20-F: Earlyworks Revenue Surges, Nasdaq Delisting Looms

Earlyworks Co., Ltd. reported significant revenue growth for fiscal year 2025, driven by software development, but faces substantial doubt about its ability to continue as a going concern and a Nasdaq delisting threat.

Summary

• Total operating revenues for the fiscal year ended April 30, 2025, increased by 145.5% to JPY 440.4 million (US$3.1 million) from JPY 179.4 million in the prior year.
• Net loss for FY2025 decreased to JPY 256.7 million (US$1.8 million) from JPY 336.2 million in FY2024.
• Software and system development services revenue surged by 198.8% to JPY 375.3 million (US$2.6 million) in FY2025, now accounting for 85.2% of total revenue.
• Consulting and solution services revenue increased by 2,221.3% to JPY 65.0 million (US$0.5 million) in FY2025.
• Revenue from the sale of NFTs decreased by 100% to nil in FY2025, as resources were reallocated to core growth areas.
• The company received a Nasdaq delisting notice on May 2, 2025, for failing to maintain a minimum market value of listed securities of $35 million and was granted an extension until September 19, 2025, to comply with the $2.5 million stockholders' equity rule.
• Auditors expressed "substantial doubt about the Company's ability to continue as a going concern" due to significant losses and the need for additional funds.
• A lawsuit was filed against the company and CEO Satoshi Kobayashi on December 18, 2023, seeking $2,925,747 in damages, with JPY 31,486,253 (US$220,755) in bank accounts temporarily seized.
• Management identified a material weakness in internal controls over financial reporting due to insufficient financial reporting and accounting personnel.

Sentiment

Score: 3

Explanation: While the company demonstrated strong revenue growth in its core services and reduced its net loss, these positives are severely overshadowed by critical risks. The 'substantial doubt about its ability to continue as a going concern' from auditors, the active Nasdaq delisting process, a significant lawsuit with seized assets, and identified material weaknesses in internal controls indicate profound operational and financial instability. The urgent need for capital, despite a potential raise, highlights the precarious financial position. The overall outlook is highly uncertain and negative.

Positives

• Total operating revenues increased by 145.5% to JPY 440.4 million (US$3.1 million) in FY2025, demonstrating strong top-line growth.
• Software and system development services revenue grew by 198.8% to JPY 375.3 million (US$2.6 million), becoming the primary revenue driver and indicating strong demand for core blockchain solutions.
• Consulting and solution services revenue increased significantly by 2,221.3% to JPY 65.0 million (US$0.5 million), reflecting successful project completion and increased service requests.
• Net loss decreased to JPY 256.7 million (US$1.8 million) in FY2025 from JPY 336.2 million in FY2024, indicating improved operational efficiency or cost management.
• Research and development expenses decreased by 43.2% to JPY 43.3 million (US$0.3 million) due to project completion and bringing staff in-house, suggesting more efficient R&D operations.
• Received government grants of JPY 21.255 million (US$149,022) in FY2025, providing non-dilutive funding.
• The completion of the Grid Ledger System (GLS) SDK in FY2024 enabled the company to provide services that meet customer needs and contributed to revenue growth.
• The Nasdaq listing increased the company's industry presence and bolstered trust from other companies, contributing to revenue growth.
• The company's proprietary GLS technology is highlighted as superior to conventional blockchains, offering high processing speed (0.016 seconds per transaction), parallel processing, auto-scale functions, high tamper-resistance, zero server downtime, versatile applications, emergency stop, lower construction/maintenance costs, and flexible fees.
• The company maintains a robust research and development team and collaborates with academia (Professor Kazuyuki Shudo) and business partners (NTT Docomo, NEC Communication Systems) to advance its technology.
• Strategic focus on expanding GLS deployment into eight key sectors: stablecoins, carbon offset, advertising, supply chain, entertainment, energy, trade logistics, and insurance, indicating a clear growth strategy.

