Summary of Consolidated Financial Results
For the Six-Month Period Ended September 30, 2019
[Japanese GAAP]
November 14, 2019
Company name: | FRONTEO, Inc. | |
Stock Exchange Listing: | Tokyo Stock Exchange | |
Stock code: | 2158 | |
URL: | http://www.fronteo.com/ | |
Representative: | Masahiro Morimoto, Chief Executive Officer and Chairman of the Board | |
Contact: | Tomohiro Uesugi, Director, Chief Financial Officer, and Chief Administrative Officer | |
Tel: | +81-3-5463-6344 | |
Scheduled date of filing Quarterly Financial Report: | November 14, 2019 | |
Scheduled date of commencement of dividend payment: | – | |
Supplementary materials for the quarterly financial results: | Yes | |
Briefing on the quarterly financial results: | Yes (for institutional investors and analysts) | |
(Amounts of less than one million yen are rounded down to the nearest million yen)
1. Consolidated Financial Results for the Six-Month Period Ended September 30, 2019 (from April 1, 2019 to September 30, 2019)
(1) Consolidated results of operations
(Percentage figures represent changes from the same period in the previous year)
Six-month period |
| Net sales |
| Operating (loss) income |
| Ordinary (loss) income |
| Net (loss) income |
| ||||||||
ended |
| Millions of yen |
| % |
| Millions of yen |
| % |
| Millions of yen |
| % |
| Millions of yen |
| % |
|
September 30, 2019 |
| 4,909 |
| (12.5 | ) | (775 | ) | — |
| (827 | ) | — |
| (938 | ) | — |
|
September 30, 2018 |
| 5,610 |
| (4.1 | ) | 196 |
| — |
| 299 |
| — |
| 185 |
| — |
|
Note: Comprehensive (loss) income
Six-month period ended September 30, 2019 |
| ¥(1,106) million [–%] |
|
Six-month period ended September 30, 2018 |
| ¥476 million [–%] |
|
Six-month period |
| Net (loss) income |
| Net income per share |
|
|
|
|
|
|
|
|
|
ended |
| Yen |
| Yen |
|
|
|
|
|
|
|
|
|
September 30, 2019 |
| (24.61 | ) | — |
|
|
|
|
|
|
|
|
|
September 30, 2018 |
| 4.88 |
| 4.67 |
|
|
|
|
|
|
|
|
|
(2) Consolidated financial position
|
| Total assets |
| Net assets |
| Equity ratio |
|
|
|
|
|
As of |
| Millions of yen |
| Millions of yen |
| % |
|
|
|
|
|
September 30, 2019 |
| 12,126 |
| 3,356 |
| 25.6 |
|
|
|
|
|
March 31, 2019 |
| 13,442 |
| 4,622 |
| 32.3 |
|
|
|
|
|
Reference: Equity
As of September 30, 2019 |
| ¥3,099 million |
|
As of March 31, 2019 |
| ¥4,344 million |
|
2. Dividends
|
| Dividend per share |
| ||||||||
|
| End of the |
| End of the |
| End of the |
| End of |
| Total |
|
|
| Yen |
| Yen |
| Yen |
| Yen |
| Yen |
|
Year ended March 31, 2019 |
| — |
| 0.00 |
| — |
| 3.00 |
| 3.00 |
|
Year ending March 31, 2020 |
| — |
| 0.00 |
|
|
|
|
|
|
|
Year ending March 31, 2020 (Forecast) |
|
|
|
|
| — |
| 3.00 |
| 3.00 |
|
Note: Changes from the latest dividend forecasts: None
3. Consolidated Forecasts for the Year Ending March 31, 2020 (from April 1, 2019 to March 31, 2020)
(Percentages represent year-on-year changes)
|
| Net sales |
| Operating income |
| Ordinary income |
| Net income |
| Net income |
| ||||||||
For the year |
| Millions |
| % |
| Millions |
| % |
| Millions |
| % |
| Millions |
| % |
| Yen |
|
March 31, 2020 |
| 10,500 |
| (6.8 | ) | (750 | ) | — |
| (840 | ) | — |
| (1,000 | ) | — |
| (26.22 | ) |
Note: Changes from the latest consolidated forecasts: Yes
Notes:
(1) | Changes in significant subsidiaries during the six-month period ended September 30, 2019 (changes in the scope of consolidation): None | |||
|
| |||
(2) | Application of specific accounting treatments for the preparation of the quarterly consolidated financial statements: Yes | |||
|
| |||
(3) | Changes in accounting policies, changes in accounting estimates, and restatements | |||
|
|
|
| |
| 1) | Changes in accounting policies associated with the revision of accounting standards: | Yes | |
| 2) | Changes in accounting policies other than the 1) above: | None | |
| 3) | Changes in accounting estimates: | None | |
| 4) | Restatements: | None | |
|
|
|
| |
(4) | Number of issued and outstanding shares (common stock) | |||
|
| |||
| 1) | Number of issued and outstanding shares (including treasury stock) | ||
|
| As of September 30, 2019: | 38,149,862 shares | |
|
| As of March 31, 2019: | 38,123,862 shares | |
|
|
|
| |
| 2) | Number of treasury stock |
| |
|
| As of September 30, 2019: | 696 shares | |
