May 2018

January 31 every year

Please refer to the “IR calendar”.

Please refer to the “IR calendar”.

Unfortunately, we do not accept inquiries regarding IR over the phone. If you are unable to resolve your issue by referring to the FAQ section. Please contact us through the “IR Inquiry” for further assistance.

Even if Net Debt/EBITDA rises temporarily due to M&A, Deleveraging will proceed rapidly due to the utilization of the target company’s Debt Capacity, EBITDA growth through PMI of the target company, and ample cash flow from existing businesses. With the M&As announced today, we expect that the ratio will temporarily be 2.0x at the end of this fiscal year, but if there are no additional M&A in the future, the deleverage will accelerate and we expect the ratio to go down to 1.5x at the end of the next fiscal year and 1.1x at the end of the year after that.

The wholly owned subsidiary of C’traum through partial share exchange announced today is the first M&A project utilizing GENDA shares. This has the following advantages, which we will take advantage of this opportunity.

(1) M&A can be conducted while preserving Debt Capacity.

At the time of our IPO, the Company’s Net Debt/EBITDA was 0.1x, which meant that it was virtually unable to utilize its debt, resulting in a low level of capital efficiency. From this point on, we have achieved a certain level of improvement in capital efficiency by utilizing appropriate leverage through debt-financed M&A. However, from this point on, we will need to manage M&A activities while controlling debt capacity rather than focusing solely on borrowing. As an intermediate method between debt and equity financing, we believe that M&A with stock deal is an effective way to promote M&A while preserving our debt capacity.

However, from Cash EPS standpoint, entry valuation is more important for stock deal M&A than M&A solely with debt. This point is explained in section (2) below.

(2) If PER of GENDA is higher than the PER of target, Cash EPS will increase even with stock deal M&A.

The above is our approach to PER and Cash EPS in stock deal M&A, which is described in detail in the appendix of M&A materials released today. In addition, when the M&A consideration is a mix of stock and cash (borrowings), the PER of the target company multiplied by the percentage of the acquisition via stock is compared with our PER, and the hurdle for increasing Cash EPS is lowered. For example, for the C’traum acquisition, Cash EPS will increase significantly by acquiring 80% of C’traum’s PER of 5.9x by acquiring GENDA shares at a PER of 20.6x (20% of the shares have already been acquired through debt).

As we place importance on Cash EPS in M&A, we will limit our stock deal M&A to companies with lower PER (after taking into account the acquisition ratio) compared to our own PER. In the future, we will continue to consider M&A by way of shares as an effective means to (1) preserve Debt Capacity while pursuing our M&A strategy, and (2) improve Cash EPS if our PER is high compared to the PER of the target company.

In addition to (1) and (2), the M&A of the partial share exchange to C’traum has further advantages.

(3) It will also be an incentive after participation in GENDA.

The representative of C’traum, which is also the seller, will continue to be the representative of C’traum after the participation in GENDA. Therefore, this M&A with GENDA shares can be used as an incentive to increase the value of the shares after joining GENDA. Thus, if the seller of the target company’s shares continues to promote its business in GENDA after the completion of the M&A, it will be able to enjoy an upside by receiving GENDA shares as consideration, and will have an incentive to increase the value of GENDA’s shares after the M&A is completed.

(4) A partial share exchange to C’traum, which is largely net cash, is effectively funded by equity.

In a typical M&A transaction, since the target company usually has interest-bearing debt, even debt minus cash will be positive (net debt position), and thus even a stock deal M&A will usually result in the addition of incremental target company’s debt.

However, in this M&A of C’traum via partial share exchange, the subject company was “debt free” as of the end of the most recent fiscal year with cash on hand of ¥2.02bn, and had negative net debt (net cash position). As a result, the EV of the target company was ¥1.98bn and a equity value of ¥4bn. Therefore, with regard to the ¥4bn equity value of C‘traum’s shares, the 20% cash consideration on May 1 plus the current 80% acquisition via new GENDA shares, ¥1.98bn is the consideration for the acquisition of C’traum’s business, and the rest of ¥2.02bn is effectively consideration for the company‘s cash and deposits itself.

This has the same economic impact as if GENDA had completed equity financing. Furthermore, in this case, GENDA will be able to improve its Cash EPS while, practically raising funds through equity. In addition, from the subject company owner’s perspective, it is more reasonable from a tax perspective to sell the target company’s cash, rather than withdrawing the cash as dividends from the target, and we believe that this will have a certain level of replicability in the future.

We will continue to utilize equity M&A from the perspective of (1) and (2) alone, but we will also make good use of projects like this one, which have all the elements of (3) and (4), to control Debt Capacity. We will continue to manage our business with an awareness of “continuous and discontinuous growth” and Cash EPS through M&A.

In the roll-up of amusement arcades to this point, many stores have converted to the GiGO brand, and we will continue to largely follow that approach. However, if we determine that this is not necessarily optimal for our customers and stakeholders, we will not be limited to that.

For more information, please see the “Transcript of the 6th Annual General Meeting of Shareholders” posted on logme Finance.

https://finance.logmi.jp/articles/379333

1) Amusement arcade

We have achieved robust PMI results. For details, please refer to the following documents.
April 23, 2024″M&A Progress andFY2025/1 Q1 Outlook” P10～18

https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/154262/00.pdf#page=18

In M&A in the amusement business, as disclosed today in “M&A Progress and First Quarter Outlook”, all of the six amusement arcades acquired after SEGA ENTERTAINMENT have shown significant growth in operating income before depreciation and amortization (EBITDA), and and PMI is progressing well.

In addition, for the three amusement arcade projects prior to the IPO, the timing of the cash flow to GENDA stated in February 2022, a little over two years ago for Takarajima, and October 2022, about 18 months ago for Sugaidinos and Avice, but they have already achieved a full recoup of the initial investment, and the cash flow generated now is all upside for stakeholders. The current cash flow is entirely upside for stakeholders.

In addition to appropriate entry valuations based on cash flow (that is not assuming PMI), which is GENDA’s primary focus, the PMI has actually been successful and the situation is showing a “flywheel effect”. With regard to amusement arcades, since the PMI “format” has been established, we will proceed in the same manner for projects after the IPO.

PMI is also progressing very well in the karaoke business. Specifically, Shin Corporation, which had been making loss in the single-month of February for 35 consecutive years since its establishment, quickly returned to surplus in February 2024, the first single-month profit since its establishment, when GENDA began consolidation. The Company’s full-year target of achieving its highest profit since its establishment is now even more certain.

We will continue to strive to maximize synergies outside of amusement arcades, such as karaoke. We will announce these results at the appropriate time once we have comparable data for a certain period of time after the M&A.

As mentioned above, the synergies themselves from the affiliated group of entertainment companies can be realized in a wide range of fields. However, as we answered in “Q1” of this document, GENDA is thoroughly committed to acquiring companies at appropriate valuations, and our Investment Committee is leading us in the basic principle of investment: invest money and recover more money than it is invested. We are thorough in our efforts.

Therefore, GENDA conducts M&A transactions that allow for a sufficient return on investment even without the improvement of business performance through PMI, and for GENDA, PMI only adds extra value.

2)Amusement arcade-related

We have achieved robust PMI results. For details, please refer to the following documents.

