Annual Report for Fiscal Year Ending July 31, 2026 (Form 20-F)

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion may contain forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under "Item 3. Key Information-3.D. Risk Factors" and elsewhere in this annual report.

For the impact of foreign currency fluctuations on the Company, and the extent to which foreign currency net investments are hedged by currency borrowing and other hedging instruments, please refer to "Item 11. Quantitative and Qualitative Disclosures about Market Risk- Foreign Currency Exchange Rate Risk."

Key Factors Affecting Our Results of Operations

Our business and results of operations are affected by a number of general factors that impact gaming industry including, among others, economic, political and social conditions in Japan, trade and environmental regulations or enforcement, changes in the business strategies of our customers and the end-users, any increase or decrease in customer demand for our services, changes in end-users playing preferences, new technology and feature sets for mobile and other devices, and the competitive environment. Unfavorable changes in any of these general factors, including those set forth in "Item 3. Key Information- 3.D. Risk Factors", could adversely affect demand for our products and materially and adversely affect our results of operations.

While our business is influenced by these general factors, our results of operations are more directly affected by the following company-specific factors.

Our Ability to Secure Key Intellectual Property and Content of High Quality, Marketability and Value

Our ability to secure key intellectual property (IP) and high-quality, marketable, and valuable content is a significant factor that directly impacts our results of operations. As an HTML5 game platform distributing IP-oriented games to gamers globally, we rely on contractual arrangements with IP holders to obtain rights to popular and recognizable IPs for facilitating the game developments by game developers. These IPs enable us to leverage the established fan base of the original IP as a foundation for attracting potential end-users while distributing games on our platform on behalf of the game developers. By aligning our platform with IPs that resonate with existing fanbases, we enhance end-user engagement and drive in-game purchases, which form the basis of our revenue. Since our revenue is derived as a share of in-game purchases made by end-users, the quality, marketability, and value of the IPs we secure are directly correlated with our operational and financial performance. Consequently, our ability to acquire and effectively utilize such IPs is a key determinant of our business success. If we fail to secure key intellectual property and content of high quality, marketability and value, our revenue along with our results of operations may be adversely impacted.

Our Ability to Partner with Talented and Experienced Third-party Game Developers to Launch High Quality and Playability Games on Our Platform

Our ability to partner with talented and experienced third-party game developers to launch high-quality, engaging, and playable games on our platform is a significant factor that directly impacts our operating results. As an HTML5 game platform, our revenue is ultimately derived from a share of in-game purchases made by end-users. To generate these revenues, we rely on game developers to create games that align with gamers' expectations, deliver high-quality gameplay experiences, and effectively attract and retain players. The quality and playability of the games launched on our platform are critical to driving user engagement and encouraging in-game purchases. If we fail to partner with skilled game developers capable of producing games that meet these criteria, our ability to attract and monetize end-users will be impaired. This would not only limit our revenue potential but also negatively impact our overall operating results.

Historically, our top games and related developers have accounted for a substantial portion of our revenue earned from our platform. For Fiscal 2026, Customers A and E accounted for approximately 20.20% and 17.50% of our revenue, respectively. Game developers are our customers, and our ability to maintain relationships with these developers remains important to our operating results.

Furthermore, game developers are our customers, and our ability to attract and retain talented and experienced developers is essential to our success. We strive to provide game developers with comprehensive services that meet their needs, including access to high-quality intellectual property, a robust distribution platform, and tools to monetize their games effectively. If we fail to meet the expectations of game developers or to provide them with the necessary support and resources to succeed on our platform, we risk losing their business. This would limit the availability of high-quality and engaging games on our platform, diminishing our ability to attract end-users and generate revenue from in-game purchases. Consequently, maintaining strong relationships with game developers by addressing their needs and enhancing their experience on our platform is critical to sustaining our revenue growth and operational success.