|
| As of March 31, 2019: | 696 shares | |
|
|
|
| |
| 3) | Average number of issued and outstanding shares during the six-month period ended | ||
|
| September 30, 2019: | 38,140,823 shares | |
|
| September 30, 2018: | 38,078,753 shares | |
|
|
|
| |
* | This summary of quarterly consolidated financial results falls outside the scope of quarterly review procedures to be performed by certified public accountants or an audit firm. | |||
|
| |||
* | Explanations concerning the appropriate use of the forecasts for results of operations and other special matters | |||
|
| |||
| · | The forecasts for results of operations in this report are based on information currently available to FRONTEO, Inc. (the “Company”) and assumptions determined to be reasonable, and are not intended to assure achievement of the Company’s operations. Actual results may differ significantly from the forecasts due to various factors. | ||
Table of Contents of Attachment
1. | Qualitative Information on Financial Results for the Six-Month Period Ended September 30, 2019 | 2 | |
|
|
| |
| (1) | Explanations regarding the operating results | 2 |
|
|
|
|
| (2) | Explanations regarding the consolidated financial position | 5 |
|
|
|
|
| (3) | Explanations regarding the forecasts for the consolidated financial results | 6 |
|
|
|
|
2. | Quarterly Consolidated Financial Statements | 7 | |
|
|
|
|
| (1) | Quarterly consolidated balance sheets | 7 |
|
|
|
|
| (2) | Quarterly consolidated statements of operations and consolidated statements of comprehensive income | 9 |
|
|
|
|
| (3) | Quarterly consolidated statements of cash flows | 11 |
|
|
|
|
| (4) | Notes to the quarterly consolidated financial statements | 12 |
|
|
| |
| Going concern assumptions | 12 | |
|
|
| |
| Significant changes in shareholders’ equity | 12 | |
|
|
| |
| Specific accounting treatments for the preparation of the quarterly consolidated financial statements | 12 | |
|
|
| |
| Changes in accounting policies | 12 | |
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| |
| Segment information | 13 | |
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| |
| Significant subsequent events | 14 |
1. Qualitative Information on Financial Results for the Six-Month Period Ended September 30, 2019
(1) Explanations regarding the operating results
The Company and its consolidated subsidiaries (the “Group”) operate in accordance with their mission of “Being a Bright Value Creator—providing solutions to unearth risks and opportunities buried deep within data to bring fairness into an information society.” Making full use of the Group’s sophisticated information analysis technologies, particularly a proprietary artificial intelligence (AI)-based search engine called KIBIT and Concept Encoder (CE), the Group has been contributing to the creation of an environment where users can obtain essential and appropriate information and to solve challenges faced by society in a wide array of fields from the Group’s founding business of international litigation support and fraud investigation services to other businesses, including manufacturing, finance, retail, logistics, healthcare, and nursing.
In the “LegalTech AI business,” the eDiscovery market (comprised of contracts with companies in Asia) is expected to continue to expand at approximately 15% annually (Mordor Intelligence “Global e-Discovery Market 2017-2023”). This is primarily driven by a continuous increase in the volume of electronically stored information held by companies subject to the eDiscovery process. Meanwhile, the pressure for lower prices of analysis service per data volume increases each year, which has led a number of vendors to suffer from unprofitable projects under such circumstances. As a result, some eDiscovery vendors outsource their review process, which has high labor costs and low profit margins, to subcontractors.
The review process is a step that incurs 70% of the total eDiscovery process costs, but with an improvement in efficiency by use of technologies, it is possible to substantially reduce the amount of time spent on the review process and improve profit margins. The Company has sophisticated information analysis technologies and sees this as a substantial opportunity for its business.