June 11, 2024 “FY2025/1 1Q Earnings Presentation” P20～21

https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym3/157494/00.pdf#page=21

3)Karaoke

We have achieved robust PMI results. For details, please refer to the following documents.

June 11, 2024 “FY2025/1 1Q Earnings Presentation” P20～21

https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym3/157494/00.pdf#page=23

4)F&B

We have achieved robust PMI results. For details, please refer to the following documents.

June 27, 2024 “Latest Announced M&As” P21

https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/158415/00.pdf#page=21

The entry valuation being high relative to the cash flow to be generated by the target company in the M&A transaction, is a critical issue. This is because there is a high probability that the cash invested will not be recouped in the future.

Therefore, GENDA places the highest importance on cash flow-based valuations in its M&A strategy.

From the above perspective, the absolute amount of goodwill itself is not necessarily a problem in theory. However, in general, the absolute amount of goodwill tends to be larger for more high valuation M&As, and it is important not to increase the absolute amount of goodwill in order to avoid unnecessarily depressing operating income, after deducting goodwill amortization expenses under Japanese GAAP.

In light of the above, GENDA’s “M&A discipline” places the highest importance on entry valuation on a cash flow basis in M&A and ensures that M&A are conducted at appropriate valuations. Once this premise is fulfilled, we also strive to minimize the amount of goodwill to the extent possible.

As a result, the recoup of the initial investment is progressing smoothly, as described in the “M&A Progress and First Quarter Outlook” disclosed today.

In addition, as described in “Q3” of this report, PMI has been more successful than expected due to significant synergies in areas other than amusement arcades. We will announce the status of PMI in areas other than amusement arcades in the future as well.

For example, in amusement arcade M&A, assets with relatively small book value such as crane games, or assets that have depreciated to a small amount in terms of book value, may generate ample cash flow, supported by customer demand due to the popularity of cartoons and other factors.

In such cases, the net asset value on the balance sheet may appear smaller than the valuation based on future cash flows, and as a result, goodwill may easily arise as a result. However, based on the theory of valuation, GENDA gives priority to valuations based on cash flows, while also trying to minimize the amount of goodwill as much as possible.

Although GENDA is committed to acquiring assets at appropriate valuations, we understand that some investors may have concerns about whether the acquisition price is at an appropriate valuation, since the acquisition price is undisclosed.

As a disclosure on this point, we have announced that it is making steady progress in recovering its investment, as described in the “M&A Progress and First Quarter Outlook” disclosed today. In the case of M&A, which generally requires a long period of time to recoup the initial investment, GENDA has completed the recovery of investment in the pre-IPO amusement arcade M&A at an early stage, and all cash flows generated now and in the future will be returned to GENDA’s stakeholders in excess of the original investment amount. (See “Q3” below for the status of PMI other than amusement arcades.)

Furthermore, by financing the majority of the acquisition price with debt financing and minimizing GENDA’s cash contribution, GENDA’s actual recouped cash has exceeded the aforementioned gross basis recoup of the initial investment.

In conclusion, to prioritize the speed of M&A.

Our company, along with SHIFT, became “the company with the most M&A deals in Japan in 2023 (10 deals)”. We went public in July 2023, and we executed those 10 deals (and 15 others combined) in the 5 months following our listing. You can see that we are currently executing M&A projects most speedily in Japan.

On the other hand, all of the subject companies in our past projects have adopted Japanese GAAP, and we believe that this trend is likely to continue. If we adopt IFRS, we will need to recalculate prior year financial statements for the companies we M&A (even if they are small) as if they had adopted IFRS. We understand that this would fall far short of the speed of M&A at the beginning of this section.

In light of the above, when weighing the nominal profit-increasing benefits of IFRS adoption against the speed of our M&A activities, and considering M&A as our biggest growth driver, our final decision was to prioritize the speed of M&A and return the fruits of discontinuous growth to our shareholders, even if we had to forego the adoption of IFRS.

On top of that, in order to compensate for the disadvantages of not adopting IFRS as an M&A company, we are in a situation where we repeatedly emphasize the explanation of EBITDA and income before amortization of goodwill from the perspective of informing investors of the actual situation.

There are many M&A companies (commonly known as Serial Acquirors) in Europe and the United States, and the concept is common in Western capital markets. In addition, IFRS and U.S. GAAP, which do not amortize goodwill, are common for both the M&A company and the acquiror.

In the Japanese market, where the above concept has not been widely accepted, I believe that it will take time for it to spread. Conversely, however, we believe that until the above ideas become widespread, there are still opportunities for further investment by our company. This is because, if GENDA were to switch to IFRS, operating income and net income would suddenly rise significantly, and P/E ratios would suddenly drop significantly, making the company look cheap, even though there would be no substantive difference as a company.

When our company, which aims to be the world’s largest entertainment company by 2040 in terms of market capitalization and EBITDA, is five to ten times larger than it is today, we will reach a point where the overall importance of repeating a number of small M&A transactions will decrease, or the organization will be large enough to handle them adequately. At that time, we will be in a position to make the change to IFRS. At that point, I think it is possible that the benefits of the change to IFRS will prevail at some point.

In conclusion, using an earnings measure from which goodwill amortization has been deducted to determine enterprise value would result in a double deduction of enterprise value for the reasons discussed below.

First, we believe that for a normal company that only does organic growth, it is appropriate to measure it in terms of operating income. This is because depreciation is something that will “actually” continue to cash out in the future due to capital expenditures. We do not believe that it is inherently necessary to add it back to operating income.

On the other hand, there is no additional cash outflow for amortization (of course, capital investment will be made, and the same arguments apply for depreciation as described above). In this respect, it differs significantly from depreciation, that actually need additional cash outflow whereas none for amortization.

Because of this difference, if goodwill amortization is also deducted in the analysis of performance, as discussed below, it is doubly deducted from the value of the enterprise. This is because the cash outflow has already been completed at the completion of the acquisition, it has already been factored into the balance sheet either through a decrease in cash or an increase in debt, and unlike capital expenditures, it will not occur in the future.

In the DCF method, which measures the intrinsic corporate value of a company, the equity value is calculated by adding up all the free cash flows that will be generated forever, and then deducting the “Net Debt” on the balance sheet at the end, which exactly deducts the completed cash out for the M&A. Therefore, judging the M&A company by its operating income afterwards is a double deduction of value.

M&A companies emphasize the addition back of goodwill amortization because only the amortization of goodwill differs from companies with organic growth, and GENDA, in that regard, is an appropriate inspection indicator as long as the goodwill amortization is added back to operating income. In other words, it is precisely speaking, “EBITA”.

In addition, companies that only grow organically basically have zero goodwill amortization, so in a sense, operating income = EBITA as a figure that adds back (zero) goodwill amortization to operating income.

However, EBITA is not an indicator that is displayed in a general-purpose database, so we recommend that you make your decision based on EBITDA, which is a common indicator.

The above is the concept of calculating value on an all-share basis based on the assumption that control is acquired. When looking at value per share without control, we believe that it is common to refer to P/E multiple and compare relative to other companies in the same industry.

