business report final - raqualia.com · productivity and expand its r&d and licensing...

March 13, 2012

Business Report for the Fourth Fiscal Year ended December 31, 2011

RaQualia Pharma Inc. (4579, Osaka Stock Exchange, Growth Market) today reported financial results for the

fourth fiscal year ended December 31, 2011.

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Business Report

The Fourth Fiscal Year

Period from January 1, 2011

to December 31, 2011

1. Status of the Company

(1) Status of Operations

1) Progress and Results

Overall Trend

The Great East Japan Earthquake and subsequent nuclear crisis in Fukushima had a significant impact on

the Japanese economy, resulting in considerable economic deterioration in the ensuing weeks and months.

Moreover, financial problems in Europe triggered a global credit crisis and rise of the Japanese yen,

developments which further weakened economic conditions in Japan.

In the pharmaceutical sector, the government continued implementing policies to curb medical

expenditures by lowering regulated drug prices and promoting the use of generic medicines.

Concurrently, pharmaceutical companies faced “The 2010 Problem,” the loss of exclusivity for a large

number of blockbuster drugs. The industry is attempting to cope with these challenges by investing

significant resources in the discovery and development of new drugs.

Despite these challenging circumstances, RaQualia successfully executed its strategy to increase

productivity and expand its R&D and licensing portfolio. In 2011, the Company entered into two new

licensing agreements, the first with Meiji Seika Kaisha, Ltd. (Meiji Seika Pharma Co., Ltd.) in March for

the commercialization of Ziprasidone (RQ-00000003), and the second with CJ CheilJedang Corporation,

South Korea, in July for the commercialization of a 5-HT4 Partial Agonist (RQ-00000010). RaQualia

recognized one-time business revenue from the execution of the two contracts.

Business revenue for Fiscal Year 2011 was ¥684 million, down by 42.3% from 2010. RaQualia’s

operating loss totaled ¥1,916 million, up from ¥1,345 million in 2010, ordinary loss totaled ¥1,906

million, up from ¥1,295 million in 2010, and net loss was ¥1,916 million, up from ¥1,307 million in 2010.

Total business expenses were ¥2,600 million, an increase of 2.7% from 2010. “Cost of business

revenue” accounted for ¥11 million of this total, 88.8% less than in 2010, “R&D expenses” were ¥1,660

million, up by 0.5% from 2010, and “Other selling, general and administrative expenses” were ¥928

million, up by 19.4% compared to 2010.

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Research and Development Activities

Research and Development expenses incurred through the Company’s Research and Development

activities for the fiscal year under review came to ¥1,660 million.

The main components of these activities were:

i. Exploratory and discovery phase

In projects to develop a CB2 agonist and 5-HT2B antagonist, agents mainly used for indications such

as irritable bowel syndrome (IBS), and a Motilin receptor agonist mainly used for indications such as

functional dyspepsia (FD), we completed identifying several compounds and proceeded with the

investigation to confirm efficacy and initial safety assessments.

In the T-type (Cav3.2) calcium channel blocker program, we focused on optimizing activity of lead

compounds used for indications such as neuropathic pain, to discover compounds sufficiently

qualified for pharmacological evaluation. In parallel we also explored applications to other

indications.

In projects on a TRPM8 blocker, we evaluated the characteristic efficacy and safety of selected

potential candidate compounds towards identification of a development candidate. However, safety

concerns linked to pharmacokinetics properties led us to return search new development compounds.

In projects to develop a sodium channel blocker incorporating a Nav1.3, a Nav1.7 and a Nav1.8

useful for indications such as inflammatory pain and neuropathic pain, we continued to implement

optimization and evaluate characteristics of compounds.

In the project to develop an N-type calcium channel blocker we discovered a family of compounds

and commenced evaluations for their optimization.

In projects focused on specific ion channels, we continued its collaborative research with Eli Lilly

and Company (United States) effective from December 2010 with a view towards exploring and

discovering development compounds with high levels of efficacy and safety.

ii. Development phase

a) EP4 Antagonist (RQ-00000007 and RQ-00000008)

These development compounds have significant potential for indications such as chronic

inflammatory pain, acute pain, inflammation, autoimmune diseases, allergies, cancer, and other

diseases. During the fiscal year under review we carried out additional studies to investigate

pharmacological effects on these indications, including collaborative studies with research

laboratories specialized in the evaluation of the anticancer effects in animal models.

We also performed pharmacokinetics studies and toxicity studies in preparation for clinical trials

of these indications of RQ-00000007. Likewise, we carried out the safety pharmacological

studies required for the commencement of clinical trials of RQ-00000008.

b) 5-HT4 Partial Agonist (RQ-00000009)

In order to support development for Alzheimer’s disease, we completed the evaluation on

intracerebral acetylcholine levels in a rodent animal model.

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c) 5-HT4 Partial Agonist (RQ-00000010)

Completed several non-clinical studies applicable to potential gastrointestinal indications

such as gastro-esophageal reflux disease (GERD), including toxicity studies required to

commence a Phase I clinical trial. In the current fiscal year, we prepared the investigator’s

brochure and clinical protocols, manufactured the agents, and conduct other works for

starting a Phase I clinical trial.

d) Acid Pump Antagonist (RQ-00000004)

Completed clinical part of a Phase I clinical trial in the US. During the year, we completed

a clinical study report and submitted it to the US Food and Drug Administration (FDA).