Achieve and Maintain Successful End-user Engagement and Adapting to Changing Player Preferences

Achieving and maintaining successful end-user engagement and adapting to changing player preferences are critical factors that directly impact our operating results. Since all of our revenue is ultimately derived from a share of gamers' in-game purchases, our ability to sustain and grow revenue depends on keeping players engaged and motivated to make purchases within the games distributed on our platform. If gamers lose interest or no longer wish to make in-game purchases, not only would our revenue decrease, but we would also fail to help game developers monetize their games effectively, jeopardizing our relationships with developers and our overall business model.

The gaming industry is intensely competitive, and we face challenges from larger competitors with greater resources and broader market reach. In addition to direct competitors in the gaming industry, we also compete with companies across the general entertainment sector, as gamers have a wide range of entertainment options vying for their time and attention. This dynamic creates additional pressure to deliver highly engaging and relevant content to retain users and sustain revenue.

Moreover, gamers' preferences evolve frequently and significantly, making it difficult to consistently align the games distributed on our platform with their changing tastes. If we fail to anticipate and adapt to these shifts in preferences, the games on our platform may not resonate with players, resulting in lower engagement, reduced in-game purchases, and declining revenue. To remain competitive and sustain our operating results, it is imperative that we successfully engage players and adapt to their evolving preferences while navigating the competitive pressures of the industry.

Effectively Manage Game Marketing and Other Operating Expenses in a Cost-Effective Manner

Effectively managing game marketing and other operating costs in a cost-effective manner is a significant factor that directly impacts our operating results. We incur substantial marketing expenses to attract end-users to our platform, raise awareness of our games, and encourage gameplay and in-game purchases. Additionally, we invest in maintaining and enhancing our platform to meet the demands of a technology-driven industry that is constantly evolving. If we fail to manage these costs efficiently, our cost of revenue and operating expenses will increase, negatively affecting our operating income. Balancing the need to invest in user acquisition, platform improvements, and technology upgrades while maintaining cost-effectiveness is critical to sustaining our financial performance. Ineffective cost management could result in diminished profitability and hinder our ability to compete in the highly competitive gaming industry.

Key Operating Metrics

The following table includes our key operating metrics for the years ended July 31, 2026 ("Fiscal 2026"), 2025 ("Fiscal 2025") and 2024 ("Fiscal 2024").

We remain focused on expanding our active user base, increasing the conversion of active users into paying users, and enhancing overall platform monetization and profitability. To support these goals, we continue to collaborate with leading game developers and IP providers to launch and distribute compelling content that drives user engagement and in-game purchases. At the same time, we actively monitor and optimize our ROAS to ensure efficient user acquisition and marketing effectiveness. To calculate ROAS, we track the number of created users as part of our key operating metrics. However, the cohort of created users in any particular year may not be representative of cohorts in other years, and such metric is not necessarily indicative of our past or future performance. Variations in user behavior, game mix, and marketing channels across different cohorts may impact the relevance or comparability of ROAS or other related metrics across periods. See "Item 3. Key Information - 3.D. Risk Factors - Risks Related to Our Business and Industry - Our operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may harm our reputation and our business."

For the fiscal years ended July 31, 2026, 2025 and 2024, our average daily active users ("DAUs") were approximately 245,522, 264,149 and 197,100, respectively. Over the same periods, our average paying daily active users ("PDAUs") were approximately 15,152, 17,458 and 16,446, respectively.

For the fiscal years ended July 31, 2026, 2025 and 2024, our average monthly active users ("MAUs") were approximately 2.26 million, 3.38 million and 2.30 million, respectively. Over the same periods, our average paying monthly active users ("PMAUs") were approximately 89,053, 88,503 and 62,621, respectively.

Gross in-game purchase amounts, which represent total end-user spending on our platform before revenue-sharing deductions, were approximately US$96.8 million, US$107.0 million and US$84.5 million for the years ended July 31, 2026, 2025 and 2024, respectively. These amounts are distinct from our consolidated revenue, which reflects deductions for developer revenue shares and recoupment of advances to game developers.

Our ROAS was approximately 105.8%, 116.4% and 99.3% for the years ended July 31, 2026, 2025 and 2024, respectively. During Fiscal 2026, we reduced advertising spending for games that did not meet our expected returns and directed marketing investment toward games whose performance supported further spending. This approach reflects our focus on sustainable growth and preserving capital and cash.