For investors who look at valuations of M&A companies in terms of P/E multiple, we believe it is appropriate to think in terms of P/E multiple before goodwill amortization. This is because it is the same as P/E multiple under pseudo IFRS. This is because P/E multiple before goodwill amortization is almost the same regardless of which accounting standard is adopted.

In other words, if GENDA were to adopt IFRS in the future, the P/E multiple based on GENDA’s net income in each database would suddenly drop, giving the appearance of being undervalued, even though there would naturally be no essential change in GENDA, because this is not inherently correct. Therefore, we believe that the P/E multiple before amortization of goodwill, which remains unchanged regardless of which accounting standard is introduced, is appropriate.

On the other hand, P/E multiple before goodwill amortization is not available in general databases, so for your reference, I will explain a simplified way to look at GENDA’s P/E multiple before goodwill amortization. In GENDA’s case, it is “P/E multiple of net income × 0.8x = P/E multiple of net income before amortization of goodwill”.

This is because GENDA’s forecast for the current term is 5.4 billion yen for net income before amortization of goodwill and 4.3 billion yen for net income, a difference of approximately 1.25 times, and thus a PER of (1/1.25=) 0.8 when calculated at 1.25 times the P/E multiple normally seen in a database.

We advocate “Continuous Transformational Growth” as we consider M&A in the entertainment industry to be a pillar of our growth strategy. Therefore, we consider “companies that grow discontinuously through repeated M&A in a specific industry” to be our comparable companies.

Companies that engaged specifically in the “M&A” industry have long existed in Europe and the U.S., engaging in dozens to hundreds of M&A transactions per year, and are generally classified as “Serial Acquiror”.

However, as shown on page 25 of the “M&A Progress and Earnings Forecasts from December 2023 onward” disclosed on January 22, 2024, GENDA expects net sales to exceed 53.0 billion yen, EBITDA to exceed 7.8 billion yen, and operating income to be 5 billion yen in the fiscal year ending January 31, 2024. As shown on page 25 of the “M&A Progress and Earnings Forecast after December 2023” disclosed on January 22, 2024, we expect net sales to exceed 90 billion yen, EBITDA to exceed 12.0 billion yen, and operating income to exceed 6.5 billion yen in thefiscal year ending January 31, 2024, as a result of the contribution to earnings of companies acquired through M&A during fiscal year of January 31, 2024.

https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/148590/00.pdf#page=25

This is significantly different from the organic growth rates in the amusement arcade industry, which accounts for a large portion of our sales, which is centered on new store openings and existing store sales growth, and from the organic growth rates in the general entertainment industry. This is significantly different from organic growth in the arcade industry, which accounts for a large portion of our sales, and from organic annual growth in the entertainment industry in general.

This simply translates to YoY growth of +70% in sales, +54% in EBITDA, and +30% in operating income. This is significantly different from the organic growth rate in the amusement arcade industry, which is driven mainly by new store openings and existing store sales growth. This is also significantly different from the organic annual growth rate in the entertainment industry in general.

As stated above, we assume that we will continue to accumulate Continuous Transformational Growth through M&A in the entertainment industry, and therefore, the industry in which we are engaged is “companies that grow through repeated M&A in a particular industry” as a comparative company. We believe that the industry in which we are engaged is “M&A”.

GENDA does not plan to announce its medium-term management plan for the following reasons

While we place M&A at the core of our growth strategy, we believe that if we announce a medium-term management plan that incorporates M&A, there is a risk that we may carry out unreasonable M&A to achieve our business performance, resulting in a high price tag, while on the other hand, if we announce a medium-term management plan that only incorporates organic growth, we believe that the disclosure of a medium-term management plan that incorporates only organic growth would increase the possibility of presenting a growth trajectory that differs significantly from that of our group, which places M&A at the core of its growth strategy. For these reasons, we refrain from disclosing our medium-term management plan.

Please refer to page 31 of “M&A Progress and Earnings Forecasts after December 2023” for the growth image up to 2040.

https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/148590/00.pdf#page=31

We believe that “food” can be broadly divided into two categories: “food for living” and “food for leisure”. We have already been engaged in the “food for leisure” business for a long time in our amusement business, and we believe that this is an area in which we can continue to expand.

Specifically, our group has a track record of “food” initiatives in the context of entertainment, such as the “GiGO COLLABO CAFE” and “GiGO’s Taiyaki”, in which restaurants collaborate with popular content such as anime, manga, artists, and characters, and offer menus named after the works and characters at GiGO. We have a track record of “food” initiatives in the context of entertainment.

We will continue to consider investment in “food for leisure” that can bring enjoyment to people, as an area in which our group could enjoy synergies. On the other hand, we have no plans to enter the general restaurant business (e.g., food service industry) as “food for life”.

(1) Growth in existing businesses (organic growth) and (2) growth through M&A (inorganic growth).

(1) Growth of existing businesses

They are broadly classified into the following three categories.

• Increase in sales of existing businesses
• Increase in sales due to the full-year contribution in the current fiscal year of new stores opened during the previous fiscal year
• Increase in sales due to the contribution of new stores opened during the current fiscal year

We will open a certain number of new stores each year.

(2) Growth through M&A

They are broadly classified into the following three categories.

• Increase in sales due to the full-year contribution in the current fiscal year of the stores acquired through M&A during the previous fiscal year
• Increase in sales due to the contribution from stores acquired through M&A during the current fiscal year
• M&A of companies other than amusement arcades

We will aim to improve business performance by appropriately conducting post merger integration (PMI) of the newly grouped companies. We will also work to deliver “fun” to customers in rural areas by serving as a receptacle for stores that are suffering from a lack of successors to owners in regional cities and other areas.

M&A as inorganic growth will be conducted mainly in the amusement business and its peripheral areas.

There are two factors for that performance which were (1) an upturn in existing businesses and (2) contributions from companies acquired through M&A.

Note: Showing existing businesses and new M&A targets with a consolidated contribution of more than 1bn yen. “GGE” refers to GENDA GiGO Entertainment; GGE and FUKUYA HD are consolidated financials (although GGE numbers are excluding Kiddleton basis).

• (1) Upturn in existing business

Existing businesses significantly exceeded the initial plan as shown above. This was mainly due to the continued strong performance of amusement arcade and its peripheral areas, as well as the increase in profit from karaoke.

• (2) Contribution of companies acquired through M&A

Among the M&A projects announced this fiscal year, which were not anticipated in the initial plan, C’traum, which has already closed, is contributing to profits.

• (1) Existing businesses that exceeded initial plan (+2.0 billion yen)

As mentioned in Q1, existing business results were strong, and there was an upward revision of approximately 2 billion yen in the first half. The second half forecast remains unchanged from the plan at the beginning of the period. The plan for amusement arcade sales in the second half of the year is also “single-digit growth in same-store sales by half a percent,” but the current situation in amusement arcade sales is not favorable, with the existing-store sales growth rate of 106% in August, the peak month for sales, and the same indicator for September exceeding that of August, partly due to the TWICE LOVELYS campaign and the successful performance of the GiGO Osaka Dotonbori main store. The same index for September was higher than that of August, maintaining a strong performance.

• (2) Contribution from M&A that was not included in the initial plan (+8.0 billion yen)

Sales contributions to the current fiscal year (all less than 12 months) from announced M&A projects (SANDAI, AMEX, NEN, C’traum, ONTSU), which were not anticipated at the beginning of the fiscal year, will amount to approximately 8 billion yen.