2) Capital investments

Capital investments made during the current fiscal year amounted to ¥16 million in total. The major

components of capital investments went towards software improvements and replacement of analytical

equipment for enhancing business capacity.

The Company did not make remove or sell any significant property and equipment during the current

fiscal year.

3) Fund procurement status

The Company listed its stocks on the Growth Section of the Osaka Securities Exchange in July 2011. In

floating its shares, the Company increased its shareholders’ equity by a public offering of 4,000,000

shares of ordinary stock (the paid-in amount per share was ¥1,480). The Company raised funds

amounting to ¥5,920 million in total.

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(2) Changes in assets and profit/loss

(In thousands of yen)

Item

First Fiscal year

(February 2008 to December 2008)

Second Fiscal year

(January 2009 to December 2009)

Third Fiscal year


Current (Fourth) Fiscal year


Business revenue ― ― 1,186,759 684,202

Ordinary loss (2,903,476) (2,638,527) (1,295,839) (1,906,429)

Net loss (2,899,748) (2,642,327) (1,307,679) (1,916,269)

Net loss per share (in yen) (4,207,536.19) (2,642,327.53) (261,094.08) (172.85)

Total assets 6,690,678 4,111,171 4,460,773 8,379,143

Net assets 6,522,251 3,879,923 4,191,144 8,174,470

Net assets per share (in yen) (2,889,749.00) (5,532,076.52) 180,902.28 616.14

Notes:

1. Because the Company was founded on February 19, 2008, the duration of the first fiscal year was approximately 11 months, from February 19, 2008 through December 31, 2008.

2. The amounts stated in the Table above are rounded down to the nearest thousand yen, except for the net loss per share and net asset per share, which are shown in yen, rounded off to the third decimal point.

3. The current net loss per share was calculated based on the average number of outstanding shares issued during the fiscal year.

4. On January 28, 2011, one ordinary share of the Company was split into 400 shares. The net loss per share for the fourth term was calculated as if the share split had been effected at the beginning of the fiscal year.

(3) Status of material parent companies and subsidiaries

N/A

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(4) Issues to Address

For RaQualia, an R&D-oriented company pursuing the discovery and creation of new pharmaceutical

products, we believe that the achievements in the following three areas will lead to enhanced corporate

value: (i) the discovery and creation of promising development compounds; (ii) the escalation of

development compounds to clinical trials, the next step towards licensing arrangements; and (iii) the

identification of optimal parties as the licensees to which licenses are granted. In recognition of these

factors, the Company has defined the following as issues to address.

1) Reinforce our system for promoting licensing

The Company believes that it will be critical to continue to strengthen its exploitation of potential

licensees based on its business strategy, in order to establish optimal licensing arrangements for the

development compounds it owns. The Company will be adopting the following measures to address

these issues.

- To achieve successful licensing arrangements, the Company will execute effective selection of

appropriate licensees and determine the best timing for product launches for customers. Thus, the

Company is committed to reinforcing its capabilities in collecting and analyzing customer information.

- The Company strives to employ talented individuals with experience and expertise in licensing

activities at pharmaceutical companies, to provide internal education through the OJT approach, and to

retain outside advisors with in-depth experience. By doing so, the Company will gain and maintain

optimized marketing and sales activities.

- The Company will allocate significant management resources to its Licensing Department to achieve

efficient contact and engagement with the management, development leaders, research leaders,

relevant personnel, and licensing departments of licensee candidates.

2) Reinforce our system for promoting projects

The Company flexibly leverages a combination of outside resources to obtain high-quality information

both promptly and efficiently, in order to enhance the value of the development compounds in the

Company’s portfolio. Our main challenge, to this end, is to develop and improve our project promotion

system. The Company has implemented the following measures to address these issues.

- The Company continues to research and assess potential collaboration partners in order to retain

high-quality outsourced talent in every area of the development businesses. Through close

collaboration with these partners, we strive to carry out higher-quality development activities.

- The Company will obtain information on the business needs of individual pharmaceutical companies,

our potential customers, by working closely with specialists with in-depth expertise in each area, while

making our best efforts to develop strategies for individual diseases and indications, and enhancing the

respective values of relevant development compounds. As part of our project promotion strategy, we

are committed to developing and implementing development plans to obtain trial results at lower cost

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and within shorter time frames, in order to satisfy key budgetary and scheduling requirements for the

licensing of individual development compounds.

- Regarding technical matters involving pertinent issues in our development programs, including clinical

trials, CMC (activities related to chemical and manufacturing management and quality control in

applications for drug development and drug approval), examination of toxicity, pharmaceutical affairs,

and project management, we will reinforce our development system by proactively engaging outside

specialists and fostering internal human resources, as well as new recruits.

3) Reinforce our research and development portfolio

To create new development compounds, the Company believes that it will be critical to incorporate new

projects into our existing research and development portfolio. We have implemented the following

measures to address these challenges:

- We strive to discover new target molecules and increase the number of projects by leveraging our own

unique assessment system and related database.

- We strive to utilize collaborative research efforts with collaboration partners, in particular outside

research laboratories, and to add projects outside the areas of pain disease and gastrointestinal disease,

areas in which we have a substantial inventory of pharmacology models.