Negatives

• Auditors expressed "substantial doubt about the Company's ability to continue as a going concern" due to significant losses and the need to raise additional funds.
• Received a Nasdaq delisting notice on May 2, 2025, for failing to meet the $35 million minimum market value requirement, with an extension granted only until September 19, 2025, to comply with the $2.5 million stockholders' equity rule.
• An ongoing lawsuit against the company and CEO Satoshi Kobayashi seeks $2,925,747 in damages, and JPY 31,486,253 (US$220,755) in company bank accounts have been temporarily seized.
• Management identified a material weakness in internal controls over financial reporting due to insufficient financial reporting and accounting personnel, which has not been fully remediated.
• Heavy reliance on a limited number of major customers, with two customers accounting for 50.7% and 35.7% of total sales revenue in FY2025, posing a significant concentration risk.
• Net cash used in operating activities was JPY 191.7 million (US$1.3 million) in FY2025, indicating continued cash burn from operations.
• Revenue from NFT sales decreased by 100% to nil in FY2025, indicating a complete shift away from this revenue stream.
• Foreign exchange loss of JPY 10.2 million (US$0.1 million) was recorded in FY2025, compared to a gain in FY2024.
• The company has limited experience operating as a public company, which may strain resources and divert management attention.
• Share ownership is highly concentrated, with CEO Satoshi Kobayashi beneficially owning 62.76% of outstanding Ordinary Shares, potentially limiting influence for other shareholders.
• The company does not intend to pay dividends for the foreseeable future, meaning investor returns depend solely on share price appreciation.

Risks

• Blockchain is a nascent and rapidly changing technology, and the slowing or stopping of its development or acceptance may adversely affect the business.
• Inability to apply technology effectively in driving value for customers through blockchain-based solutions, or failure to keep pace with rapid technological changes, could adversely affect the value proposition.
• GLS may not gain acceptance or recognition in a market dominated by more established and conventional technologies, or competitors may invent similar technologies.
• Inability to adequately evaluate the legal, regulatory, and cybersecurity risks associated with NFT platforms.
• Dependence on stable telecommunications infrastructure and the performance of devices equipped with blockchain.
• Cybersecurity incidents, security breaches, computer malware, and hacking attacks could result in significant legal and financial exposure and damage to reputation.
• Operational system failures or interruptions due to reliance on third-party systems and software.
• Inability to successfully compete with entities having substantially greater capital and resources and offering a wider range of products and services.
• Inability to protect or preserve proprietary rights (intellectual property, trade secrets) against imitation or infringement.
• Negative publicity regarding the company, its technology, key personnel, or blockchain technology generally could damage business prospects.
• Infringement on the intellectual property rights of others, potentially leading to significant costs and management distraction.
• Inability to successfully identify, hire, and retain highly skilled professionals and software engineers.
• Loss of key personnel, particularly management and officers, could have a material adverse effect.
• Risk of employee or contractor misconduct, including fraud, conflicts of interest, or unauthorized disclosure of confidential information.
• Adverse effects if vendors and third-party service providers experience difficulties, terminate services, or raise prices.
• Dependence on a limited number of major customers, where the loss of any or their inability to make payments could materially harm the business.
• Difficulty executing growth strategy and maintaining growth effectively, potentially leading to unanticipated costs.
• Risks associated with exploring acquisitions, other investments, and strategic alliances, including integration difficulties and unknown liabilities.
• Inability to obtain additional financing on commercially acceptable terms, adversely affecting liquidity and financial condition.
• Operational risk arising from inadequate or failed internal processes, people, systems, or external events.
• Insufficient insurance coverage for potential losses and claims.
• Involvement in legal and other proceedings, such as the current lawsuit, could result in substantial costs and diversion of resources.
• General economic, political, and market conditions, including global events like conflicts, epidemics, and natural disasters, may adversely impact operating performance.
• Uncertain regulatory regimes governing blockchain technologies, with new regulations or policies potentially affecting development.
• Ineffective compliance and risk management programs could adversely affect reputation, financial condition, and operating results.
• Limited experience operating as a public company, potentially leading to slower reactions to industry changes and diversion of management attention.
• The requirements of being a public company may strain resources and increase legal, accounting, and financial compliance costs.
• Concentration of share ownership in management, allowing significant influence over shareholder-approved matters.
• The sale or availability for sale of substantial amounts of ADSs could adversely affect their market price.
• If securities or industry analysts do not publish research or publish negative reports, the price of ADSs and trading volume could decline.
• The market price of ADSs may be volatile or decline regardless of operating performance due to numerous factors beyond control.
• Failure to implement and maintain an effective system of internal control could lead to material misstatements, loss of investor confidence, and delisting.
• As a foreign private issuer, following home country practice provides less protection than for shareholders of domestic issuers.
• No intention to pay dividends for the foreseeable future, meaning return on investment depends entirely on price appreciation.
• Rights of shareholders under Japanese law may be different from rights in other jurisdictions.
• ADS holders may have fewer rights than holders of Ordinary Shares and must act through the depositary.
• Direct acquisition of Ordinary Shares by foreign investors is subject to prior filing requirements under the Japanese Foreign Exchange and Foreign Trade Act (FEFTA).
• ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement.
• ADS holders may not receive distributions on Ordinary Shares if it is illegal or impractical to make them available.
• Limitations on transfer of ADSs.
• The deposit agreement may be amended without consent from holders of ADSs.
• Difficulty enforcing judgments obtained in courts outside Japan.
• Dividend payments and sale proceeds will be affected by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen.
• Ceasing to qualify as a foreign private issuer would require full compliance with U.S. domestic issuer reporting requirements, incurring significant additional expenses.
• Inability to satisfy the continued listing requirements and other rules of Nasdaq could lead to delisting, negatively impacting price and liquidity.
• As an emerging growth company, taking advantage of certain exemptions makes it difficult to compare performance with other public companies and could affect investor confidence.
• Classification as a Passive Foreign Investment Company (PFIC) could have adverse U.S. federal income tax consequences for U.S. taxpayers.