In an effort to respond quickly to these changes in the market environment, the Company released “KIBIT Automator,” an AI review tool, in March 2019 and has been promoting its document review services using the tool. As a result, the effectiveness of the “KIBIT Automator” has been assessed highly through verification testing and actual review processes by multiple customers in Japan and the United States. In Japan, the Company has seen cases where only AI reviews are required without any human checks so that a human reviewer is able to review the remaining documents, while still maintaining the same quality as traditional reviews carried out by humans. In the United States, it was confirmed through verification testing that the Company has successfully enhanced the review speed, at least twice the speed of the Company’s conventional review tool, and as a result, collaboration between the Company and leading law firms is on rise.
Additionally, in order to make the fundamental transition to a business model that is geared towards AI technology, the Company has implemented numerous measures, beginning in the three-month period ended September 30, 2019, to increase awareness and implementation of AI solutions in the eDiscovery market, including establishment of the Customer Success Business Headquarters, which is focused on the mission of promoting adoption and diffusion of AI and strengthening of promotional activities through the use of digital marketing.
Nonetheless, in addition to a market environment, including business trends, that is constantly changing in recent years, the fundamental shift in the business model through sales and marketing measures, and optimization of human resources by the Company is requiring more time than initially planned. As a result, the Company has not been able to successfully win new large-scale projects as expected. Regarding this shift in its business model, the Company has already made structural reforms in a subsidiary located in the United States. Furthermore, in order to accelerate the shift in the business model on a global basis, the Company plans to increase its ability to secure orders by taking promotional activities of the “KIBIT Automator” to another level and establishing a sales structure that suits each business flow, including establishing a cross-sectional function that is specialized in corporate sales.
In the AI Solution business, the Group performed well in Japan in the fields of business intelligence and healthcare. As a result, the total number of companies that have implemented the Company’s AI products increased to 203 (1.6 times year on year) in the AI Solutions business, and net sales in the overall AI Solution business for the six-month period ended September 30, 2019, increased significantly by 49% year on year. In the AI market in Japan, companies’ willingness to invest in AI has been growing, supported by “Work style reform” measures by the Japanese government aimed at improving productivity and labor automation in the context of a working population that is expected to decrease.
Under such circumstances, the Company has begun to provide to pharmaceutical companies solutions for daily and weekly report screening by medical representatives (MRs) utilizing its proprietary AI engine. The introduction of these solutions is closely linked with the “Guidelines for Prescription Drug Marketing Information Provision,” which was released and mandated by the Ministry of Health, Labour and Welfare of Japan in April 2019. Under the guidelines, management is required to reinforce existing fundamentals of leadership, supervision and internal structure in aspects of the preparation and retention of records, reflecting the work of MRs in their performance evaluation and establishing a supervisory division to monitor the appropriateness of the provision of prescription drug marketing information and marketing materials. In particular, tracking MR daily and weekly reports involves monitoring a large volume of data; therefore, securing sufficient man-hours and establishing the necessary structure have been big challenges for many companies. The solution offered by the Company supports comprehensive and effective screening of a large volume of MR daily and weekly report data, and in doing so, it can address the issues faced by customers and contribute to the expansion of their businesses.
In the healthcare field, the Company has begun to provide a tumbling and falling prediction system called “Coroban®” that uses the Company’s new AI-based search engine, CE, featuring objectivity, transparency, and reproducibility. The Company and Eisai Co., Ltd. (“Eisai”) commenced the joint development of “Coroban®” in January 2018. Utilizing Eisai’s network of medical institutions, “Coroban®” was introduced to numerous medical institutions in Japan on a trial basis and improved to meet the specific needs of the clinical setting. After all these efforts, “Coroban®” has been launched as a new product.
The Group will continue to utilize the strength of CE that enables natural language processing by statistical procedures that is essential for evidence-based medicine in the healthcare field and promotes the utilization of big data and the delivery of solutions in the healthcare field.
In its consolidated operating results for the six-month period ended September 30, 2019, the Group recorded net sales of 4,909,201 thousand yen (a 12.5% decrease year-on-year) and operating loss of 775,819 thousand yen (operating income of 196,996 thousand yen for the same period in the previous year). The Group recorded ordinary loss of 827,959 thousand yen (ordinary income of 299,241 thousand yen for the same period in the previous year) due to revaluation of receivables from and to its subsidiaries denominated in foreign currencies, which were recorded by the Company, and foreign exchange loss of 53,537 thousand yen from a debt-equity-swap transaction with FRONTEO USA, Inc., a consolidated subsidiary of the Company. In addition, as a result of incurring one-time expenses related to a structural reform of FRONTEO USA, Inc. and recording such expenses as extraordinary losses of 156,464 thousand yen, the Group recorded net loss attributable to owners of the parent of 938,462 thousand yen (net income attributable to owners of the parent of 185,742 thousand yen for the same period in the previous year). The Group’s operating results underperformed compared with the same period in the previous year.