- We will develop new projects aiming at new indications by utilizing our existing R&D portfolio.

4) Further improve our systems for compliance with regulations under the Pharmaceutical Affairs

Law

In the context of drug R&D, it is essential to create drugs that demonstrate effectiveness, safety, and

quality in accordance with the standards established by competent regulators for pharmaceutical affairs in

each country and jurisdiction. From our inception, RaQualia has been strongly aware of the importance

of its systems for complying with these regulations. As such, we have carried out our businesses by

developing and updating SOPs (Standard Operating Procedures) and training and educating our

employees on these standards. We will continue collecting the latest information on the standards

mentioned above and reinforcing our compliance systems accordingly.

5) Improve our financial strength

The Company has incurred an operating loss and operating cash outflow every year, from the first fiscal

year to the fourth. Progress in R&D has continued steadily over the same period, but the Company

expects R&D expenditures to continue rising. To meet these funding requirements, we will obtain

revenue via licensing the growing number of development compounds we are producing through

exploratory and discovery efforts, pre clinical trials, and initial clinical trials. We continue to

contemplate the development of diverse routes for fundraising, including the use of the public finance

system and other measures, to improve our financial strength in support of our business.

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(5) Main businesses (as of December 31, 2011)

The Company has defined its main business as the licensing of intellectual property related to research and

development of drugs and development compounds.

(6) Main sales offices and factories (as of December 31, 2011)

Name Location

Head Office 5-2 Taketoyo, Aichi, Japan

(7) Status of employees (as of December 31, 2011)

Number of employees Changes from the previous year Average age Average years of service

81 Increase of 2 43.7 years old 3.2 years

Notes:

1. The number of employees represents the full-time working employees and does not include any temporary workers (any employees contracted via a manpower service company).

2. The Company is now in its fourth year of operations. Since operations in the first year began in July 2008, the average number of years under employment is as stated in table above.

(8) Major lenders (as of December 31, 2011)

The Company has not borrowed any funds.

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2. Matters related to shares of the Company (as of December 31, 2011)

(1) Total number of shares authorized to be issued: 37,068,800

Notes:

The total number of shares authorized to be issued increased to 36,976,128 as a result of a share split (1: 400).

(2) Total number of outstanding shares issued: 13,267,200

Notes:

1. The total number of outstanding shares issued increased to 9,244,032 as a result of share split-up (1: 400).

2. The issuance of new shares upon the new listing led to an increase of 4,000,000 in the total number of outstanding shares issued.

(3) Number of shareholders: 6,787

(4) Major shareholders (Top 10 shareholders)

Name Number of shares held Ratio of shareholding

CIP V Japan Limited Partnership Incorporated 2,296,000 17.30%

NIFSMBC-V2006S3 Investment Ltd. Partnership 1,834,400 13.82%

Pfizer Japan Inc. 1,772,000 13.35%

NIFSMBC-V2006S1 Investment Ltd. Partnership 1,100,800 8.29%

JAFCO Super V3 Investment Limited Partnership 320,000 2.41%

Atsushi Nagahisa 252,000 1.89%

JKPE LLC 240,000 1.80%

UTEC Limited Partnership 1 240,000 1.80%

Daiwa Securities Capital Markets, Co., Ltd. 185,800 1.40%

COLLABO SGK FUND Investment Limited Partnership 160,000 1.20%

Notes: We have no treasury shares

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3. Matters related to stock acquisition rights, etc.

(1) Status of stock acquisition rights granted to Directors and Statutory Auditors of the Company for

consideration for the duties held by them (As of December 31, 2011)

Third round stock acquisition rights Seventh round stock acquisition rights

Issuance resolution date September 5, 2008 July 28, 2009

Number of stock acquisition rights 190 20

Class and number of shares underlying stock acquisition rights

Ordinary Shares 76,000 (400 shares per stock acquisition right)

Ordinary Shares 7,980 (399 shares per stock acquisition right)

Paid-in amount for stock acquisition rights

No payment is required in exchange of stock acquisition rights.

No payment is required in exchange of stock acquisition rights.

Value of assets contributed upon the exercise of stock acquisition rights

¥1,275 per stock acquisition right ¥1,288 per stock acquisition right

Exercise period

From October 16, 2010 to July 31, 2018 Provided, however, that in the event that the end of the exercise period falls on a non-business day of the Company, the immediately preceding day shall be deemed to be the end of the exercise period. The stock acquisition rights can be exercisable only on and after the initial public trading date (this means that certificates representing shares are listed on any financial instruments exchange in Japan and the trading thereof is commenced).

From June 12, 2012 to July 27, 2019 Provided, however, that in the event that the end of the exercise period falls on a non-business day of the Company, the immediately preceding day shall be deemed to be the end of the exercise period. The stock acquisition rights can be exercisable only on or after the date when 13 months elapse from the initial public trading date (this means that certificates representing shares are listed on any financial instruments exchange in Japan and the trading thereof is commenced).

Conditions for exercise of stock acquisition rights

Note 1 Note 2 Stock A

cquisition Rights held by D

irector

Directors

(Excluding outside Directors)

―

Number of stock acquisition rights: 20 Number of shares underlying each stock acquisition right: 7,980 Number of holder: 1

Outside Directors

Number of stock acquisition rights: 5 Number of shares underlying each stock acquisition right: 2,000 Number of holder: 1

―

Statutory Auditors ― ―

Notes:

1. Following are the conditions applied to the exercise of stock acquisition rights:

(1) Stock acquisition rights cannot be exercised in fractions of less than one.