We have revised sales upward only because sales will be added regardless of one-time expenses from future M&A, and because sales will exceed the timely disclosure threshold for upward revision of sales.

Our company’s core business is M&A, and as we repeat M&A, there is a large discrepancy between our cashflow generating ability at the beginning of the fiscal year, and that of after M&As during the fiscal year. We believe that such information asymmetry is undesirable for investors to make investment decisions in our company, which advocates Continuous Transformational Growth, and that it is important for us to present our M&A-consolidated cashflow generating ability in a timely and appropriate manner.

We consider the sales and profits that can be generated in a 12-month period to be the actual cashflow generating ability. The assumptions for this are that there will be no additional M&A activity, and therefore no one-time M&A-related expenses during the period, and no contribution to earnings by the target company of the M&A activity.

When we try to show you this actual ability, we cannot do so with a full-year forecast during the same fiscal year in which the M&A took place. This is because (1) one-time M&A-related expenses are included in the forecast for the year in which the M&A is announced, and (2) the M&A target company will contribute to the forecast for less than 12 months.

On the other hand, the actual cashflow generating ability is almost synonymous with the “next fiscal year” earnings forecast. This is because we do not incorporate undisclosed M&A into our earnings forecast, thus eliminating (1) and (2) above.

Therefore, in the future, when M&As during the fiscal year have a certain impact on our cashflow generating ability that are initially assumed at the beginning of the year, we expect to disclose such based on the assumption that M&A-related expenses are excluded and contribute to our performance for a full 12 months, i.e., our forecast for the following year, in a timely and appropriate manner without waiting for the full fiscal year results.

Although we will incur a certain amount of M&A-related expenses this fiscal year, we have already increased the KPI of EBITDA by 5.5 billion yen (+42%) from 13.0 billion yen to 18.5 billion yen at the end of the first half of the fiscal year. We would like to achieve transformational growth with M&A expenses rather than 13 billion yen +α growth avoiding M&A expenses.

The forecast for the next fiscal year (1) does not include the contribution to earnings (and one-time expenses) from undisclosed M&A, and (2) conservatively incorporates growth from existing businesses.

The reason for doing (1) is that if we announce a business forecast that incorporates potential M&As , there is a risk that we might execute an unreasonable M&A to achieve our business performance, resulting in M&A that will result in a high price tag. The reason why we do not disclose our medium-term management plan is based on the same reason.

On the other hand, regardless of the earnings forecast for the next fiscal year that we are currently announcing, we are working rigorously to announce our current M&A pipeline as soon as possible.

The entire amount of 10 billion yen raised through this public offering will wholly be used as standby funds for future M&A. Therefore, this 10 billion yen will never be spent to the M&As that have already been announced or closed as of today. The 10 billion yen will be used sequentially for M&A projects after today, together with debt financing.

Since July 31, when we received 10 billion yen, although there is actually no cash outflow, we are aware that the cost of capital for the shares is incurred as well as interest on debt, and that the cost to be returned to investors is compounding even before we actually use the funds for M&A. On the other hand, as M&A being our core business, we believe that we should not rush to use the funds for a poor M&A.

Therefore, in order to minimize the opportunity loss until the funds are actually used in the M&A, we currently do not keep the 10 billion yen funds in our deposit account, but rather manages the funds in a low-risk, short-term manner in order to generate as much interest income as possible. Since the funds for M&As are actually remitted at the time of final completion, not at the time of announcement, the short-term fund management does not interfere with the M&A process.

We will be aggressively pursuing M&A projects with the funds entrusted to us by our investors, and will announce our current pipeline one by one as soon as possible.

The impact of foreign exchange rate fluctuations is not zero, but the impact of foreign exchange rate fluctuations on the Company’s results of operations will be minor due to the low ratio of overseas sales and the lack of a large number of overseas business transactions. If the yen continues to appreciate, the amount of the acquisition in yen terms will be less.

We prefer to borrow at floating interest rates, so there will be an impact from rising interest rates. However, we believe that the impact on our core business will be negligible because the current domestic borrowing costs remain sufficiently low.

As an example, let us consider a hypothetical case in which our funding rate suddenly rises by +1%, although this is unlikely to be realistic.

Once the NEN and ONTSU M&A complete, our interest-bearing debt will be approximately 50.0 billion yen, of which 1%, or 0.5 billion yen, will be an additional cost. Since this additional cost of 0.5 billion yen represents only 3.8% of our full-year EBITDA forecast of 13.0 billion yen, we believe that the impact on our cash flow will be negligible. In the same case of the above-mentioned 105.0 billion yen of interest-bearing debt and 29.0 billion yen of EBITDA, the impact would be only 3.6% of the same.

In addition, this is an estimate based on the assumption that all borrowings are at variable interest rates, but in reality there are also borrowings at fixed interest rates, so the actual impact will be even smaller.

Based on these estimates, we believe that the impact of the increased interest burden resulting from higher interest rates will be negligible, as domestic borrowing costs remain sufficiently low, given our strategy of growth through M&A and our plan to achieve 60% EBITDA growth year over year.

Reasons for the public offering – There are four reasons

• 1. To eliminate the market’s greatest concern of our public offering, with our growth driver based on M&A, while minimizing the dilution
• 2. To enable M&A execution with full speed by removing capital restrictions in order to face the ever-increasing M&A pipelines
• 3. To fortify our rock solid relationship with the banks, by strengthening our financial position while we have sufficient debt capacity
• 4. To improve the liquidity of our stock, which has been an issue for our stock
• 1.Public offering with minimal dilution of share value

As M&A is our growth strategy, we place the highest priority on Cash EPS, and we have raised 10.0 billion yen for future M&A by completing a public offering while minimizing the dilution of Cash EPS.

First, the stock price level at the time of the announcement was after the close of July 16, which was the highest price since listing for two consecutive business days, a timing that allowed for minimal dilution. In addition, as of the evening of the announcement, the company had already formed a significant excess demand from overseas institutional investors. Although the nominal dilution of the number of shares due to the issuance of new shares was approximately 7%, the closing price of the stock on July 17, the next business day, was only -2.5%, enabling same-day pricing based on excess demand and minimizing market risk. Also, the pricing resulted in the smallest discount (3.04%) in the range.

Based on the above, we succeeded in raising 10.0 billion yen while minimizing the impact of the dilution event, which had been our greatest concern, on Cash EPS in practice, i.e., the dilution of the share value, which is the asset of existing shareholders.

Furthermore, the 10.0 billion yen in cash raised through the public offering was deposited last Wednesday, July 31, and is present in our bank account as of today.

If this ¥10.0 billion is used in a manner that does not increase our consolidated cash flow, such as repayment of past financing, we believe that this public offering will be substantially dilutive to the value of our shares.

On the other hand, if used in a manner that increases our consolidated cash flow by more than 7%, which is the nominal dilution rate of this offering, this offering would not be dilutive; rather, the offering would provide funds to increase the theoretical value of our shares through public offering. In simplified terms, for example, the hurdle is whether the increase will be +0.9 billion yen or more compared to our projected EBITDA of 13 billion yen, and in practice, the leverage effect of the debt financing will further lower the hurdle.

