internet Business area, the market for telecommunications carrier services, e-commerce, e-books, and other Internet services, as well as cashless payments, is expected to expand as 5G enters a phase of full-scale penetration. Here, as the market expands, the Group is receiving many inquiries not only for technical support services, like development and quality verification, but also for service support such as service direction and operation. Going forward, the Group will actively work not only on development but also on these services overall. In the Social Infrastructure area, in addition to development and quality verification related to 5G infrastructure equipment, the Group will expand and enhance its services to include maintenance and operation ahead of 5G coverage area expansion. The Group will also actively engage in proof of concept testing for smart cities and other projects by utilizing its expertise in IoT and AI. In the Smart Devices area, the Group will harness its strong track record in smartphone development services to aggressively develop quality verification services related to 5G, IoT, AI services, and more amid increasing inquiries about web services and IoT-related services, in addition to development and quality verification for various products such as smartphones, game consoles, and payment terminals. In the Robotics/AI area, the Group will utilize its strong expertise in communication robots to continue to strengthen its sales activities with regard to medical robots, industrial robots, and lifestyle robots associated with long-term care and daily life. In addition, as the spread of COVID-19 changes the way people work, the Group expects demand in the areas of RPA and robotics to increase, and the Group will provide technical and service support in robotics to help grow orders received. In the DX Services area, enterprises are urgently tasked with improving productivity and operational efficiency, partly due to soaring raw material prices. Amid this increasing demand, the Group will not only promote the application of DX to its clients’ B2B systems, but also differentiate itself from competitors by developing a wider range of in-house services and products to address emergent and latent issues faced by clients in order to grow orders received and improve profitability. Regarding the status of the Group’s response to COVID-19 and its impact on activities within this business, the Group has shifted to telecommuting in each business area, successfully mitigating risks so as to ensure the continuation of business. However, on the short term, there is the potential of temporary order postponement in operational support that is more challenging to provide on a telecommuting basis. This is of particular concern for some operations in the In-Vehicle, Social Infrastructure, and Robotics/AI businesses. In addition, the area of business systems is susceptible to customer cost-cutting and investment limitations, – 6 – and likewise, there are concerns about order postponement over the short term. On the other hand, inquiries for the Internet Business and 5G-related services remain strong even under today’s conditions. Amid these circumstances, this business will engage in selection and concentration, with the goal of shifting to areas where demand is greater. In the Framework Design Business, the Group is expanding business in the public and corporate sectors by deploying business system development expertise it has cultivated in the financial sector. Going forward, the Group will continue to maximize its current services and aggressively develop business, promoting sales activities and human resource development in line with market trends. Within the existing system development business, the Group will expand its offerings for business operators in retail, distribution, and Internet services in addition to the ongoing large-scale financial (life and non-life insurance) and public sector projects, aggressively pursuing business development utilizing the Group’s development expertise. In the infrastructure-related business, the Group is expanding its business with a focus on technical support for the introduction of public cloud ecosystems. The Group expects the need for cloud-related technical support to continue, and will continue to actively cultivate personnel for further business expansion. In the DX-related business, inquiries for operational improvement projects utilizing DX solutions are increasing. The Group will focus on training professional engineers for building system integration infrastructure with DX solutions at its core. In addition, the Group is expanding development projects for core system renewal (mainframe migration) and cloud-native systems (serverless systems), and will continue to aggressively pursue orders for DX-related projects. As its sales policy, the Group will continue to maximize utilization of online environments to expand proposal opportunities and improve customer response speed, with an eye to maintaining business in the COVID era. In the IT Service Business, demand is expected to expand for IT support services, software