(2) The stock acquisition rights can be exercisable only on and after the date when ordinary shares starts to be traded publicly (this means that certificates representing shares are listed on any financial instruments exchange in Japan and the trading

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thereof is commenced).after the initial public trading date (this means that the trading of share certificates of ordinary stock of the Company in any country or jurisdiction starts after the stock is listed on a financial instruments exchange in that country or jurisdiction).

(3) When any person entitled to stock acquisition rights loses his or her capacity as a director, Statutory Auditor, or employee of the Company, that person cannot exercise the rights; provided, however, that this shall not apply to cases where a director retires upon the expiration of his or her term of office, an employee retires at the stated retirement age, or there are other reasons deemed appropriate by the Board of Directors.

(4) The inheritance of the stock acquisition rights of the Company shall not be permitted.

(5) No person entitled to the stock acquisition rights can exercise the rights when any of the following circumstances takes place: (1) the person is sentenced to imprisonment, (2) the person breaches any contract he or she entered into with the Company, (3) the person breaches any law or regulation, (4) the person is subject to a disciplinary action more severe than a demotion, or (5) the person impairs the reputation of the Company by committing any form of fraud.

(6) The terms and conditions of the exercise are provided for in the arrangement entered into and by the Company and the person entitled to exercise the stock acquisition rights (“Stock Acquisition Right Allocation Arrangement”).

2. Following are the conditions applied to the exercise of stock acquisition rights:

(1) Stock acquisition rights cannot be exercised in fractions of less than one.

(2) The stock acquisition rights can be exercisable only on or after the date when 13 months elapse from the date when ordinary shares starts to be traded publicly (this means that certificates representing shares are listed on any financial instruments exchange in Japan and the trading thereof is commenced).after the initial public trading date (this means that the trading of share certificates of ordinary stock of the Company in any country or jurisdiction starts after the stock is listed on a financial instruments exchange in that country or jurisdiction).

(3) When any person entitled to stock acquisition rights loses his or her capacity as a director, Statutory Auditor, or employee of the Company, that person cannot exercise the rights; provided, however, that this shall not apply to cases where a director retires upon the expiration of his or her term of office, an employee retires at the stated retirement age, or there are other reasons deemed appropriate by the Board of Directors.

(4) The inheritance of the stock acquisition rights of the Company shall not be permitted.

(5) No person entitled to the stock acquisition rights can exercise the rights when any of the following circumstances takes place: (1) the person is sentenced to imprisonment, (2) the person breaches any contract he or she entered into with the Company, (3) the person breaches any law or regulation, (4) the person is subject to a disciplinary action more severe than a demotion, or (5) the person impairs the reputation of the Company by committing any form of fraud.

(6) The terms and conditions of the exercise are provided for in the arrangement entered into and by the Company and the person entitled to exercise the stock acquisition rights (“Stock Acquisition Right Allocation Arrangement”).

(2) Stock acquisition rights granted to employees and others for consideration in exchange for the

execution of duties during the current fiscal year

N/A

(3) Other matters related to stock acquisition rights

N/A

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4. Matters related to the Directors and Statutory Auditors of the Company

(1) Names, etc. of Directors and Statutory Auditors (as of December 31, 2011)

Position in the Company Name Assignment of work and significant concurrent positions

Representative Director Atsushi Nagahisa

Director Susumu Tsuchiya Senior Vice President (HR & Administration, Quality Assurance)

Director Naoki Tani Senior Vice president (Licensing)

Director Shinichi Koizumi Senior Vice President (Research)

Director Akimitsu Hirai Managing Partner, Lexwell Partners

Full-time Statutory Auditor Hisaharu Inoue

Statutory Auditor Yasushi Honma

Statutory Auditor Hisaji Agata Outside Director, TAIYO YUDEN CO., LTD. Outside Auditor, TMRC Co., Ltd.

Notes:

1. Director Mr. Akimitsu Hirai is an outside director.

2. Mr. Hisaharu Inoue, full-time Statutory Auditor, and Mr. Hisaji Agata, Statutory Auditor are outside auditors.

3. The Company designated Mr. Hisaji Agata, Statutory Auditor, as an independent director in accordance with relevant regulations of the Osaka Securities Exchange and filed the registration therewith.

4. The Company has adopted the corporate officer system in order to activate the Board of Directors by segregating the role of decision making and supervision from the performance of operations. The following nine persons are the corporate officers.

Position Name Assignment of work

Senior Vice President Susumu Tsuchiya HR & Administration, Quality Assurance

Senior Vice President Naoki Tani Licensing

Senior Vice President Shinichi Koizumi Research

Senior Vice President Akihiro Furuta IT

Senior Vice President Tomoko Nii Development

Vice President Sanshiro Horii Finance & Accounting

Vice President Taisuke Inagaki Alliance Management

Vice President Kazuhiro Ikeda Legal & IR

Vice President Kiichiro Kawada Corporate Planning & Strategy

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(2) Director who retired during the fiscal year

Name Date of Retirement Reason for retirement Assignment of work, duties and significant concurrent positions at the retirement

Hiroki Narita October 31, 2011 Resignation

Outside Director Deputy Director, Daiwa Corporate Investment Co., Ltd. Outside Director, RIBOMIC Inc. Outside Director, REGiMMUNE Corporation Outside Director, TMRC Co., Ltd.