In turn, we will use all of the 10.0 billion yen for M&A to be announced after today. We do not plan to use this amount to repay the borrowings for the M&As that have already been announced and completed, and for the M&As that have already been announced but not yet completed, NEN and ONTSU, we have received funding approvals from Mizuho Bank and Sumitomo Mitsui Banking Corporation, respectively, to borrow the entire amount of the consideration for the share acquisition.

Based on the above, the Company believes that this public offering is a measure not only to limit dilution, but also to significantly increase share value by accelerating M&A activities in the future.

On the other hand, the stock market is currently suffering from a historical correction. As a result, the book value of overseas institutional investors who participated in the current public offering is 2,042 yen, which is a significant deviation from the current stock price level. Although a cyclical correction in the stock market is practically inevitable, we believe that the only way to reward all of our investors who have entrusted us with their funds, both before and after the public offering, is to announce our ample M&A pipeline in front of us one by one as soon as possible, regardless of the market environment, and to promptly return the fruits of transformational growth.

From this perspective, we will explain in the following section (2) that this public offering will remarkably strengthen our M&A structure going forward.

• 2. M&A execution with full speed with least ever capital constraints

We believe that this public offering will allow us to remove capital constraints and to enable M&A execution with full speed in order to face the ever-increasing M&A pipelines owing to our enhanced sourcing capabilities after listing on the stock exchange.

First of all, our ability to source new M&A pipelines have greatly improved in the one year since we went public. In the past, our mainstay was sourcing from the inner circle of the industry, but over the past year, we have received daily introductions of potential M&A projects from approximately 50 financial institutions and 100 M&A brokers. The number of M&A sourcing pipelines during the previous fiscal year was 170, while the number of cases during the three months of 1Q in the current fiscal year, has already reached 99.

One of the remarkable results was that, we were able to announce a tender offer for ONTSU Co., Ltd., while obtaining the agreement from the target company, although we entered the karaoke industry quite recently. We believe that this is an example of M&A in the entertainment industry that has never been seen before. In addition, we have already announced that the major companies in our group, mainly in the amusement arcade and karaoke businesses, have achieved YoY growth through PMI.

In addition, as of today, we have 10.0 billion yen in our bank account, which was raised through a public offering. This is the first time since our incorporation that we have a vast amount of hard cash in our bank account that can be used for M&A. This is because all of the 5 billion yen raised through the IPO was for business capital expenditure, and was not used for M&A. As we have financed almost all M&As since our IPO using bank loans, the fact that we have an abundant cash that can be used for M&As, is something entirely new and exciting to us.

In addition, it is customary in a normal public offering for any new share issuance to be restricted by a so-called (issuer) lock-up to protect investors, and M&A in the form of shares is generally restricted. In our recent public offering, we are also restricted from raising funds through the issuance of new shares for a period of six months. However, as M&A is our growth strategy, we believed that restricting M&A using our stock (with new share issuance) was not what investors wanted.

Therefore, we have structured the offering in such a way that we are only allowed to issue in the event of an stock deal M&As (e.g., M&A through share exchange) up to 5% of the outstanding shares after the completion of the offering. In this way, we have taken care to maximize our ability to execute M&A transactions so that the public offering will not be a constraint on growth.

Furthermore, in light of the fact that it would have been virtually impossible to commence equity offering in the current market environment, the fact that we already have 10.0 billion yen for future M&A in hand prior to this macro stock price correction is significant for our long-term M&A activities. In addition, the funds we raised through the public offering was at a Cash EPS-based P/E multiple of 29x, and in order to deploy the funds to Cash EPS accretive M&A, the target company theoretically needs to have the same or less than 29x P/E multiple, making it an even stronger source of funds in this Japan-wide stock price correction phase. This 10.0 billion yen is a powerful source of funding.

The M&A pipeline has been expanding day by day since we went public, and we have a clear pathway for the use of proceeds of 10.0 billion yen. We are fully motivated by the belief that we will be able to meet the expectations of our shareholders in the medium to long term through this M&A activity. We intend to leverage this 10.0 billion yen by debt financing through the expansion of our borrowing capacity, and to carry out M&A that will increase Cash EPS as quickly as possible, thereby providing investors with transformational growth.

• 3. Strengthening of financial institutions’ support systems and debt capacity

Since going public, we have procured almost all of our M&A projects through borrowings, and as a result, the burden of M&A financing has been borne almost entirely by financial institutions. Under these circumstances, in light of the further acceleration of our M&A strategy, we were able to further strengthen our solid relationships with financial institutions by demonstrating our ability to raise funds in the stock market while we still had sufficient debt capacity.

While the cash flow index shows that the Company has a comfortable margin in terms of debt capacity, the Company has continued to conduct M&A through borrowing with an eye on Cash EPS, and the “absolute amount” of net assets, which domestic rating agencies place importance on, has been a small issue. However, we believe that the public offering will increase our net assets by 1.5 times, from approximately 20 billion yen to 30 billion yen, and that direct market financing, including corporate bonds, may become a reasonable option for the Company.

In addition, the ¥10.0 billion in public offering will greatly improve our debt capacity. Let us explain in detail.

In discussions with financial institutions, we have announced that Net Debt / EBITDA 3.0x is the standard for debt capacity and that the current index is 2.0x, which will be greatly improved by this capital increase through public offering. We will mechanically calculate the theoretical total amount of interest-bearing debt to bring the index to 3.0x by raising interest-bearing debt through M&As. To do this, we will make certain assumptions regarding our cash and cash equivalents, EBITDA, and Net Debt of the target company.

First, we assume that the 10.0 billion yen from the public offering will temporarily increase cash and deposits, but that the entire amount will be used for M&A and will ultimately be zero, so cash and deposits before the public offering will remain unchanged at 18 billion yen.

Next, let us discuss the increase in EBITDA. The increase in Net Debt (the numerator of Net Debt / EBITDA) means that we will execute M&As, which will result in the consolidation of the target company’s EBITDA and an increase in consolidated EBITDA (denominator), so the numerator and denominator will increase simultaneously. Since it is necessary to make an assumption as to how much EBITDA will increase when interest-bearing debt increases, we will assume an M&A entry multiple with EV / EBITDA of 5.0x (for your reference, the EV / EBITDA of the three most recently announced M&As, NEN, ONTSU, and C’traum, were 3.6x, 5.6x, and 1.8x, respectively). For example, using 10.0 billion yen for M&A would increase EBITDA by 2 billion yen.

Finally, the Net Debt of the target companies we have acquired in the past has been a mixture of positive and negative (Net Cash), and the increase in Net Debt after M&A has been uneven. For the purpose of making this calculation neutral, we assume that the Net Debt of the target company is zero (i.e., cash-free and debt-free).

Based on the above assumptions, after this ¥10.0 billion public offering, we can mechanically determine the interest-bearing debt and EBITDA that would bring Net Debt / EBITDA to 3.0x, resulting in interest-bearing debt of ¥105.0 billion, cash and cash equivalents of ¥18.0 billion, and EBITDA of ¥29.0 billion. However, by mechanical calculations, the 10.0 billion yen in proceeds from this public offering will enable us to raise an additional 55.0 billion yen in interest-bearing debt.