The following is an overview of the financial results of each business segment for the six-month period ended September 30, 2019:
LegalTech AI business
1) eDiscovery services
Net sales from eDiscovery services were 3,954,755 thousand yen, a decrease of 20.8% from the same period in the previous year. The decrease reflects a delayed response by the Group to the change in business trends. Previously, law firms were given a discretion to select an eDiscovery service provider, but now, it is their clients, who are highly conscious of the quality of services provided and costs, that select a service provider. To address changes in the market environment, the Group has embarked on a fundamental shift in its business model to one that is geared towards AI technology, but full-fledged development of the new business model is still in progress.
2) Forensic services
Net sales from forensic services were 356,176 thousand yen, an increase of 64.9% from the same period in the previous year, due to winning large-scale investigation projects that utilize AI technology in Japan, such as investigation support for third-party committees and increases in the number of projects related to the forensic investigation services for payment cards and consulting services.
As a result, net sales of the LegalTech AI business were 4,310,931 thousand yen, a decrease of 17.2% from the same period in the previous year. As shown in the segment information section below, the LegalTech AI business recorded operating loss of 626,852 thousand yen mainly due to a decrease in sales from hosting services with high profit margins and an increase in personnel expenses due to investments made in senior management-level personnel during the period (operating income of 271,834 thousand yen for the same period in the previous year).
Overview of net sales by service type is as follows:
(Thousands of yen)
Service type |
| Net sales |
| |
1. eDiscovery services | Review |
| 1,230,757 |
|
|
|
| (1,367,241 | ) |
| Collection and process |
| 687,056 |
|
|
|
| (1,057,619 | ) |
| Hosting |
| 2,036,941 |
|
|
|
| (2,567,831 | ) |
| Total |
| 3,954,755 |
|
|
| (4,992,692 | ) | |
|
|
|
| |
2. Forensic services |
| 356,176 |
| |
|
| (216,014 | ) | |
|
|
|
| |
Total net sales for the LegalTech AI business |
| 4,310,931 |
| |
|
| (5,208,707 | ) |
The amounts in parentheses are net sales for the same period in the previous year.
Overview of net sales by country of residence of customers is as follows:
(Thousands of yen)
Country of residence of customers |
| Net sales |
|
Japan and other countries in Asia |
| 2,107,084 |
|
|
| (2,392,949 | ) |
|
|
|
|
United States and Europe |
| 2,203,847 |
|
|
| (2,815,758 | ) |
|
|
|
|
Total net sales of the LegalTech AI business |
| 4,310,931 |
|
|
| (5,208,707 | ) |
The amounts in parentheses are net sales for the same period in the previous year.
AI Solution business
The AI Solution business grew steadily, supported by an increase in large-scale projects and the number of companies that introduced AI products in both business intelligence field and healthcare field. As a result, net sales from the AI Solution business were 598,269 thousand yen, an increase of 49.0% from the same period in the previous year. Nevertheless, despite an increase in sales, increases in indirect costs and continuous strengthening of internal resources led to operating loss of 148,966 thousand yen (operating loss of 74,838 thousand yen for the same period in the previous year). Expenses related to back-office divisions of the Company of 168,817 thousand yen were allocated to the AI Solution business.
Overview of net sales by service type is as follows:
(Thousands of yen)
Service type |
| Net sales |
| |
AI Solution business | Business intelligence |
| 534,172 |
|
|
|
| (362,244 | ) |
| Healthcare |
| 53,850 |
|
|
|
| (34,622 | ) |
| AI Solution-overseas |
| 10,247 |
|
|
|
| (4,632 | ) |
|
|
|
| |
Total net sales from the AI Solution business |
| 598,269 |
| |
|
| (401,499 | ) |
The amounts in parentheses are net sales for the same period in the previous year.
(2) Explanations regarding the consolidated financial position
(Assets)
Total assets decreased by 1,315,802 thousand yen to 12,126,822 thousand yen compared with the end of the previous year.
Current assets decreased by 969,602 thousand yen to 5,893,216 thousand yen compared with the end of the previous year. This was mainly attributable to the net effect of an increase of 241,859 thousand yen in prepaid expenses under “Other”, a decrease of 334,878 thousand yen in notes and accounts receivable-trade affected by decreased sales, and a decrease of 866,536 thousand yen in cash and deposits.
Noncurrent assets decreased by 346,200 thousand yen to 6,233,605 thousand yen compared with the end of the previous year. This was mainly attributable to a decrease of 126,320 thousand yen in goodwill due to the effects of foreign currency exchange rates and amortization, a decrease of 115,549 thousand yen in customer-related assets, and a decrease of 124,200 thousand yen in investment securities due to a decrease in the fair value of stocks held.