Key Components of Results of Operations

Revenue

We derive our revenue primarily from providing a comprehensive suite of services, including providing access to IP-related content for game development, online gaming distribution, game development support, and game marketing and advertising services, to game developers. Our revenue is variable and directly derived from a share of in-game purchases made by end-users, with a fixed proportion of these purchases representing our compensation. See "Item 4. Information on the Company-4.B. Business Overview-Our Win-Win Monetization Approach" for details about how we generate our revenues.

Cost of Revenue

Our cost of revenue primarily consists of the costs that are directly related to providing our platform and services to game developers, who are our customers. These costs include royalty fees paid to intellectual property holders, costs associated with the provision of game developer support services, costs associated with the maintenance of our G123.jp game distribution platform, and transaction fees for payment processing and others.

We expect our cost of revenues to increase in absolute amount in line with our expansion of business and customer base growth, and to decrease as a percentage of our revenues in the long run through economies of scale and improvement of operation efficiency.

General & Administrative Expenses

Our general and administrative expenses primarily consist of (i) payrolls for administrative staff and management team, (ii) depreciation and amortization, (iii) general office and administrative expenses, including rent and insurance, and (iv) others.

We expect our general and administrative expenses will increase in absolute amount in the foreseeable future as we continue to increase our general and administrative functionalities to support the future expansion of our business. Following the completion of our IPO in August 2025, we incur expenses as a public company, including expenses related to compliance with the rules and regulations of the SEC and stock exchange listing standards, additional insurance expenses, investor relations activities, and other administrative and professional services.

Research and Development Expenses

Our research and development expenses primarily consist of (i) payrolls for our in-house research and development staff, and (ii) expenses related to advance fees paid to the third-party game developers that we deemed to be unrecoverable.

We believe that continued investment in research and development is key to our future growth. We expect to continue to invest in research and development of our technology and content to improve users' gaming experience, while continuously increasing efficiency. We expect our research and development spending to increase over the long term, although near-term spending may remain relatively flat or decrease modestly depending on operating requirements and the revenue potential of our projects. In particular, we are actively developing and implementing AI-backed technologies, including our automatic advertisement management system to enhance our platform's intelligence and adaptability, enabling us to deliver more personalized gaming experiences and improve operational decision-making. We are also continuously investing in the enhancement of our key internal production and operational systems that support the functionality of our platform. These systems are designed to provide more accurate and relevant insights into our overall operating effectiveness, streamline development workflows, and support the efficient and rapid launch of new games. Through these ongoing initiatives, we aim to strengthen our technological foundation, improve player engagement, and maintain our competitive advantage in the highly dynamic gaming industry.

Sales and Marketing Expenses

Our sales and marketing expenses primarily consist of (i) advertising and marketing expenses, (ii) compensation paid to sales and marketing employees, (iii) expenses generated from marketing activities, such as meeting and travel expenses, and (iv) others.

We adopt an efficient marketing strategy to enhance our platform's brand awareness and user engagement primarily through online marketing channels. We plan to continue to invest in sales and marketing to promote our brand awareness, retain existing users and attract new users in the long terms, while continuously enhancing marketing efficiency to strengthen our profitability, including the adoption of advanced AI marketing tools. We expect our sales and marketing spending to increase over the long term, although near-term spending may remain relatively flat or decrease modestly depending on operating requirements, game performance and expected returns on advertising spend.

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

Year Ended July 31, 2026 Compared to Year Ended July 31, 2025

N/M means not meaningful where the prior-year amount is zero or negative or the result changes from income to loss or from tax expense to benefit. Changes are calculated from unrounded amounts where available and may differ from changes calculated from the presented amounts due to rounding.

Revenue

For the year ended July 31, 2026, revenue decreased by approximately US$7.9 million, or 8.7%, to approximately US$82.5 million from approximately US$90.4 million in the prior fiscal year. The decrease was primarily attributable to weaker performance of newly launched games overall compared to Fiscal 2025. High School of the Dead performed well following its launch at the end of April 2026, but operated for only three full months during Fiscal 2026. Its contribution therefore did not offset the weaker performance of other new titles.