In reality, debt capacity through M&A is affected by the amount of goodwill and net assets, the speed of M&A, and the overall perspective of the target company, etc. However, we present this as a theoretical mechanical calculation based on certain assumptions, limited to Net Debt / EBITDA 3.0x, which is a quantifiable indicator. Net Debt / EBITDA 3.0x, which is a quantifiable indicator.

• 4.Improvement of stock liquidity

While the majority of our shareholders since our IPO have been stable shareholders (see below for details), we have been receiving comments about improving the liquidity of our shares, especially from institutional investors with large investment funds who are considering new investments in our shares in the market.

First, “Hidetaka Yoshimura Midas B Investment Limited Partnership” held approximately 38%, “Midas Capital G Fund Limited Liability Partnership” held approximately 5%, and the Company’s officers and employees held approximately 24% in total. In addition, at the time of the IPO, Asset Management One Inc. acquired 564,900 shares (1.52%) of the Company’s stock through a private placement as described in the “Amended Securities Registration Statement (Initial Public Offering)” disclosed on July 19, 2023, and the Company’s holding policy at that time was “expected to be a long-term holding. The Company’s policy is to hold the shares for a long period of time. As stated in the “Amended Securities Registration Statement (Initial Public Offering)” disclosed on July 10, 2023, we received an Indication of Interest from Capital Group for 4.19% of the shares (total acquisition price: 2,711 million yen), which was also disclosed as “our holding policy is to hold the shares for the medium to long term. (Since this is only an expression of interest, the actual allocation of shares in the IPO is not disclosed.)

Due to the nature of our company’s stock being listed on a liquid stock market, we are not in a position to make reference to shareholder trading, but it is true that the majority of our shareholders are relatively illiquid and stable, while our company’s performance is expanding compared to last year.

Under these circumstances, we have been striving to improve liquidity through a stock split, and as a fundamental improvement, we have obtained an agreement from Midas Capital G Fund Limited Liability Partnership for a partial secondary offering (1.5%, approximately 2 billion yen), while issuing 10.0 billion yen in new shares. Although there is a macro adjustment phase, as a result, trading volume has increased significantly, and we believe that with the improvement in liquidity, the groundwork has been laid for large institutional purchases in the secondary market in the medium to long term.

The entire amount is expected to be financed in GENDA in Japanese yen, and the borrowing will be executed at the time of closing. We aim to maximize shareholder value through M&A by borrowing to take advantage of the low interest rate environment in Japan.

In terms of foreign exchange risk, we will (not lend but) conduct capital injection from GENDA (through GiGO) to Kiddleton for the consideration to be paid to NEN. Thus, the impact of foreign exchange gains or losses will only incur within our balance sheet (net assets foreign currency translation adjustments), which will not impact on the PL.

Furthermore, since our domestic operations generate ample cash flow in yen, the repayment of the loan will not depend on NEN’s dollar-denominated cash flow, so the foreign exchange risk is practically negligible.

In conclusion, we have seen strong organic growth, particularly in amusement arcades and karaoke, in our footprint.

Originally, in the guidance disclosed on January 22, 2024, we expected net sales of approximately 90 billion yen, EBITDA of approximately 12 billion yen, and operating income of approximately 6.5 billion yen (please refer to “M&A Progress and Earnings Forecasts from December 2023” on page 25).

https://ssl4.eir-parts.net/doc/9166/tdnet/2382538/00.pdf#page=25

However, the various synergy measures implemented in the M&A target company have been successful, and we have observed strong organic growth, especially in amusement arcades and karaoke. We will disclose these results at the appropriate time once we have comparable data for a certain period of time after the M&A.

Simply put, corporate income taxes will be paid from the fiscal year ending January 31, 2025.

In other words, while total income taxes for the fiscal year ending January 31, 2024, were suppressed to only approximately 200 million yen due to the loss carried forward, the plan for the fiscal year ending January 31, 2025 is approximately 2 billion yen due to the normalization of income tax payments. In fact, the fact that net income is expected to increase despite a 1.8 billion yen increase in income tax payment compared to the previous year is something that would not have been possible without the M&A in the previous year.

While net income, the numerator of EPS, has increased, EPS has decreased because the number of shares outstanding, the denominator, has increased due to the exercise of stock options.

As stated above, this matter does not inherently impair GENDA’s intrinsic value.

In addition, Net income before amortization of goodwill per share (Cash EPS), which reflects the reality of GENDA’s earning power, is expected to grow 18.8% despite a 1.8 billion yen increase in income taxes, from131.91 yen for the full year ended January 31, 2024 to 156.73 yen for the year ending January 31, 2025.

GENDA will continue to pursue “maximization of shareholder value” as well as “maximization of Net income before amortization of goodwill per share (Cash EPS).

First of all, it is assumed that the acquisition price of the four former Avice stores is recoverable from the cash flow from the four stores, and there is no actual problem from the standpoint of investment recovery, i.e., from the standpoint of M&A.

Rather, GENDA has repeatedly rolled up amusement arcade M&As and generated numerous synergies, and in fact, the four former Avice stores (now referred to as three stores due to a change in store definition) have a high comparable store growth rate of 107% in GENDA’s pre- and post-GENDA in-place comparison.

Despite this, the goodwill impairment is due to the following structural factors in management accounting.

Briefly stated, the four former Avice stores will incur a loss in management accounting if GENDA GiGO Entertainment’s Headquarters SG&A expenses are allocated to the four former Avice stores. However, the existing GiGO stores will incur less expenses, and their profits will increase in management accounting, by the same amount that the Headquarters’ SG&A expenses are allocated to the four former Avice stores. Therefore, the debate is which store will have its profits prorated for management accounting purposes.

On the other hand, from a company-wide perspective, the acquisition of the four former Avice stores has increased both company-wide profits and cash flow, and the increased cash flow will be used to recover the original acquisition price, so there is no problem with this investment.

For details, please refer to page 11 of the “Financial Results for the Fiscal Year Ended January 31, 2024 and Forecast for the Fiscal Year Ending January 31, 2025” disclosed on March 11, 2024.

https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym/152154/00.pdf#page=11

In conclusion, we have not lost goodwill in either the first half or the full year. In other words, in both the first half and the full year, operating income from M&A target companies > amortization of goodwill from M&A target companies.

Next, I would like to explain the reasons for the year-on-year decrease in profit, although we did not lose goodwill in the first half of the year.

First, due to the seasonal nature of the GENDA group, sales are more heavily weighted toward the second half of the year (August through January), when consecutive holidays and farewell parties are more frequent than in the first half (February through July). On the other hand, amortization of goodwill is expensed on a straight-line basis.

While All.Net usage fees begin to rise, “sales are seasonal, being lower in the first half and higher in the second half,” while “goodwill amortization expenses are always recorded in the same amount in both the first and second half (ultimately, every day of every month),” and if only the first half is taken out, operating income, a profit indicator after goodwill amortization, does not appear to be beating back the cost increase.

On the other hand, if we take only the first half of the year, even after taking into account the increased cost of All.net usage fees, EBITDA is expected to increase significantly from the previous year, even after deducting the impact of amortization of goodwill. GENDA uses EBITDA as an indicator to judge the health of the actual business.

