Revenue Growth Driven By AI Drug Discovery and Alnetz, But Operating Loss Widens. Full-Year Operating Income of JPY 300M Is Back-End Loaded; AI Drug Discovery Out-Licensing Is The Key

Key Positives From The 1Q Results

Revenue came in at JPY 1,632M (+5.6% YoY), securing top-line growth. AI drug discovery — positioned as the company's growth driver — expanded to JPY 102M (+58.6% YoY), with the build-up of co-creation projects and DDAIF Innovation Bridge deals now showing up in the numbers. SG&A reductions and smaller extraordinary losses drove a YoY improvement at the bottom line.

• AI drug discovery revenue of JPY 102,994K (+58.6% YoY), aided by the launch of a new co-creation project with Astellas Pharma and an indication-exploration contract signed with Scohia Pharma
• Net loss of ▲JPY 105M, a JPY 55M improvement from ▲JPY 161M a year earlier. Main drivers were extraordinary losses falling from JPY 47M to JPY 8M and the absence of the prior-year JPY 18M FX loss
• SG&A of JPY 810M (▲9.2% YoY). Cost structure improvements including the overseas business exit are flowing through to company-wide expenses
• DX business (Alnetz) revenue of JPY 694M (+64.4% YoY); external customer revenue mix rose from 27.3% to 40.8% (our estimate)
• Equity ratio of 40.3% (vs. 39.7% at end-FY). Capital levels were maintained despite the net loss, helped by an increase in unrealized gains on available-for-sale securities

Key Concerns From The 1Q Results

Gross profit margin fell to 38.7% (▲13.7pt YoY, our estimate) and the operating loss widened to ▲JPY 179M. Cost of goods sold rose +36.1% YoY, far outpacing revenue growth. Management attributes the wider operating loss in the Life Science AI business to the expansion of AI drug discovery research headcount. Continued revenue declines in the Risk Management business also increase the degree to which the full-year plan is back-end loaded.

• Cost of goods sold of JPY 1,000M (+36.1% YoY), far above the +5.6% revenue growth; gross profit fell to JPY 631M (▲22.1% YoY)
• Risk Management business revenue of JPY 826M (▲18.6% YoY), with operating loss widening to ▲JPY 44M from ▲JPY 0.05M a year earlier
• BI & Compliance Support of JPY 234M (▲34.4% YoY). Revenue contribution from a major financial institution project has begun, but was more than offset by cancellations from large customers including manufacturers
• Against a full-year operating income plan of JPY 300M, 1Q came in at ▲JPY 179M. Management characterizes this as in line with a back-end-loaded plan, but the required build-up over the remaining three quarters is demanding
• Interest-bearing debt of JPY 3,871M versus cash and deposits of JPY 1,446M (▲16.6% vs. prior period). EBITDA was ▲JPY 53M (our estimate: operating loss + depreciation of JPY 107M + goodwill amortization of JPY 18M)

Focus Areas / Items To Monitor Going Forward

• Progress on AI drug discovery out-licensing. The NB Health Laboratory project is targeting out-licensing to a pharmaceutical company as early as FY2026, and the timing of milestone revenue recognition is key to the full-year plan
• When the impact of Risk Management contract cancellations bottoms out, and the likelihood of a 2H recovery in BI & Compliance Support and Economic Security (government projects are planned to be back-end loaded)
• The scale of the increase in research headcount and fixed costs associated with the "KIBIT AI Biology Lab" opening in May 2026, and the break-even point for the Life Science AI business

Key Financial Highlights

Gross profit margin declined from 52.4% to 38.7% (our estimate). The low-margin DX business accounted for 40.8% of external customer revenue, while growth investment such as expanded AI drug discovery research headcount weighed on profits. The net loss was smaller than the operating loss due to JPY 46M of dividend income, a JPY 13M reversal of foreign currency translation adjustments, and a ▲JPY 23M income tax benefit. Note that prior-year figures are restated to reflect the finalization of the provisional accounting treatment for the Alnetz acquisition.

Performance By Business Segment

The Life Science AI business grew revenue +29.2% on AI drug discovery expansion, but losses widened on growth investment. All four areas of the Risk Management business posted revenue declines, with the operating loss widening to ▲JPY 44M from ▲JPY 0.05M a year earlier. The DX business grew revenue +64.4% on a full-quarter contribution from Alnetz, but earnings declined on upfront hiring investment.

Segment Performance Table (revenue on a "total" basis including inter-segment sales)

Note: From 1Q, the Business Intelligence & Professional Support area was transferred from the DX business to the Risk Management business. Prior-year figures are restated.

Progress Versus Full-Year Guidance

Revenue progress of 21.5% is ahead of the comparable prior-year level (1Q FY2025 revenue of JPY 1,546M ÷ full-year actual of JPY 7,643M = 20.2%, our estimate). Progress rates are not applicable at the profit level given the operating loss. Management notes that the original plan was built on a back-end-loaded profile and that 1Q was in line with expectations. Achieving full-year profitability hinges on AI drug discovery out-licensing and milestone revenue, plus a 2H recovery in the Risk Management business.

• Management explicitly states that the original plan assumes a back-end-loaded profile, with earnings expanding toward 2H
• Government projects in the Economic Security area are planned to be back-end loaded

Changes To Guidance

FY March 2027 consolidated guidance is unchanged from the prior disclosure (May 15, 2026). Revenue of JPY 7,600M (▲0.6% YoY), operating income of JPY 300M (▲59.4% YoY), recurring profit of JPY 250M (▲63.0% YoY), and net income attributable to owners of parent company of JPY 150M (▲72.4% YoY) are all maintained.

Commentary On Shareholder Returns

The FY March 2027 dividend forecast remains at JPY 0.00 per annum (no dividend), unchanged from the most recent guidance. The prior year was also JPY 0.00. Treasury shares stand at 230,859 shares, unchanged from the end of the prior period.

Financial Position

Total assets declined to JPY 8,828M on collection of accounts receivable and contract assets plus debt repayment, while the equity ratio edged up to 40.3%. With interest-bearing debt of JPY 3,871M against cash and deposits of JPY 1,446M, the trajectory of borrowing dependence tied to AI drug discovery investment is a key watch point.

Note: Net Debt/EBITDA is omitted as EBITDA is negative, and the interest coverage ratio is omitted given the operating loss. Net interest-bearing debt is JPY 2,425M (our estimate).

Disclosures Released Alongside The Earnings Announcement

None

Major Announcements During The Quarter

Large-Shareholding Filings / Material Proposals Over The Past Year

• Masahiro Morimoto (President and Representative Director): 10.25%→10.25% (2025/10/22, Change Report No.14) — holding ratio unchanged, but 550,000 shares pledged as collateral to SBI Securities. Purpose of holding is stable shareholding as founder and representative director; no material proposal actions
• Capstan Medical: 6.99%→5.92% (2026/02/25, Change Report No.1) — purpose of holding is pure investment via MORIMOTO Investment Limited Partnership No.1; no material proposal actions
• Masahiro Morimoto: 10.25%→16.16% (2026/03/19, Change Report No.15) — acquired 2,332,900 shares via in-kind distribution from MORIMOTO Investment Limited Partnership No.1; held as a stable shareholder
• Capstan Medical: 5.92%→0.00% (2026/03/19, Change Report No.2) — eliminated its holding via in-kind distribution of shares to Masahiro Morimoto; no material proposal actions
• Masahiro Morimoto: Amended Report (2026/03/23) — corrected the breakdown of acquisition funds in Change Report No.15, adding that the acquisition was via in-kind distribution
• Material proposal actions: None (none of the above reports contain any mention of material proposal actions)