(3) Total amount of remunerations for Directors and Statutory Auditors

Category Number Amount of remuneration (In thousands of yen)

Directors (of which, Outside Directors)

5 (1)

37,680 (6,000)

Statutory Auditors (of which, Outside Statutory Auditors)

3 (2)

11,733 (9,933)

Total 8

(3) 49,414

(15,933)

Notes:

1. One Director (of which, one Outside Director) who retired on October 31, 2011 was not included in the above, as he received no remuneration.

2. The directors remunerations paid to Directors with interlocking positions as employees did not include remunerations for services the Directors rendered in their capacity of employees.

3. The annual maximum remunerations paid to Directors were set at ¥90,000 thousand (of which ¥20,000 thousand was annual remunerations for Outside Directors) by resolution of the regular general meeting of shareholders held on March 30, 2011 (excluding remunerations for the performance of duties rendered by Directors in their capacity of employees).

4. The annual maximum remunerations paid to Statutory Auditors were set at ¥16,000 thousand by resolution of the regular general meeting of shareholders held on March 26, 2009.

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(4) Matters related to Outside Directors and Statutory Auditors

1) Status of significant concurrent positions held at other companies and RaQualia’s relationships with

those companies

- Former Director, Mr. Hiroki Narita is Deputy General Manager of VC Investments, Daiwa Corporate

Investment Co., Ltd. The company is the operator of the investment business association which holds

the shares of RaQualia. He also serves as Outside Director of RIBOMIC Inc., Outside Director of

REGiMMUNE Corporation, and Outside Director of TMRC Co., Ltd. RaQualia has no capital and

business relationships with these three companies.

- Director Mr. Akimitsu Hirai is the Managing Partner of Lexwell Partners and the former Representative

Director of alphaGEN Co. Ltd. RaQualia has no capital and business relationships with the firm and

the company.

- Statutory Auditor, Mr. Hisaji Agata, is Outside Director of TAIYO YUDEN CO., LTD. and Outside

Auditor of TMRC Co., Ltd. RaQualia has no capital and business relationships with these two

companies.

2) Main activities during the current fiscal year

Attendance and main activities

Director, Hiroki Narita Mr. Hiroki Narita attended all 24 Board of Directors meetings held before his retirement and made inquiries and expressed opinions mainly on overall management, when appropriate, from the expert viewpoint based on his business experiences.

Director, Akimitsu Hirai Mr. Akimitsu Hirai attended all 29 Board of Directors meetings held during the fiscal year under review and made inquiries and expressed opinions mainly on overall management, when appropriate, from the expert viewpoint of an attorney at law and patent lawyer.

Full-time Statutory Auditor, Hisaharu Inoue Mr. Hisaharu Inoue attended all 29 Board of Directors meetings and all 16 Board of Statutory Auditors meetings held during the fiscal year under review and made inquiries and expressed opinions mainly on overall management, when appropriate, from the expert viewpoint based on his business experiences.

Statutory Auditor, Hisaji Agata Mr. Hisaji Agata attended all 29 Board of Directors meetings and all 16 Board of Statutory Auditors meetings held during the fiscal year under review and made inquiries and expressed opinions mainly on overall management, when appropriate, from the expert viewpoint based on his business experiences.

3) Outline of the liability limitation agreement

The Company has concluded a liability limitation agreement with each of the Outside Directors and

Outside Statutory Auditors. This agreement specifies that in accordance with Article 427, Paragraph

1 of the Companies Act, when Outside Directors and Statutory Auditors incur liability for damages

against the Company as provided in Article 423, Paragraph 1 of the Companies Act, the relevant

liability for damages shall be limited to the minimum liability for damages as prescribed in laws and

regulations.

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5. Status of Independent Accounting Auditor

(1) Name of independent accounting auditor Deloitte Touche Tohmatsu LLC

(2) Amount of remuneration for independent accounting auditor in the fiscal year


Amount paid

Amount of remuneration paid to the independent accounting auditor for the fiscal year 21,250

Total amount of money and other property benefits that must be paid by the Company to the independent accounting auditor

22,650

Notes:

In the engagement letter entered into by and between the Company and the independent accounting auditor, the amount of remuneration for auditing in accordance with the Companies Act and the amount for auditing in accordance with the Financial Instruments and Exchange Act have not been separated clearly, nor can they be separated in essence. Accordingly, the above amount indicates the total of these amounts.

(3) Details of non-audit services

The Company paid a consideration to Deloitte Touche Tohmatsu LLC for preparing the comfort letter in

conjunction with the listing application.

(4) Policy on decision to dismiss or not to reengage independent accounting auditor

In the event that the Board of Statutory Auditors of the Company considers that an independent accounting

auditor falls under any event mentioned in Article 340, Paragraph 1 of the Companies Act, and that it is

unlikely that they will be corrected, or in cases where any material event takes place hindering the audit

services of the Company, including the receipt of any order by the auditor from competent regulator to

suspend its services, the Board of Statutory Auditors will propose to require the Board of Directors of the

Company to submit to the agenda of the general meeting of shareholders the dismissal or no-reengagement

of the independent accounting auditor.