Above all, the company plans to increase operating income after amortization of goodwill by 30% from 5.3 billion yen to 7.0 billion yen for the full year as planned (EBITDA after deducting goodwill amortization is expected to increase by 60%).

Although GENDA tries to avoid “full year” operating income reductions due to goodwill amortization as much as possible, goodwill amortization does not affect the decision-making process in the first place, and “whether the first half of the year is a goodwill loss” is even less relevant to decision-making.

Goodwill is likely to occur when there is a large difference between an asset that has been depreciated on its book value over time (e.g., a karaoke or amusement arcade) and an asset that is generating ample cash flow each year in the future.

At GENDA, we determine the amount of capital to be invested in an M&A transaction based solely on the total amount of cash flow that we expect to recover in the future. In other words, we thoroughly adhere to the basic principle of investment, which is to invest capital and recover more than the amount of capital invested.

This is essentially the same concept that applies to capital investment in the core business, which is the same act of making a capital investment and earning cash flow over and above that through the business. However, in today’s entertainment industry, GENDA has experienced discontinuous growth over the past six years due to the outstanding efficiency of capital investment in mergers and acquisitions (it has succeeded in increasing the amount of money invested to far more than it has invested).

In conclusion, the various businesses we acquire as M&A companies are not necessarily the same profit margin, and this will naturally occur as we are acquiring businesses with different profit margins. And that is not a problem from an M&A perspective, as we will explain below.

GENDA, as an M&A firm, sometimes acquires companies in industries different from its existing businesses, which causes profit margins to fluctuate. For example, comparing FY2024/1 and FY2025/1, GENDA acquires a karaoke business, and since the profit margin of the karaoke business is lower than that of the amusement arcade business, the profit margin will be lower.

So, in the case of GENDA, based on the above assumptions, would a lower profit margin as a result of M&A be a negative?

Indeed, for many general business companies with only organic growth, it is negative if the same business has a lower profit margin on a year-to-year comparison. However, as an M&A firm, GENDA merges and acquires companies with different business models and different profit margins; therefore, if a company has a lower profit margin, its profit margin will naturally decrease.

So next, is it negative to M&A a company that is less profitable than the existing business?

This is the point in M&A that is a bit difficult to understand, but in conclusion, it depends on the acquisition price.

For example, Shin Corporation, which is responsible for GENDA’s karaoke business, is expected to generate more than ¥2 billion in EBITDA in the proceeding fiscal year, the highest profit in its 35-year history.

The acquisition price of the company is undisclosed, but just as an extreme metaphor for intuitive clarity, if you could buy the company for 100 million yen, would you pass on M&A because of low margins? 100 million yen is an investment that will turn into 2 billion yen a year later.

Rather, forgoing this M&A is what must be avoided as a company is required to maximize shareholder value. In other words, you can see that high or low margins are a means, not an end. GENDA, led by its Investment Committee, adheres to the basic principle of investment, which is solely to invest funds and recover more funds than they are invested.

We would also like to add that we have already seen synergies in many areas of the companies we have acquired, not only in the amusement arcade business, which is our forte, but also in the karaoke business, and these synergies have actually materialized as a result. We will disclose these results at the appropriate time once we have comparable data for a certain period of time after the M&A.

Currently, we continue to see a positive cycle of acquisitions at appropriate valuations and growth for the company.

Quarterly results for the previous period and the current period are shown on page 35 of the FY2024/1 Q2 Earnings Presentation. (https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym3/141438/00.pdf)

Basically, sales are higher in the first quarter, second quarter, third quarter, and fourth quarter, in that order, as is the case in most years.

On the other hand, profits can be blurred by multiple factors. Just as the previous quarter’s quarterly results fluctuated, this quarter’s results will fluctuate due to a variety of factors when compared to the results of the current quarter, which are only isolated to the quarterly accounting period. In the third quarter of this fiscal year, we expect cost accrual factors, and since we expect sales to grow in the fourth quarter in accordance with our seasonality, we believe that profits will tend to be more heavily weighted in the fourth quarter than in the third quarter. Since these variable factors have been factored in since the initial planning, we believe that we are generally making very good progress toward our full-year plan.

The number of amusement arcade stores and the number of M&A sourcing are disclosed as KPIs. For details, please refer to page 3 of the “Financial Results for the Third Quarter of the Fiscal Year Ending January 31, 2024.

https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym3/145597/00.pdf#page=3

On the other hand, from a performance perspective, as a company that focuses on M&A as a pillar of its growth strategy, we place the greatest importance on “EBITDA (operating income + depreciation and amortization + amortization of goodwill),” which represents the Group’s consolidated annual cash flow generation capacity, and “Net income before amortization of goodwill,” an indicator similar to net income under IFRS.

Currently, we are executing a large number of M&A projects. However, in light of the fact that all of the target companies in past projects have adopted Japanese GAAP, a trend that is likely to continue, we have adopted Japanese GAAP rather than IFRS in order to ensure flexibility in our M&A and accounting practices. Therefore, we will incur a certain amount of “goodwill amortization expense” (which does not occur under IFRS) as our M&A strategy progresses in the future.

If we change to IFRS, our operating income and net income will increase by the amortization of goodwill, but this will not increase our intrinsic corporate value.

Since enterprise value is only the sum of future free cash flow (after adding back goodwill amortization and other non-cash items) discounted by the time value, and since we repeatedly finance each M&A project based on the target company’s ability to generate cash flow.

We believe that it would be more appropriate for investors to focus on our ability to generate cash flow when judging the fair value of our company, which is growing through M&A, and we believe this is important in order to more accurately convey our company’s situation. For this reason, we disclose “EBITDA” and “Net income before amortization of goodwill” in our earnings announcements and forecasts, including our financial statements, in addition to the usual step-by-step profit and loss.

The majority of the Company’s sales and profits are derived from the amusement arcade of its subsidiary, GENDA Inc. GiGO Entertainment Inc.

Therefore, sales tend to be higher in quarters with long holidays, when amusement arcades are in the midst of their commercial season.

Our fiscal year ends in January, and sales tend to be higher in the following order: 1Q (Feb-Apr) < 2Q (May-July/GW) < 3Q (Aug-Oct/summer vacation) < 4Q (Nov-Jan/New Year's holiday). In addition, we have our own "campaigns," which differ from seasonality. Depending on the timing of the campaign, our performance may fluctuate differently from normal seasonality.

Please refer to “Financial Highlights”.

Please refer to “Financial Highlights”.

ince NEN is pre-closing as of today, we will refrain from mentioning specific results.

On the other hand, the Financial Results for the Second Quarter of the Fiscal Year Ending January 31, 2025 The results of the location test that Kiddleton is developing to replace Japanese-style game machines and prizes, which was mentioned in part in “2Q Results”, have exceeded our initial expectations, and we will report on the progress at the appropriate time after the closing.

The forecast of EBITDA of 18.5 billion yen for the next fiscal year conservatively assumes a growth rate of zero for NEN.

The amusement arcades in which our group operates can be broadly classified into two types: general-style amusement arcades with permanent staff and game areas without permanent staff (“mini-locations”).