(Liabilities)
Total liabilities decreased by 49,883 thousand yen to 8,770,740 thousand yen compared with the end of the previous year.
Current liabilities increased by 481,663 thousand yen to 5,229,063 thousand yen compared with the end of the previous year. This was mainly attributable to an increase of 600,000 thousand yen in short-term loans payable due to new borrowings and a decrease of 90,522 thousand yen in accounts payable-other due to payments made.
Noncurrent liabilities decreased by 531,546 thousand yen to 3,541,677 thousand yen compared with the end of the previous year. This was mainly attributable to a decrease of 411,666 thousand yen in long-term loans payable due to repayments and a decrease of 83,418 thousand yen in deferred tax liabilities due mainly to valuation difference on available-for-sale securities.
(Net Assets)
Total net assets decreased by 1,265,918 thousand yen to 3,356,081 thousand yen compared with the end of the previous year. This was mainly due to a decrease of 1,086,066 thousand yen in retained earnings due to dividends and net loss attributable to owners of the parent, a decrease of 125,229 thousand yen in foreign currency translation adjustment, and a decrease of 52,935 thousand yen in valuation difference on available-for-sale securities.
(Analysis of cash flows)
As of September 30, 2019, cash and cash equivalents (“net cash”) were 3,028,481 thousand yen.
The analysis of cash flows for the six-month period ended September 30, 2019, and the primary factors for those results are as follows:
(Cash flows from operating activities)
Net cash used in operating activities was 358,105 thousand yen, a decrease of 425,996 thousand yen of cash provided as compared with that for the six-month period ended September 30, 2018. This was mainly attributable to recording of loss before income taxes.
(Cash flows from investing activities)
Net cash used in investing activities was 491,363 thousand yen, an increase of 87,766 thousand yen of cash used as compared with that for the six-month period ended September 30, 2018. This was mainly attributable to the 356,353 thousand yen used to purchase intangible assets.
(Cash flows from financing activities)
Net cash provided by financing activities was 6,436 thousand yen, a decrease of 742,431 thousand yen of cash used as compared with that for the six-month period ended September 30, 2018. This was mainly attributable to 1,700,000 thousand yen of proceeds from short-term loans payable, 1,100,000 thousand yen of repayment of short-term loans payable, and 477,266 thousand yen of repayment of long-term loans payable.
(3) Explanations regarding the forecasts for the consolidated financial results
Please refer to the separate press release issued today titled “Notice regarding FRONTEO’s Revision of Forecasts and Recording of Extraordinary Losses” for the consolidated operating forecasts for the year ending March 31, 2020.
Note: The operating forecasts are based on information currently available to the Company and contain uncertainties. Actual operating results may differ from the forecasts due to various factors.
2. Quarterly Consolidated Financial Statements
(1) Quarterly consolidated balance sheets
(Thousands of yen)
|
| As of March 31, 2019 |
| As of September 30, 2019 |
|
Assets |
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash and deposits |
| 3,926,008 |
| 3,059,471 |
|
Notes and accounts receivable-trade |
| 2,666,605 |
| 2,331,727 |
|
Merchandise |
| 1,051 |
| 77 |
|
Supplies |
| 2,826 |
| 2,769 |
|
Other |
| 351,042 |
| 614,167 |
|
Allowance for doubtful accounts |
| (84,715 | ) | (114,996 | ) |
Total current assets |
| 6,862,818 |
| 5,893,216 |
|
Noncurrent assets |
|
|
|
|
|
Property, plant, and equipment |
|
|
|
|
|
Buildings and structures, net |
| 145,194 |
| 120,213 |
|
Vehicles, net |
| 1,952 |
| 1,161 |
|
Tools, furniture, and fixtures, net |
| 483,269 |
| 500,424 |
|
Leased assets, net |
| 100,498 |
| 60,741 |
|
Other, net |
| 12,549 |
| 12,201 |
|
Total property, plant, and equipment |
| 743,464 |
| 694,741 |
|
Intangible assets |
|
|
|
|
|
Software |
| 878,980 |
| 976,146 |
|
Goodwill |
| 1,733,991 |
| 1,607,671 |
|
Customer-related assets |
| 1,599,671 |
| 1,484,121 |
|
Other |
| 326,763 |