(5) Outline of the liability limitation Agreement

The Company and the independent accounting auditor have not entered into any agreement to limit liability

for damages against the Company as prescribed in Article 423, Paragraph 1 of the Companies Act.

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6. Systems to ensure the fairness of operations

The Board of Directors resolved as follows with regard to the “System to ensure the fairness of operations” as

prescribed in the Companies Act and Ordinance for Enforcement of the Companies Act.

(1) Systems to ensure that the execution of duties by Directors shall comply with laws and regulations and

the Articles of Incorporation

1) To ensure that the execution of duties by Directors shall comply with laws and regulations and the Articles

of Incorporation, the Company has developed compliance regulations and will prevent any breach of laws

and regulations and the Articles of Incorporation by employing outside specialists, if necessary.

Whenever a Director detects any breach of laws and regulations or the Articles of Incorporation by

another director, he or she immediately reports to the Statutory Board of Auditors and the Board of

Directors, whereupon the Company strengthens the governance system accordingly.

2) The Company has established the Corporate Audit under the direct supervision of the representative

director, and the Corporate Audit performs the internal audit. The Corporate Audit positions the status of

compliance as the most material audit item in the operation audit and reports the audit results to the Board

of Directors and the Statutory Board of Auditors, as appropriate.

3) For the purpose of laws and regulations, the Company has established an internal reporting system as a

vehicle that enables all employees to provide information on doubtful acts or other issues.

4) The Company closely cooperates with police departments outside institutions and relevant bodies to

absolutely shield itself from anti-social forces that threaten the order and safety of the citizen community.

The Company as a whole is committed to eliminate the actions of any anti-social forces by developing

and improving relevant systems.

(2) Systems for the storage and management of information related to the execution of duties by directors

Information concerning the execution of duties by Directors is properly documented or recorded into other

media. The documents and other media so produced are kept and managed appropriately, with complete

certainty, and with high retrievability in accordance with the Articles of Incorporation and Regulations on the

Storage of Documents, and are kept available for inspection for 10 years, as necessary.

(3) Regulations and other systems concerning loss and risk management

1) The Company has developed risk control regulations and procedures as a basis of its risk control system,

assigns relevant persons to positions of responsibility according to the nature of each risk, and develops

the risk management system in accordance with the regulations. Whenever any unexpected event takes

place, the Company forms an emergency task force division headed by the Company President.

Furthermore, the Company will organize an outside advisory team made up of an information liaison

function and retained corporate legal counsel to cope with any such event promptly and properly, to

prevent damage from spreading, and to limit damage to the minimum possible level.

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2) The Representative Director may disseminate any necessary measures thoroughly to all the departments

and divisions, if necessary, in order to cope with any newly emerged risks. A Director in charge will

promptly be determined and assigned.

(4) Systems to ensure the efficient execution of duties by Directors

1) The Company holds the meeting of the Board of Directors each month as a basis to ensure the efficient

execution of duties by Directors, and whenever else circumstances so merit.

2) For the execution of duties based on a resolution of the Board of Directors, respective persons in charge

and their duties and execution procedures shall be provided for in the regulations on organizations,

regulations on the segregation of duties, and regulations on the authority to execute duties.

3) Notwithstanding the provisions of the two preceding items, any material matters concerned with the

management policies and management strategies of the Company shall be discussed beforehand by the

Board of Corporate Officers in accordance with internal regulations (including the regulations on the

Board of Corporate Officers), and decisions reached regarding such matters shall be based on such

deliberations by the Board of Directors. In addition, any matters requiring resolutions by the Board of

Directors based on laws and regulations, the Articles of Incorporation, and internal regulations (including

the rules on the Board of Directors) shall be submitted to the Board of Directors, which shall deliberate

them and make necessary decisions.

(5) Systems to ensure the compliance of duties of employees with laws and regulations

1) The Company shall develop compliance regulations as a basis of its compliance system and strive to

improve and maintain the compliance system, as well as to develop, maintain and improve the internal

control system. Where appropriate, individual departments in charge will develop rules and guidelines

and provide training.

2) Whenever a Director detects any material breach of laws and regulations or other compliance matters

within the Company, the Director shall immediately report to the Board of Directors.

3) The Company shall develop the internal reporting system with respect to any breach of laws and

regulations and other facts related to the compliance.

4) Whenever a Statutory Auditor acknowledges that there are any problems with respect to the compliance

systems and internal reporting systems of the Company, the Statutory Auditor shall express opinions and

require the establishment of measures to address such problems.

(6) Matters related to employees assigned to assist Statutory Auditors in their duties, and the independence

of such employees from directors

1) Regulations on employees assigned to assist Statutory Auditors in their duties shall be included in the

rules on the Board of Statutory Auditors. When a representative director deems it necessary to assign such

employees, the Company shall appoint employees to assist the Statutory Auditors in their capacity in

consultation with the Board of Statutory Auditors.

- 17 -

2) Statutory Auditors assess the performance of employees assigned to assist them, and the Board of

Directors decides the appointments, discharges, changes in assignment, and wages and salaries of such

employees with the consent from the Board of Directors. The Board of Directors ensures the

independence of the employees so assigned from the Board.