In Fiscal 2026, we launched 15 new games on our platform, which collectively generated revenue of approximately US$22.0 million, compared to 7 new games launched in Fiscal 2025 that generated revenue of approximately US$32.3 million in Fiscal 2025. Among the new titles, Crayon Shinchan My Sugoroku Great Strategy, launched on November 18, 2025, contributed revenue of approximately US$7.1 million from its launch through July 31, 2026. High School of the Dead Day 0, launched on April 28, 2026, is based on High School of the Dead, a Japanese manga series first serialized in 2006 that was adapted into a television anime series in 2010. From its launch through July 31, 2026, a period of slightly more than three months, the game generated revenue of approximately US$6.0 million, or an average of approximately US$2.0 million per month, making it the highest revenue-generating game on our platform during that period, ahead of Vivid Army. Because the game was in operation for only part of Fiscal 2026, its contribution did not offset the overall decline in our revenue. Although the game has continued to perform in the early part of Fiscal 2027, revenue from mobile games generally declines over time following launch and there can be no assurance that this level of performance will be sustained. Revenue generated by existing games increased by approximately US$2.4 million, or 4.1%, compared to Fiscal 2025, as certain games launched in Fiscal 2025 continued to maintain relatively high user engagement and in-game purchases.

Revenue generated from end-users in Japan decreased by approximately US$10.1 million, or 16.1%, to approximately US$52.8 million. Revenue from Taiwan, Hong Kong and Macau increased by approximately US$3.3 million, or 71.2%, to approximately US$8.0 million. The growth in these markets reflected our continued efforts to expand beyond Japan and direct marketing toward new markets, cultural similarities among local users, and the appeal of the intellectual properties underlying our Fiscal 2026 new-game mix.

Japan remained our largest market, contributing approximately 64.0% of our revenue in Fiscal 2026, compared to 69.6% in Fiscal 2025. South Korea was our second largest market, contributing approximately 12.7% of our revenue in Fiscal 2026, compared to 10.3% in Fiscal 2025. Taiwan, Hong Kong and Macau contributed approximately 9.6% of our revenue in Fiscal 2026, compared to 5.1% in Fiscal 2025.

Cost of Revenue

Cost of revenue increased by approximately US$6.4 million, or 29.2%, to approximately US$28.5 million from US$22.0 million. As a percentage of revenue, cost of revenue increased to 34.5% from 24.4%. This increase reflected higher personnel, outsourcing, server and software costs and IP royalties and amortization, partly offset by lower payment-processing fees, and the absence of prepaid royalty impairment recorded in Fiscal 2025.

Personnel and benefits increased by approximately US$2.6 million to approximately US$10.2 million, compared to approximately US$7.6 million in Fiscal 2025. The increase was primarily attributable to the continued expansion of our team globally during Fiscal 2026, including our platform support, game operation support and game design support teams. Outsourcing costs increased by approximately US$2.4 million to approximately US$2.5 million, compared to approximately US$0.1 million in Fiscal 2025. The increase primarily related to the engagement of external creative consulting firms to support the art and design of our newly launched games. Servers and communications increased by approximately US$1.9 million to approximately US$5.9 million, compared to approximately US$4.0 million in Fiscal 2025. The increase was mainly due to our continued investment in tools and software directly related to platform functions and operations. IP royalties and amortization increased by approximately US$0.5 million to approximately US$5.1 million, compared to approximately US$4.6 million in Fiscal 2025. The increase was primarily attributable to changes in the mix of live games and the revenue generated by each title during Fiscal 2026, as royalty payments and amortization of prepaid royalties vary with the licensed intellectual property underlying each game and its revenue contribution. Payment-processing fees decreased by approximately US$0.7 million to approximately US$4.5 million, compared to approximately US$5.3 million in Fiscal 2025. The decrease was mainly due to lower in-game purchases by end-users, consistent with the decrease in revenue. Cost of revenue also included approximately US$0.2 million of share-based compensation in Fiscal 2026. This amount is presented separately from the personnel costs described above.