| 340,228 |
|
Total intangible assets |
| 4,539,406 |
| 4,408,167 |
|
Investments and other assets |
|
|
|
|
|
Investment securities |
| 872,114 |
| 747,914 |
|
Guarantee deposits |
| 161,533 |
| 128,924 |
|
Long-term deposits |
| 221,980 |
| 215,840 |
|
Deferred tax assets |
| 11,123 |
| 11,916 |
|
Other |
| 30,183 |
| 26,101 |
|
Total investments and other assets |
| 1,296,934 |
| 1,130,696 |
|
Total noncurrent assets |
| 6,579,805 |
| 6,233,605 |
|
Total assets |
| 13,442,624 |
| 12,126,822 |
|
(Thousands of yen)
|
| As of March 31, 2019 |
| As of September 30, 2019 |
|
Liabilities |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Accounts payable-trade |
| 137,568 |
| 158,247 |
|
Short-term loans payable |
| 1,100,000 |
| 1,700,000 |
|
Current portion of long-term loans payable |
| 933,520 |
| 865,466 |
|
Current portion of bonds with subscription rights to shares |
| 1,250,000 |
| 1,250,000 |
|
Accounts payable-other |
| 331,838 |
| 241,316 |
|
Income taxes payable |
| 80,292 |
| 39,566 |
|
Provision for bonuses |
| 35,156 |
| 137,788 |
|
Provision for loss on business liquidation |
| 63,022 |
| 118,330 |
|
Other |
| 815,999 |
| 718,347 |
|
Total current liabilities |
| 4,747,399 |
| 5,229,063 |
|
Noncurrent liabilities |
|
|
|
|
|
Long-term loans payable |
| 3,475,323 |
| 3,063,656 |
|
Deferred tax liabilities |
| 167,825 |
| 84,407 |
|
Liabilities for retirement benefits |
| 49,991 |
| 62,399 |
|
Asset retirement obligations |
| 45,755 |
| 46,012 |
|
Other |
| 334,329 |
| 285,201 |
|
Total noncurrent liabilities |
| 4,073,224 |
| 3,541,677 |
|
Total liabilities |
| 8,820,624 |
| 8,770,740 |
|
Net assets |
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
Capital stock |
| 2,559,206 |
| 2,568,651 |
|
Capital surplus |
| 2,343,293 |
| 2,352,737 |
|
Retained earnings |
| (676,120 | ) | (1,762,187 | ) |
Treasury stock |
| (90 | ) | (90 | ) |
Total shareholders’ equity |
| 4,226,288 |
| 3,159,111 |
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
Valuation difference on available-for-sale securities |
| 530,444 |
| 477,509 |
|
Foreign currency translation adjustment |
| (412,128 | ) | (537,357 | ) |
Total accumulated other comprehensive income (loss) |
| 118,316 |
| (59,848 | ) |
Subscription rights to shares |
| 227,797 |
| 197,262 |
|
Noncontrolling interests |
| 49,597 |
| 59,555 |
|
Total net assets |
| 4,622,000 |
| 3,356,081 |
|
Total liabilities and net assets |
| 13,442,624 |
| 12,126,822 |
|
(2) Quarterly consolidated statements of operations and consolidated statements of comprehensive income
Quarterly consolidated statements of operations for the six-month period ended September 30, 2019
(Thousands of yen)
|
| For the six-month period |
| For the six-month period |
|
Net sales |
| 5,610,207 |
| 4,909,201 |
|
Cost of sales |
| 3,086,354 |
| 3,149,480 |
|
Gross profit |
| 2,523,853 |
| 1,759,721 |
|
Selling, general, and administrative expenses |
| 2,326,857 |
| 2,535,540 |
|
Operating income (loss) |
| 196,996 |
| (775,819 | ) |
Nonoperating income |
|
|
|
|
|
Interest income |
| 1,194 |
| 1,610 |
|
Dividend income |
| 14,400 |
| 18,000 |
|
Foreign exchange gains, net |
| 140,924 |
| — |
|
Other |
| 1,351 |
| 2,565 |
|
Total nonoperating income |
| 157,870 |
| 22,176 |
|
Nonoperating expenses |
|
|
|
|
|
Interest expenses |
| 23,412 |
| 16,786 |
|
Foreign exchange losses, net |
| — |
| 53,537 |
|
Syndicated loan fees |
| 21,006 |
| 1,583 |
|
Other |
| 11,204 |
| 2,410 |
|
Total nonoperating expenses |
| 55,624 |
| 74,317 |
|
Ordinary income (loss) |
| 299,241 |
| (827,959 | ) |
Extraordinary income |
|
|
|
|
|
Gain on reversal of subscription rights to shares |
| 16,990 |
| 31,952 |
|
Total extraordinary income |
| 16,990 |
| 31,952 |
|
Extraordinary losses |
|
|
|
|
|
Loss on retirement of noncurrent assets |
| 603 |
| 2,488 |
|
Restructuring expenses |
| — |
| 156,464 |
|
Total extraordinary losses |
| 603 |
| 158,953 |
|
Income (loss) before income taxes |
| 315,629 |
| (954,961 | ) |
Income taxes |
| 127,429 |
| (26,457 | ) |
Net income (loss) |
| 188,200 |
| (928,504 | ) |
Net income attributable to noncontrolling interests |
| 2,458 |
| 9,957 |
|
Net income (loss) attributable to owners of the parent |
| 185,742 |
| (938,462 | ) |