Many amusement arcade customers visit for prizes of their favorite animated cartoons and IPs for prize games, and for their favorite machines for video and music games. Therefore, although our group’s amusement arcades are visited by customers of all ages, we consider customers in their 20s and 30s to be the largest age group. Mini-locations, on the other hand, are located in vacant spaces such as karaoke and mass merchandisers in Japan and food supermarkets and restaurants in the U.S., and their customer base is dependent on the flow of people in those spaces.

The GiGO Sohonten, the flagship store of all GiGO stores, opened on September 20 in Ikebukuro, Toshima-ku, Tokyo. On the day of the opening, we had such high expectations that about 500 customers lined up waiting for the opening. One month after the opening, sales have been quite strong, exceeding our plan by 15%.

The store has 269 crane games, 118 interactive music games, 72 large video card games, and 18 print sticker machines, making it a flagship store of GiGO. In addition, the store has a permanent food and beverage (F&B) shop featuring “GiGO Taiyaki Sohonten” and “Hill Valley,” a gourmet popcorn brand originating in Japan, as well as a café space where customers can enjoy these items on the spot.

Currently, the store receives about 10,000 customers on weekdays and about 30,000 customers on weekends and holidays (both figures are the total number of customers per day, as measured by a headcount counting sensor). Sales in the first trailing month after the opening were approximately 200 million yen (preliminary basis), with prize games accounting for about 80% of sales, and many customers visit the store in search of prizes, especially those of popular IPs. For example, on the opening day of the ” Crazy Raccoon×GiGOキャンペーン”, about 150 customers lined up to win prizes and limited-edition items.

In F&B, as in the case of prize games, products made in collaboration with popular IPs have been well received by customers. “Hill Valley” is currently selling “ドズル社　コラボポップコーン” with an illustration of “ドズル社”, which is that led by president “ドズル”, a medical student turned YouTuber who established his own company based on his YouTube activities, the five members are active as video game players in Japan, printed on the package. On the first day of sales, about 100 customers lined up even before the store opened to get their hands on this product. GiGO  Taiyaki Sohonten” is currently offering ” GiGOのたい焼き”ブルーロック焼き 第 2 弾”,” a taiyaki made in collaboration with “ブルーロック”, which is famous as a football manga in Japan. These taiyakis have also been well received by “ブルーロック” fans.

As “an entertainment facility where everyone can enjoy their own time as if they were the hero”, we will continue to introduce the fun of amusement arcades from Japan to the rest of the world.

Prizes of prize games are created by the manufacturers and purchased by each amusement arcade, so basically the same prizes are available at almost all amusement arcades. On the other hand, in some cases, our Group negotiates with IP publishers and other parties to purchase unique prizes that are available only to our Group. We refer to these unique prizes as “campaigns. Since the handling of prizes that other companies do not offer increases customers’ willingness to visit our stores, this is a factor that causes fluctuations in business performance that differ from normal seasonal fluctuations.

Please refer to “Overview of GENDA Group”.

As a Serial Acquirer, we have been growing through continuous M&A and expanding our business performance with 1.8 times sales and 1.6 times EBITDA compared to the previous fiscal year, we have recently been receiving substantial interest particularly from overseas institutional investors. On the other hand, while the majority of our shareholders since our IPO have been stable shareholders (see below for details), we have been receiving comments about increasing the liquidity of our shares, especially from institutional investors with large investment funds who are considering new investments in our shares in the market.

In addition, we are planning further growth through M&A for the next fiscal year, and while we advocate Transformational Growth in the future, we are also making daily efforts to　transformationally increase the value of our stock along with our growth. On the other hand, if we were to introduce shareholder benefits in the future, in light of the price level of GENDA Group’s B to C services, it is necessary to maintain the minimum investment amount of our stock at a certain level to create a meaningful shareholder benefit program.

As mentioned above, we have made the decision to carry out this stock split for two reasons: to increase liquidity and to maintain the minimum investment amount. Next, we will explain our stable shareholder base as mentioned at the beginning of this document.

First, as disclosed in our Annual Securities Report, “Hidetaka Yoshimura Midas B Investment Limited Partnership” and “Midas Capital G Fund Limited Liability Partnership” owned approximately 44% of our shares as of January 31, 2024. In addition, officers and employees of GENDA hold approximately 24% of our shares in total.

In addition, at the time of the IPO, Asset Management One Co., Ltd. acquired 564,900 shares (1.52%) of our stock through “Oyabike” (A promise by the company issuing the new shares to sell a portion of the new shares to a specific party after consulting with a securities company in advance.), as described in the “Amended Securities Registration Statement (Initial Public Offering)” disclosed on July 19, 2023, and its holding policy at that time was “expected to be a long-term holding”.

https://disclosure2dl.edinet-fsa.go.jp/searchdocument/pdf/S100RFK6.pdf

And we received an Indication of Interest from Capital Group in the amount of 2,711 million yen (4.19%), as described in the “Amended Securities Registration Statement (Initial Public Offering)” disclosed on July 10, 2023. (Since this is only an expression of interest, the actual allocation of shares in the IPO is not disclosed.)

https://disclosure2dl.edinet-fsa.go.jp/searchdocument/pdf/S100RD51.pdf

While we are not in a position to comment on future shareholder trading due to the nature of our stock being listed on a liquid stock market, it is true that the majority of our shareholders are stable shareholders with relatively low liquidity, although our business performance is expanding compared to last year. Therefore, we will make efforts in IR activities to increase liquidity by having more shareholders deepen their understanding of our company.

Please refer to the Annual Securities Report for more information, including the status of other major shareholders.

https://disclosure2dl.edinet-fsa.go.jp/searchdocument/pdf/S100TC50.pdf

Regarding dividends, we are aware of a number of attractive business investment opportunities that exceed the cost of equity, thus we understand that reinvesting our current cash flow will contribute more to shareholder value, rather than returning  right now the cash flow to shareholders. For these reasons, we are not considering dividends at this moment.

The concept of share buybacks is generally the same as that of dividends. However, in cases such as when our share price is traded at a significant discount from our fair value, it may be judged that share acquiring “our” shares are more effective in increasing share value as a result of a higher return on investment than acquiring “other company’s” shares through M&A activities  We believe that the share buyback is more effective in improving shareholder value relative to dividends, owing to this agility of being able to control the timing of implementation.

On the other hand, although nothing has been decided on shareholder benefits at this time, since our entertainment platform business is a B to C business, we recognize that shareholder benefits are an effective measures for our group from a variety of perspectives.

For example, unlike dividend payments and share buybacks, which are also forms of shareholder return but involve actual cash outflows, shareholder benefits do not directly interfere with the growth investments that are part of our M&A strategy.

In addition, while the shareholder benefits will lead to the development of a new customer base and expansion of the investor base, we believe that the expansion of the shareholder base will also have the effect of reducing the daily volatility of the share price, resulting in a lower cost of capital and subsequent increase in shareholder value. For more information on shareholder benefits, please refer to the following documents.

https://ssl4.eir-parts.net/doc/9166/ir_material_for_fiscal_ym5/157463/00.pdf

Based on the above assumptions, our basic policy is to always continue to implement the optimal allocation of capital from time to time in order to realize an increase in shareholder value.

There is no fact that has been decided on the market change at this point in time.

It is planned April annually.

100 shares

9166

Tokyo Stock Exchange Growth Market

July 28, 2023