(7) Systems for Directors and employees to report to Statutory Auditors, other systems concerning

reporting to Corporate Auditions, and other systems to ensure that auditing by Statutory Auditors will

be performed effectively

1) Systems for directors and employees to report to Statutory Auditors shall be provided for in the rules on

the Board of Directors and Regulations on Compliance, respectively. Directors and employees are

required to report any material matters that significantly affect operations or performance results

whenever such matters arise. Notwithstanding the aforementioned, a Statutory Auditor may require any

Director or employee to report to the Statutory Auditor.

2) The Company ensures appropriate systems for reporting to Statutory Auditors on breaches of laws and

regulations and other compliance-related issues by establishing an internal reporting system and

maintaining the appropriate operations.

7. Basic policy on control of the Company

The Company has not developed any specific basic policies on persons who control decisions to direct financial

and operating policies.

8. Policy on decision on distribution, etc. of surplus

The Company has had only relatively short history of research and development (R&D) activities since its

launch in 2008, and is committed to ongoing R&D implementation. Accordingly, we have decided to internally

reserve any surplus to support continuous R&D activities, rather than to distribute the surplus to shareholders,

for the time being. In light of this, and in light of the current net loss we have incurred, the Company has not

distributed profit dividends. We do, however, regard the return of profit to shareholders as an important

management duty, and will consider the appropriate distribution of profit dividends in accordance with our

performance results and financial position in future periods.

- 18 -

Non-Consolidated Balance Sheet

(As of December 31, 2011)


Item Amount Item Amount

(Assets) (Liabilities)

Current assets 7,783,270 Current liabilities 204,673

Cash and deposits 7,672,312 Accounts payable-other 99,295

Accounts receivable-trade 1,355 Accrued Expenses 76,911

Raw materials and supplies 45,112 Income taxes payable 22,569

Advance Payment-trade 31,927 Deposits received 5,897

Prepaid expenses 13,842 Total liabilities 204,673

Other 18,720 (Net assets)

Noncurrent assets 595,873 Shareholders’ equity 8,203,675

Property, plant and equipment 68,333 Capital stock 8,489,850

Buildings 41,876 Capital surplus 3,773,850

Structures 16,666 Legal Capital surplus 3,773,850

Machinery and equipment 385 Retained earnings (4,060,024)

Tools, furniture and fixtures 9,403 Other retained earnings (4,060,024)

Intangible assets 26,009 Retained earnings brought forward

(4,060,024)

Right of trademark 2,334 Valuation and translation adjustments

(29,205)

Software 23,470 Valuation difference on available-for-sale securities

(29,205)

Other 203

Investments and other assets 501,531

Investment securities 427,515

Long-term prepaid expenses 4,589

Guaranty deposited 69,427 Total net assets 8,174,470

Total assets 8,379,143 Total liabilities and net assets 8,379,143

Notes: Amounts less than ¥1,000 are rounded down.

- 19 -

Non-Consolidated Statements of Operations

(January 1, 2011 to December 31, 2011)


Item Amount

Business revenue 684,202

Business expenses

Cost of business revenue 11,429

Research and development expenses 1,660,952

Other selling, general and administrative expenses

928,431 2,600,814

Operating loss (1,916,612)

Non-operating income

Interest income 2,214

Interest on securities 759

Subsidy income 43,164

Other 9,405 55,543

Non-operating expense

Share issuance cost 22,820

Foreign exchange losses 8,321

Going public expenses 5,920

Miscellaneous loss 8,298 45,360

Ordinary loss (1,906,429)

loss before income taxes (1,906,429)

Income taxes-current 9,840 9,840

Net loss (1,916,269)


- 20 -

Non-Consolidated Statements of Changes in Net Assets

(January 1, 2011 to December 31, 2011)


Shareholders’ equity

Capital stock

Capital surplus Retained earnings

Total shareholders’ equity Legal capital

surplus

Other retained earnings

Retained earnings brought forward

Balance as of December 31, 2010 5,529,850 813,850 (2,143,755) 4,199,944

Changes of items during the period

Issuance of new shares 2,960,000 2,960,000 5,920,000

Net loss (1,916,269) (1,916,269)

Net changes of items other than shareholders’ equity

Total changes of items during the period 2,960,000 2,960,000 (1,916,269) 4,003,730

Balance as of December 31, 2011 8,489,850 3,773,800 (4,060,024) 8,203,675

Variance and translation adjustments

Total net assets Valuation

difference on available-for-sale

securities

Total valuation and translation

adjustments

Balance as of December 31, 2010 (8,800) (8,800) 4,191,144

Changes of items during the period

Issuance of new shares 5,920,000

Net loss (1,916,269)

Net changes of items other than shareholders’ equity

(20,405) (20,405) (20,405)

Total changes of items during the period (20,405) (20,405) 3,983,325

Balance as of December 31, 2011 (29,205) (29,205) 8,174,470


- 21 -

1. Notes to matters relating to significant accounting policies

(1) Valuation basis and method for assets

1) Other securities - those without fair value

The cost method is applied by using the moving average approach. However, other securities

denominated in foreign currencies are translated into Japanese yen at the prevailing spot rate of foreign

exchange at the end of the fiscal year and translation differences are accounted for as valuation

adjustments. Moreover, the valuation adjustments are recognized directly into net assets in full.