testing services, and other IT outsourcing services as more and more companies, regardless of industry engage in DX promotion and reform of work styles. Amid these circumstances, the Group leveraged its track record in IT support and deployed its management resources to the growing field of DX. Going forward, the Group will focus on providing services more directly connected to client business growth by evolving its lineup from simple helpdesk and other IT support services to project management office (PMO) and internal IT infrastructure improvement proposals. In software testing services, the Group has worked to expand orders and improve profitability in testing services provided across all processes, from quality control process consulting to debugging, to customers who provide web/application-related solutions in a B2C model. As the Group expands its business in the B2B2C domain going forward, it will also focus on expanding services by offering its software testing expertise to B2B customers supporting social infrastructure. With regard to promoting engagement of persons with disabilities, the Group will focus on acquiring a wide range of service projects, primarily in business process outsourcing (BPO), and promote the creation of an environment in which they can engage in higher value-added work by better grasping the characteristics and individual traits of each person. In addition, the Group will create new IT service solutions and improve profitability by developing new services and expanding the scope of support through alliances with Group companies and partner companies and by strengthening inside sales. In the Business Solution business, despite a sense of future uncertainty due to a prolonged COVID-19 pandemic, product delays caused by semiconductor supply shortages, and soaring commodity prices due to high resource prices, enterprises are expected to maintain steady investment in IT, tackling new work styles in the COVID era and using DX to improve productivity, cut costs, and build competitiveness. In this business, the Group will expand its solution services to address these economic issues and those of its customers. Specifically, the Group will shift its focus from product-oriented businesses to service businesses and – 7 – further strengthen its recurring revenue businesses, centered on subscription businesses and support services. As an area of particular focus, the Group will expand its services and enhance its support structure to ensure security on the whole, not only at endpoints. In addition, since robust growth is expected in the infrastructure business, the Group will work to provide higher value-added services, such as modernizing legacy infrastructure and providing hybrid environments integrated with the cloud. The DX Promotion Department (system development division), which handles RPA and data linkage tools integrated in the previous fiscal year, will further promote cloud migration, which saw significant growth in the last fiscal year. It will also provide rapid development services utilizing application restructuring and data linkage tools in addition to conventional system development to further promote expansion. This will allow the Group to continue to improve the services it offers to customers, transforming it into a system integrator and improving profitability. In the Cloud Business, the Group is working to strengthen sales of Canbus., a solution realizing data-driven operations by creating databases of various operations, including customer relationship management (CRM), recruitment management, and human and other resource management. This solution is designed to help drive changes in corporate management, who are tasked with transformation amid impact of the spread of COVID-19. In these days of ever-accelerating DX with an eye to the post-COVID world, the Group will continue to make upfront investments to strengthen its services and increase awareness, laying the foundation for business growth and developing new services. The Group will also strengthen its existing Cloudstep service in order to further improve profitability. In the Overseas Business, the U.S. subsidiary will promote sales to enterprises worldwide through the provision of the MicroAI™ AI solution in cooperation with solution provider ONE Tech, Inc., also based in the United States and a company with capital contribution from the subsidiary. The Group will also aim to expand Canbus., provided by its Cloud Business, to the U.S. market. The Group intends to continue operating in the black thanks to expansion of collaborative projects with these investees and robust demand for technical support from Japanese-affiliated companies in the United States. In the Investment & Incubation Business, GaYa Co., Ltd. plans to release horse racing game Keiba Densetsu PRIDE in the summer of 2022, a game planning and development project, and will focus on the operation of this title. In non-game application development utilizing game development technology, the Group will promote a full stack of services, from design to development to support. Based on the above, the Group