Future Outlook

The company aims to establish itself as a key technology enabler by expanding the real-world deployment of its proprietary Grid Ledger System (GLS) across eight key sectors: stablecoins, carbon offset, advertising, supply chain, entertainment, energy, trade logistics, and insurance. This strategy involves strengthening R&D investments, attracting top-tier engineering and business talent, and pursuing potential strategic alliances both domestically and globally. The viability of the business is dependent on the availability of adequate capital and attracting customers, with management actively pursuing debt and equity financing.

Management Comments

• Our mission is to optimize business operations with our creative ideas and the use of blockchain technology.
• We believe in a data centric future where blockchain technology will be indispensable and widely used, due to its efficiency, security, and reliability.
• We believe that GLS is superior to the conventional blockchains.
• We recognize that there is a lack of engineers who can handle blockchain in Japan, and we plan to increase the number of use cases for GLS and invest in researching and developing a universally usable System Development Kit (SDK) for GLS.
• We are a company that operates with an eye on the Web3. To that end, we hope that various applications using our blockchain technology will be developed and the industry as a whole will grow.
• We believe that our existing cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months from the date of this annual report.
• Management has commenced a strategy to raise debt and equity.

Industry Context

The company operates in the nascent and rapidly evolving blockchain technology industry, which is characterized by a high degree of uncertainty and rapid technological changes. It highlights the limitations of conventional blockchains, such as slow processing speed and poor real-time data processing, which its proprietary Grid Ledger System (GLS) aims to overcome. The company notes a lack of blockchain engineers in Japan and the absence of other publicly listed companies developing blockchain technology themselves, which has drawn attention to its unique capabilities. Earlyworks positions itself as a Web3-focused company, aiming to leverage blockchain as an infrastructural technology for AI, big data, and IoT.

Comparison to Industry Standards

• GLS transaction approval time can reach 0.016 seconds, significantly faster than conventional blockchains like EOS (3 seconds), Ethereum (15 seconds), and Bitcoin (10 minutes).
• GLS offers 'absolute finality' for real-time data processing, a feature the company believes conventional blockchains lack, making GLS better suited for commercial applications.
• GLS operates as a private blockchain, allowing for flexible fee structures, unlike public blockchains that typically charge fees for each transaction.
• The company believes it is one of the very few companies in Japan capable of commercializing blockchain technology, suggesting a competitive advantage in its home market.