Quarterly consolidated statements of comprehensive income for the six-month period ended September 30, 2019
(Thousands of yen)
|
| For the six-month period |
| For the six-month period |
|
Net income (loss) |
| 188,200 |
| (928,504 | ) |
Other comprehensive income (loss) |
|
|
|
|
|
Valuation difference on available-for-sale securities |
| 66,812 |
| (52,935 | ) |
Foreign currency translation adjustment |
| 221,235 |
| (125,229 | ) |
Total other comprehensive income (loss) |
| 288,048 |
| (178,164 | ) |
Comprehensive income (loss) |
| 476,249 |
| (1,106,668 | ) |
Comprehensive income (loss): |
|
|
|
|
|
Comprehensive income (loss) attributable to owners of the parent |
| 473,790 |
| (1,116,626 | ) |
Comprehensive income attributable to noncontrolling interests |
| 2,458 |
| 9,957 |
|
(3) Quarterly consolidated statements of cash flows
(Thousands of yen)
|
| For the six-month period |
| For the six-month period |
|
Cash flows from operating activities: |
|
|
|
|
|
Profit (loss) before income taxes |
| 315,629 |
| (954,961 | ) |
Depreciation and amortization |
| 409,140 |
| 418,199 |
|
Amortization of goodwill |
| 76,435 |
| 75,284 |
|
Syndicated loan fees |
| 21,006 |
| 1,583 |
|
Loss on retirement of noncurrent assets |
| 603 |
| 2,488 |
|
Restructuring expenses |
| — |
| 156,464 |
|
Gain on reversal of subscription rights to shares |
| (16,990 | ) | (31,952 | ) |
Increase in liabilities for retirement benefits |
| 9,955 |
| 12,464 |
|
Increase in provision for bonuses |
| 145,184 |
| 103,641 |
|
Increase in allowance for doubtful accounts |
| 22,852 |
| 32,781 |
|
Interest and dividends income |
| (15,594 | ) | (19,610 | ) |
Interest expenses |
| 23,412 |
| 16,786 |
|
Foreign exchange (gains) losses |
| (135,322 | ) | 6,995 |
|
(Increase) decrease in notes and accounts receivable-trade |
| (163,181 | ) | 284,214 |
|
(Increase) decrease in inventories |
| (3,831 | ) | 999 |
|
(Decrease) increase in accounts payable-trade |
| (80,376 | ) | 24,395 |
|
Decrease in accounts payable-other |
| (338 | ) | (45,968 | ) |
Other, net |
| (250,890 | ) | (309,812 | ) |
Subtotal |
| 357,693 |
| (226,005 | ) |
Interest and dividends income received |
| 15,594 |
| 19,610 |
|
Interest expenses paid |
| (23,253 | ) | (15,680 | ) |
Payments for restructuring expenses paid |
| (87,424 | ) | (84,681 | ) |
Income taxes paid |
| (194,718 | ) | (51,349 | ) |
Net cash provided by (used in) operating activities |
| 67,890 |
| (358,105 | ) |
Cash flows from investing activities: |
|
|
|
|
|
Purchase of property, plant, and equipment |
| (136,848 | ) | (134,233 | ) |
Purchase of intangible assets |
| (214,865 | ) | (356,353 | ) |
Loan advances |
| (5,041 | ) | (5,413 | ) |
Collection of loans receivable |
| 1,430 |
| 3,721 |
|
Payments for guarantee deposits |
| (36,126 | ) | (3,136 | ) |
Proceeds from guarantee deposits |
| 9,524 |
| 4,050 |
|
Purchase of goodwill |
| (21,671 | ) | — |
|
Net cash used in investing activities |
| (403,597 | ) | (491,363 | ) |
Cash flows from financing activities: |
|
|
|
|
|
Proceeds from short-term loans payable |
| 1,190,000 |
| 1,700,000 |
|
Repayment of short-term loans payable |
| (1,590,000 | ) | (1,100,000 | ) |
Proceeds from long-term loans payable |
| 100,000 |
| — |
|
Repayment of long-term loans payable |
| (483,380 | ) | (477,266 | ) |
Repayment of finance lease obligations |
| (25,156 | ) | (26,264 | ) |
Proceeds from issuance of shares resulting from exercise of subscription rights to shares |
| 63,238 |
| 12,194 |
|
Cash dividends paid |
| — |
| (114,369 | ) |
Payments for acquisition of subsidiaries’ stock without change in the scope of consolidation |
| (1,000 | ) | — |
|
Payments of syndicated loan fees |
| (2,160 | ) | (1,080 | ) |
Other, net |
| (410 | ) | 349 |
|
Net cash used in financing activities |
| (748,868 | ) | (6,436 | ) |
Effect of exchange rate change on cash and cash equivalents |
| 68,697 |
| (38,419 | ) |
Net decrease in cash and cash equivalents |
| (1,015,877 | ) | (894,325 | ) |
Cash and cash equivalents at the beginning of the period |
| 5,127,345 |
| 3,922,806 |
|
Cash and cash equivalents at the end of the period |
| 4,111,467 |
| 3,028,481 |
|
(4) Notes to the quarterly consolidated financial statements
Going concern assumptions
Not applicable.