forecasts consolidated results for the next fiscal year of net sales of ¥71,450 million, operating profit of ¥10,280 million, ordinary profit of ¥10,280 million, and profit attributable to owners of parent of ¥7,000 million. (2) Overview of financial position for the period under review (i) Analysis of assets, liabilities and net assets Total assets at the end of the fiscal year under review amounted to ¥43,477 million (versus ¥38,886 million at the end of the previous fiscal year), an increase of ¥4,590 million from the end of the previous fiscal year. Current assets amounted to ¥38,002 million (versus ¥33,420 million at the end of the previous fiscal year), an increase of ¥4,581 million from the end of the previous fiscal year. This was mainly due to a ¥2,619 million increase in cash and deposits, a ¥1,497 million increase in notes and accounts receivable – trade, and contract assets (compared to notes and accounts receivable – trade at the end of the previous fiscal year), and a ¥319 million increase in merchandise. Non-current assets amounted to ¥5,475 million (versus ¥5,465 million at the end of the previous fiscal year), an increase of ¥9 million from the end of the previous fiscal year. Property, plant and equipment amounted to ¥1,058 million (versus ¥917 million at the end of the previous fiscal year), an increase of ¥140 million from the end of the previous fiscal year. Intangible assets amounted to ¥278 million (versus ¥307 million at the end of the previous fiscal year), a decrease of ¥29 million from the end of the previous fiscal year. Investments and other assets amounted to ¥4,138 million (versus ¥4,240 million at the end of the previous fiscal year), a decrease of ¥102 million from the end of the previous fiscal year. This was mainly – 8 – due to a ¥498 million increase in allowance for doubtful accounts (the balance of investments and other assets decreased due to the allowance) and a ¥527 million increase in leasehold and guarantee deposits. Total liabilities amounted to ¥13,303 million (versus ¥12,889 million at the end of the previous fiscal year), an increase of ¥414 million from the end of the previous fiscal year. This was mainly due to a ¥439 million increase in accounts payable – trade, a ¥203 million increase in accounts payable – other, and accrued expenses, and a ¥155 million decrease in income taxes payable. Net assets amounted to ¥30,173 million (versus ¥25,996 million at the end of the previous fiscal year), an increase of ¥4,176 million from the end of the previous fiscal year. This was mainly due to profit attributable to owners of parent of ¥5,992 million and dividends of surplus of ¥1,945 million. As a result, the equity-to-asset ratio increased 2.6 percentage points from the end of the previous fiscal year to 68.5%. (ii) Analysis of cash flows Cash and cash equivalents (“net cash”) at the end of the fiscal year under review amounted to ¥21,964 million, up ¥3,089 million from the end of the previous fiscal year. The following outlines the status and underlying change factors of each classification of cash flows for the fiscal year under review. (Cash flows from operating activities) Net cash provided by operating activities amounted to ¥5,544 million (versus ¥7,205 million provided in the previous fiscal year). The main inflows were profit before income taxes of ¥8,578 million, an increase in allowance for doubtful accounts of ¥460 million, an increase in trade payables of ¥438 million, and depreciation of ¥429 million. The main outflows were income taxes paid of ¥2,816 million and an increase in trade receivables of ¥1,494 million. (Cash flows from investing activities) Net cash used in investing activities amounted to ¥559 million (versus ¥1,562 million used in the previous fiscal year). The main outflows were ¥17,158 million for purchase of investment securities, ¥545 million for payments of leasehold and guarantee deposits, and ¥519 million for purchase of property, plant and equipment and intangible assets. The main inflows were ¥17,127 million in proceeds from sale of investment securities and ¥374 million in proceeds from withdrawal of time deposits. (Cash flows from financing activities) Net cash used in financing activities amounted to ¥1,905 million (versus ¥1,983 million used in the previous fiscal year). The main outflow was dividends paid of ¥1,938 million. Trends in the Group’s cash flow indicators are shown below. Equity-to-asset ratio (%) Equity-to-asset ratio on a market value basis (%) Ratio of interest-bearing debt to cash flows (%) Interest coverage ratio (times) Fiscal year ended March 31, 2020 Fiscal year ended March 31, 2021 Fiscal year ended March 31, 2022 68.5 63.0 394.8 32.1 663.8 65.9 550.9 21.5 1,022.4 384.0 28.0 777.6 Equity-to-asset ratio: Shareholders’ equity ÷ Total assets Equity-to-asset ratio on a market value basis: Market capitalization ÷ Total assets Ratio of interest-bearing debt to cash flows: Interest-bearing debt ÷ Cash flows Interest coverage ratio: Cash flows / Interest payments For each indicator, all calculations are based on consolidated financial figures. Market capitalization is