2) Inventories - Raw materials and supplies

The last cost method is applied (the method to write down the values included in the balance sheet based

on the lowering of productivity)

(2) Depreciation methods used for tangible fixed assets

1) Property, plant and equipment (excluding lease assets)

They are depreciated by using the declining-balance method; provided that building (excluding any

ancillary equipment, etc. they contain) are depreciated by using the straight line method.

Main useful lives are as follows:

Tools, furniture and fixtures: two to four years

2) Intangible assets (excluding lease assets)

They are amortized mainly by using the straight-line method.

Moreover, software for own use is amortized using a straight-line method over the period determined

based on its potential internal use (5 years).

3) Long-term prepaid expenses

They are amortized mainly by using the straight-line method.

(3) Accounting for deferred assets

Share issuance cost

They are charged to expenses in full when they are paid.

(4) Other basis for presentation of financial statements

Accounting for consumption taxes

Consumption taxes and local consumption taxes are excluded from the transaction amounts.

- 22 -

(5) Changes in accounting policies

Adoption of Accounting Standard for Asset Retirement Obligations

Effective from the fiscal year under review, the Company has adopted "Accounting Standard for Asset

Retirement Obligations" (ASBJ Statement No.18, March 31, 2008) and "Guidance on Accounting Standard

for Asset Retirement Obligations" (ASBJ Guidance No.21, March 31, 2008).

Such changes will not have any effect on profit and loss.

2. Notes to non-consolidated balance sheet

Accumulated depreciation deducted from tangible fixed assets amounted to ¥396,837 thousand

3. Notes to non-consolidated statements of changes in net assets

(1) Matters concerning the classes and the number of outstanding shares issued

Class of shares of stock Number of shares as of December 31, 2010

Increase in the number of shares during the fiscal year

Decrease in the number of shares during the fiscal year

Number of shares as of December 31, 2011

Common stock 23,168 13,244,032 - 13,267,200

Notes:

The increase in the number of outstanding shares issued was due to the increase of 9,244,032 via split of shares (1: 400) and increase of 4,000,000 via the issuance of new shares upon the new listing.

(2) Matters relating to classes and number of treasury stocks

N/A

(3) Matters relating to distribution of surplus

N/A

(4) Matters relating to stock acquisition rights at the end of the fiscal year

Third round stock acquisition rights

Class of shares underlying the stock acquisition rights Common stock

Number of shares underlying the stock acquisition rights 76,000

Balances of stock acquisition rights 190

Notes: Stock acquisition rights for which the beginning date of the exercise period has not arrived are excluded.

- 23 -

4. Notes to financial instruments

(1) Matters concerning the status of financial instruments

1) Policy on financial instruments

The Company has adopted policies on investments that the Company restricts its investments to short

term deposits and other instruments which are safe and highly liquid. The Company does not hold

derivatives.

2) Details of financial instruments and risks arising from their holding

Although account receivables, which are trade receivables, are exposed to the credit risks of customers,

we mitigate such risks in accordance with the sales management regulations of the Company.

In effect, investment securities (denominated in foreign currencies) relate to the shares of entities with

which we have business relationships and they are exposed to the credit risks of the issuers and foreign

exchange rate fluctuation risks.

Guaranty money deposited primarily relates to the lease of our headquarters building and it is exposed to

the credit risks of the lessor to which we have deposited the guaranty money.

Accounts payables, which are trade payables, are mostly settled within three months. Accounts payable

in foreign currencies are exposed to foreign exchange rate fluctuation risks.

(2) Matters relating to the fair value of financial instruments

Table below shows the values included in the balance sheet, their fair values and differences between them as

of December 31, 2011. Those amounts which are acknowledged to be extremely difficult to calculated

based on fair value are not included in Table below (see Note 2).


Amounts included in balance sheet (*)

Fair value (*)

Difference

1) Cash and deposits 7,672,312 7,672,312 -

2) Accounts receivable-trade 1,355 1,355 -

3) Guaranty deposited 69,427 69,291 (136)

4) Accounts payable-other (99,295) (99,295) -

5) Income taxes payable (22,569) (22,569) -

6) Deposits received (5,897) (5,897) -

(*) The figures in (bracket) are those included in liabilities.

- 24 -

Notes:

1. Matters relating to the calculation of fair values of financial instruments

1) Cash and deposits and 2) Accounts receivable-trade

Since they are settled on a short-time basis, their fair values approximate the book value. As such we deem the fair values to be the book values.

3) Guaranty deposited

In the calculation of its fair value, we reasonably determine the contract expiration time for every contract and calculate the present value, discounted by the rate derived taking into account the period related risks and credit risks.

4) Accounts payable-other, 5) Income taxes payable and 6) Deposits received

Since they are settled on a short-time basis, their fair values approximate the book value. As such we deem the fair values to be the book values

2. Financial instruments – those are extremely difficult to calculate based on fair values Unlisted stocks and others (balance sheet amounts to ¥427,515 thousand) have no market prices and future cash flows can not be estimated. As such their fair values are extremely difficult to calculate and are not included in the above.

5. Notes to tax effect accounting

Deferred tax assets arise from unused tax losses, and the excess of the maximum tax deductions for amortization of intellectual property. We have provided valuation allowances for them.

6. Notes to information per share

(1) Net assets per share ¥616.14

(2) Net loss per share (¥172.85)

7. Significant subsequent events

N/A