Significant changes in shareholders’ equity
There were no significant changes in shareholders’ equity compared with the end of the previous year.
Specific accounting treatments for the preparation of the quarterly consolidated financial statements
Income tax expenses are calculated by reasonably estimating the effective tax rate based on the expected income before income taxes (net of the effects of deferred taxes) for the fiscal year to which the six-month period pertains and multiplying income before income taxes for the six-month period by the estimated effective tax rate. Nevertheless, if income tax expenses calculated using the estimated effective tax rate result in significantly unreasonable amounts, the effective statutory tax rate is used for such calculation.
Changes in accounting policies
Application of Revenue from Contracts with Customers (Accounting Standards Codification (ASC) 606):
Overseas consolidated subsidiaries adopting generally accepted accounting principles (GAAP) in the United States of America have applied ASC 606 beginning from the three-month period ended June 30, 2019. The impact of the change on the quarterly consolidated financial statements is expected to be immaterial.
Segment information
I. Six-month period of the previous year (from April 1, 2018 to September 30, 2018)
1) Information relating to net sales and profits or losses for each reportable segment
(Thousands of yen)
|
| Reportable segment |
|
|
| Amounts |
| ||||
|
| LegalTech AI |
| AI Solution |
| Total |
| Adjustments |
| statements *1 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
(1) External sales |
| 5,208,707 |
| 401,499 |
| 5,610,207 |
| — |
| 5,610,207 |
|
(2) Intersegment sales and transfers |
| — |
| — |
| — |
| — |
| — |
|
Total |
| 5,208,707 |
| 401,499 |
| 5,610,207 |
| — |
| 5,610,207 |
|
Segment profits (losses) |
| 271,834 |
| (74,838 | ) | 196,996 |
| — |
| 196,996 |
|
Note:
(1) Total segment profits (losses) are equal to operating income (loss) reported in the quarterly consolidated statements of operations.
2) Information relating to assets for each reportable segment
Not applicable.
3) Information relating to impairment loss on property, plant, and equipment or goodwill for each reportable segment
Not applicable.
4) Matters relating to changes in reportable segments
Not applicable.
II. Six-month period of the current year (from April 1, 2019 to September 30, 2019)
1) Information relating to net sales and profits or losses for each reportable segment
(Thousands of yen)
|
| Reportable segment |
|
|
| Amounts |
| ||||
|
| LegalTech AI |
| AI Solution |
| Total |
| Adjustments |
| statements *1 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
(1) External sales |
| 4,310,931 |
| 598,269 |
| 4,909,201 |
| — |
| 4,909,201 |
|
(2) Intersegment sales and transfers |
| — |
| — |
| — |
| — |
| — |
|
Total |
| 4,310,931 |
| 598,269 |
| 4,909,201 |
| — |
| 4,909,201 |
|
Segment profits (losses) |
| (626,852 | ) | (148,966 | ) | (775,819 | ) | — |
| (775,819 | ) |
Notes:
(1) Total segment profits (losses) are equal to operating income (loss) reported in the quarterly consolidated statements of operations.
2) Information relating to assets for each reportable segment
Not applicable.
3) Information relating to impairment loss on property, plant, and equipment or goodwill for each reportable segment
Not applicable.
4) Matters relating to changes in reportable segments
Effective starting from the end of the fiscal year ended March 31, 2019, the names of the Company’s reportable segments have been changed as follows: the LegalTech business to the LegalTech AI business. The change is only applicable to the names, and therefore, there will be no effects on segment information.