Management Changes

Corporate Governance

Legal Proceedings

• A lawsuit was filed in the Tokyo District Court on December 18, 2023, against the company and CEO Satoshi Kobayashi.
• Plaintiffs allege CEO Kobayashi violated Article 709 of the Japanese Civil Code by intentionally delaying or misrepresenting procedures for share sales, thereby unfairly depriving them of the opportunity to sell shares at a higher price post-IPO.
• The plaintiffs are seeking monetary damages totaling $2,925,747, plus interest and costs.
• JPY 31,486,253 (US$220,755) in company bank accounts were temporarily seized on November 7, 2023, due to a Tokyo District Court order related to this lawsuit.
• The company believes the complaint is without merit and intends to vigorously defend the case, but acknowledges litigation is inherently uncertain and cannot reasonably estimate potential loss.

Related Party Transactions

• CEO Satoshi Kobayashi is a guarantor for the company's office space lease agreement, which expires on September 30, 2025.
• CEO Satoshi Kobayashi was a guarantor for two loan agreements with Kiraboshi Bank; one loan (JPY 35,000,000) matured and was paid off by April 30, 2025, while the other (JPY 50,000,000) had an outstanding principal balance of JPY 24,563,000 (US$172,214) as of April 30, 2025.
• CEO Satoshi Kobayashi was a joint guarantor for an overdraft agreement with Resona Bank, Ltd. (maximum JPY 100,000,000), which has been paid off as of the date of this annual report.
• On July 22, 2025, the company entered into a loan agreement with CEO Satoshi Kobayashi, borrowing JPY 17,000,000 (US$119,190) without interest, with a maturity date of September 30, 2025.

Stakeholder Impact

• Shareholders face significant risks including potential dilution from future capital raises, the threat of Nasdaq delisting, uncertainty regarding future dividend payments, and potential negative impacts on share price due to the ongoing lawsuit, going concern doubts, and internal control weaknesses. The concentrated ownership by management also limits the influence of other shareholders.
• Employees may experience uncertainty and potential impact on morale due to the company's financial instability and going concern doubts, although the company offers competitive compensation and development opportunities. The need to attract and retain skilled talent is critical for future growth.
• Customers may face potential disruptions if the company's financial instability or operational issues affect service delivery, although the company is focused on meeting their needs through GLS development and support.
• Creditors, particularly banks, face increased risk due to the company's going concern doubts and negative cash flow from operations. The CEO's personal guarantees on some loans mitigate some of this risk.
• Regulatory bodies like Nasdaq and the SEC are actively involved due to non-compliance with listing standards and identified material weaknesses in internal controls, requiring the company to take corrective actions.

Next Steps

• Regain compliance with Nasdaq Listing Rule 5550(b)(1) (minimum stockholders' equity of $2.5 million) by September 19, 2025.
• Remediate the material weakness in internal controls over financial reporting by appointing a Chief Financial Officer with relevant U.S. GAAP and SEC reporting experience, hiring additional qualified finance and accounting personnel, and implementing enhanced internal control procedures.
• Pursue additional financings through the issuance of equity or debt securities to meet capital requirements and support operations.
• Continue R&D investments in GLS and the GLS-SDK to expand use cases and develop a universally usable System Development Kit.
• Attract top-tier engineering and business talent to support growth strategies.
• Pursue potential strategic alliances both domestically and globally to strengthen the business.
• Expand the real-world deployment of GLS across eight key sectors: stablecoins, carbon offset, advertising, supply chain, entertainment, energy, trade logistics, and insurance.
• Renew the office lease agreement, which expires on September 30, 2025.
• Vigorously defend against the ongoing lawsuit filed by certain shareholders in the Tokyo District Court.

Key Dates

Recommendation

Despite strong revenue growth in core services and a reduction in net loss, the company faces severe, immediate threats that fundamentally undermine its investment viability. The 'substantial doubt about its ability to continue as a going concern' from its auditors, the active Nasdaq delisting process (with a short compliance deadline), a significant lawsuit with seized assets, and identified material weaknesses in internal controls collectively present an extremely high-risk profile. While a capital raise is in progress, its success and terms are uncertain, and the company's current equity is far below Nasdaq's alternative listing standard. These factors indicate profound financial instability and a high probability of significant capital loss, warranting a 'strong sell' recommendation for any seasoned investor.

Keywords

Blockchain, Grid Ledger System, GLS, Software Development, Consulting Services, Japan, SEC Filing, 20-F, Nasdaq, Delisting, Going Concern, Cybersecurity, Web3, Financial Technology, Distributed Ledger, NFT