Overall, the year-over-year increase in cost of revenue, both in absolute value and as a percentage of revenue, primarily reflected our continued investment in the team, infrastructure and external creative resources that support our platform and game operations, which we made notwithstanding the decrease in revenue. These increases were partially offset by lower payment-processing fees, which vary with in-game purchases, and the absence of the prepaid royalty impairment recorded in Fiscal 2025. We believe these investments have established the operating foundation for the next phase of our business. We expect personnel costs to continue to increase in absolute terms as we selectively add headcount for critical talent in line with our strategic priorities, and we believe that, as we continue to develop our internal technology capabilities, our existing infrastructure will be able to support a larger scale of operations.

General & Administrative Expenses

General and administrative expenses increased by approximately US$3.2 million, or 37.9%, to approximately US$11.7 million from US$8.5 million. As a percentage of revenue, these expenses increased to 14.2% from 9.4%.

Personnel and benefits increased by approximately US$1.2 million to approximately US$3.7 million. Professional fees increased by approximately US$1.9 million to approximately US$2.0 million. The increases in personnel and benefits and professional fees were mainly due to additional hires in our corporate and administrative functions to support the larger scale of our business and to fulfill our reporting, compliance and governance responsibilities as a public company, together with the related legal, audit and advisory fees. Rent and leases increased by approximately US$0.5 million to approximately US$3.2 million as we opened up our new office in New York City in early 2026. We also recognized approximately US$0.5 million of Taiwan business tax expense. Taiwan business tax expense reflected our best estimate of business tax payable on cross-border electronic services for the periods concerned, taking into account information available from the Taiwan tax authority. The final amount remains subject to review by the Taiwan tax authority, and additional tax, interest or penalties remain reasonably possible.

Overall, the year-over-year increase in general and administrative expenses, both in absolute value and as a percentage of revenue, primarily reflected the build-out of our corporate and administrative functions to support the larger scale of our business and our responsibilities as a public company, together with the opening of our New York City office and the Taiwan business tax expense recognized in Fiscal 2026, a portion of which related to periods prior to Fiscal 2026 and is therefore not indicative of the ongoing annual cost. We believe the core compliance, governance and administrative infrastructure required of a public company is now largely in place. Although Fiscal 2027 will reflect a full year of occupancy costs for our New York City office, we expect general and administrative expenses to increase only modestly in absolute terms and to decrease as a percentage of revenue over time as our business scales.

Research and Development Expenses

Research and development expenses decreased by approximately US$1.7 million, or 31.2%, to approximately US$3.8 million from US$5.5 million. The decrease primarily reflected capitalization of qualifying China development payroll following our early adoption of ASU 2025-06, rather than recognition of those qualifying costs as current-period expense. We capitalized US$4.1 million of internal-use software development costs across our activities in Fiscal 2026. That amount is separate from research and development expense and is not attributable entirely to that expense caption.

Developer-advance impairment expense decreased by approximately US$0.5 million to US$2.6 million from US$3.1 million. Research and development expenses included US$0.6 million of share-based compensation and approximately US$0.2 million of software amortization in Fiscal 2026.

Overall, the year-over-year decrease in research and development expenses primarily reflected the capitalization of qualifying development payroll following our early adoption of ASU 2025-06, together with lower developer-advance impairment expense, rather than a reduction in our development activities. Taking into account the US$4.1 million of development costs capitalized in Fiscal 2026, our total spending on research and development activities, whether expensed or capitalized, increased compared to Fiscal 2025, reflecting our continued investment in our internal technology capabilities and platform. We expect our research and development spending to increase over the long term, although near-term research and development expense may remain relatively flat or decrease modestly, depending on operating requirements, the revenue potential of our projects and the extent to which development costs qualify for capitalization.

Sales and Marketing Expenses

Sales and marketing expenses decreased by approximately US$9.5 million, or 17.2%, to approximately US$45.9 million from US$55.4 million. As a percentage of revenue, these expenses decreased to 55.6% from 61.3%.