calculated by multiplying the number of shares outstanding minus the number of treasury shares by the closing stock price, both as of the end of the fiscal year. Interest-bearing debt is all debt on the consolidated balance sheet for which interest is paid. Cash flows and interest payments refer to “Cash flows from operating activities” and “Interest paid” as reported in the consolidated statement of cash flows. – 9 – (3) Basic policy on profit distribution and dividends for the fiscal year under review and the next fiscal year The Company recognizes that returning profits to shareholders is one of its most important management issues, and its basic policy is to distribute profits in accordance with business performance, with a foundation of ongoing, stable dividends. The Company will be proactive in targeting a consolidated dividend payout ratio of 40% or more, taking into consideration its business performance and financial position for each fiscal year, as well as the strengthening of its management base and future business development. The Company will also flexibly implement share repurchases as part of its profit return policy, taking into consideration such factors as its financial condition and stock price trends. The Company implemented a four-for-one stock split of its common stock, effective December 1, 2021, in order to lower the amount required per investment unit of stock, increase the liquidity of the Company’s stock, and further expand its investor base. For the fiscal year under review, the Company plans to pay an annual dividend of ¥6 per share, calculated on the assumption that the stock split had been conducted at the beginning of the fiscal year. This consists of a year-end dividend of ¥3.5 per share (after stock split) and an interim dividend of ¥10 per share (before stock split). Retained earnings will be effectively used for investment in business fields where growth is expected, research and development of in-house products, and strengthening of recruitment and training of human resources in line with business expansion. For the next fiscal year, the Company plans to pay an annual dividend of ¥8 per share (consisting of an interim dividend of ¥4 per share and a year-end dividend of ¥4 per share). Note that the Company’s Articles of Incorporation stipulate that the Company may pay dividends from surplus, etc. by resolution of the Board of Directors pursuant to Article 459, Paragraph 1 of the Companies Act. (4) Business and other risks The following is a list of major risk factors that may affect the Group’s business development. While it is the Group’s policy to recognize the possibility of the occurrence of these risks and to make every effort to avoid their occurrence and to address any that may occur, the Group believes that investment decisions regarding this stock should be made after careful consideration of the following content provided in this section as well as other matters listed. This section includes forward-looking statements reflecting judgments made as of the end of the fiscal year under review. (i) Management of confidential information Since many of the Company’s operations require a high degree of confidentiality in terms of both technology and sales strategy and information security is becoming increasingly important, the Company has obtained ISO 27001 certification, the international standard for information security management, and is taking rigorous action to ensure this certification is applied and enforced. If, despite these actions, information leaks were to occur, the Company could face compensation for damages, decreasing business orders due to loss of trust, and other significant effects on the business, which could affect the Group’s performance and financial position. (ii) Legal regulations The legal regulations surrounding the Group’s business are as follows. a. Act against Delay in Payment of Subcontract Proceeds, etc. to Subcontractors This law specifies the obligation to deliver an order form, to prepare and preserve documents, to specify a due date for payment of subcontract proceeds (the obligation to pay within 60 days after delivery or provision of services), to pay interest on late payment, etc., when a corporation with capital of over ¥300 million subcontracts to a corporation with capital of ¥300 million or less. The law was amended in June 2003 (effective April 1, 2004) to add subcontracting for the creation of information-based products (programs, broadcast programs, etc.), provision of services, and manufacture of metal dies to the scope of the law. As a result, subcontracting transactions for the creation of information-based products (programs) related to the Group are covered and subject to legal regulations. b. Act on Securing the Proper Operation of Worker Dispatching Businesses and Protecting Dispatched Workers (“Worker Dispatching Act”) – 10 – The purpose of this act is “to take measures for securing proper operation of a worker dispatching business for the proper adjustment of labor demand and supply, in conjunction with the Employment Security Act, as well as measures for protecting dispatched workers, and thereby to contribute to the stability of employment and otherwise to the promotion of the welfare of dispatched workers” (Article 1). In accordance with this act, the Group has been licensed for general worker dispatching business. Reasons for disqualification of license for general worker dispatching are stipulated in the items of Article 6 of this act. Furthermore, Article 14 of this act stipulates that if a general worker dispatching business operator (including its officers) falls under any of the items of Article 6 of the act after license registration, the Minister of Health, Labour and Welfare may rescind the license granted to said general worker dispatching business operator. Article 14 also stipulates that, when a general worker dispatching business operator violates the provisions of the act or the Employment Security Act, or any orders or dispositions based on these provisions, the Minister of Health, Labour and Welfare may order the operator to suspend all or part of the relevant worker dispatching business for a designated period of time. In addition, the Group submits business reports and settlements of accounts associated with worker dispatching to the Minister of Health, Labour and Welfare in accordance with this act. Since the Group has established a system that complies with laws and regulations, and its officers are also committed to compliance with laws and regulations, there are currently no factors present that could hinder business activities. Although the Group will continue to make every effort to comply with laws and regulations, any violation of laws and regulations may lead to restrictions on its business, which could affect the Group’s performance. (iii) Impact from the spread of COVID-19 Since February 2020, when the issue of the spread of COVID-19 began to enter the public eye, the Group has been promoting infection control and business continuity measures in preparation for a worst-case scenario. Infection control measures include the installation of alcohol sanitizers for hand disinfection at the entrances to all rooms at not only the head office but all business locations, and mask recommendations have been put in place. In particular, in places where more than a certain number of people gather, companies distributed masks and established maximum possible social distance to prevent infection caused by physical contact and speaking. Based on guidance from industrial physicians and internal resident nurses, employees are provided with ongoing guidance for health management, including daily body temperature checks. Those employees who are not feeling well are suspended from commuting to work from initial stages so as to ensure clusters do not form within companies. Simultaneously, the Group took action to implement telecommuting, including procurement of laptop computers and other hardware, introduction of web conferencing systems and remote access tools for internal systems. Employees who are able to work from home are gradually transitioning to telecommuting. In addition, the Group is revising various internal rules and regulations and improving the degree of freedom employees have in the work hours in order to achieve a flexible work system in response to government policies and requests. Furthermore, to mitigate information security risks arising from the dispersion of work locations, the Group is strengthening employee training and clarifying guidelines and rules for establishing a telecommuting environment. In addition, the Group has partnered with a hospital to provide dedicated online medical care for employees, not only to prevent the spread of the virus, but also to create a system that enables early detection and rapid response in the event of an outbreak. As a result of these measures, the Company is now able to continue business operations equivalent to normal operations. (5) Issues to be addressed Impact from COVID-19 is gradually subsiding and the environment is finally becoming conducive to promoting proactive management toward a post-COVID era. The question of how quickly formerly-stagnant projects can be launched will make the difference between winning and losing in achieving the medium-term plan. Another important factor in achieving the Group’s goals is to present product alternatives amid a further-disrupted supply chain from the conflict in Ukraine and the resulting shortages of semiconductors and many other kinds of products, and to promote business negotiations in a beneficial manner. Despite a subsiding pandemic, the remote work-driven changes in business style are expected to largely – 11 – remain in the post-COVID era, and the Group sees the key to achieving its medium-term plan as capturing the accelerating trend of promoting digital transformation (DX)* in business scenes, driven by digital technologies like networks and cloud computing. With regard to recruitment plans, amid a freeze on hiring within the service and air transportation industries, the Group has been able to secure excellent talent with strong service mentalities inherent to these industries, and has been proactively recru