Advertising expense decreased by approximately US$11.4 million, or 21.7%, to US$41.0 million from US$52.4 million. We reduced marketing and advertising spending on underperforming games to preserve capital and cash and increased investment where game performance and expected ROAS supported further spending. The decrease in advertising expense was partly offset by US$1.1 million of share-based compensation, an increase of approximately US$0.9 million in commissions, and higher personnel and travel and meeting expenses.

Overall, the year-over-year decrease in sales and marketing expenses, both in absolute value and as a percentage of revenue, primarily reflected lower advertising spending under our continued strategy of allocating advertising spending with reference to a target ROAS, partially offset by higher share-based compensation, commissions and personnel-related costs. The decrease as a percentage of revenue primarily reflected the reduction in advertising spending on underperforming games rather than an improvement in advertising returns, as our overall ROAS in Fiscal 2026 was slightly lower than in Fiscal 2025. We expect to continue to apply this ROAS-based approach. As a result, our sales and marketing expenses may fluctuate from period to period and may increase in absolute terms in periods in which we launch new games whose performance supports further investment.

Together, the changes in revenue and functional expenses increased our operating loss by approximately US$6.3 million to approximately US$7.3 million, compared to US$1.1 million in Fiscal 2025.

Interest Income, net

Interest income, net increased by approximately US$0.05 million, or 9.4%, to approximately US$0.5 million.

Foreign Currency Transaction Gain (Loss)

We recorded a foreign currency transaction gain of approximately US$0.3 million in Fiscal 2026, compared to a loss of approximately US$0.3 million in Fiscal 2025, an improvement of approximately US$0.6 million. These amounts arise from settlement and remeasurement of balances denominated in currencies other than the relevant entity's functional currency and are distinct from translation adjustments included in other comprehensive income.

Other Income

Other income decreased by approximately US$0.1 million, or 23.5%, to approximately US$0.4 million. Other income primarily included income from investments in films and television programs of US$373,798 and US$475,987 in Fiscal 2026 and Fiscal 2025, respectively.

Contingent gain on recovery of previously impaired assets

There was a MTGOX recovery gain in Fiscal 2026 which is the remainder of the claim with amount of US$238,561 as compared to Fiscal 2025 recovery of approximately US$4.7 million relating to a previously fully impaired cryptocurrency investment. The significantly lower recovery gain reduced total other income and contributed to the decline in profitability in Fiscal 2026.

Total other income decreased by approximately US$4.0 million to US$1.5 million from US$5.5 million, primarily due to the decrease of the recovery gain, partly offset by improved foreign currency results and higher interest and other income.

Income Tax Expense

We recognized an income tax benefit of approximately US$1.7 million in Fiscal 2026, compared to income tax expense of approximately US$0.6 million in Fiscal 2025. The benefit comprised deferred income tax benefits of approximately US$2.4 million, partly offset by current income tax expense of approximately US$0.7 million. Our effective tax rate was 29.08%.

Material tax effects included release of an opening Singapore deferred tax liability of approximately US$1.0 million, partly offset by a Singapore current-tax true-up of approximately US$0.6 million, resulting in a combined benefit of approximately US$0.4 million. A Japanese tax-loss carryforward true-up provided an additional benefit of approximately US$0.1 million. The provision also reflected deferred tax effects of capitalized development payroll, transfer-pricing true-ups, tax losses and the geographic mix of taxable results. An income tax benefit is an accounting amount and does not represent a cash receipt.

We recorded a loss before income tax of approximately US$5.8 million in Fiscal 2026, compared to income before tax of US$4.4 million in Fiscal 2025.

Net Income

As a result of the foregoing, we recorded a net loss of approximately US$4.1 million in Fiscal 2026, compared to net income of approximately US$3.8 million in Fiscal 2025, a deterioration of approximately US$8.0 million.

Year Ended July 31, 2025 Compared to Year Ended July 31, 2024

Revenue

For the year ended July 31, 2025, revenue increased by approximately US$21.9 million, or 32.07%, compared to the prior fiscal year. This increase was primarily attributable to revenue contributions from new game launches. In fiscal 2025, we launched 7 new games on our platform, which collectively generated approximately US$32.3 million in revenue.

Among these new titles, So I'm a Spider, So What? Ruler of the Labyrinth, launched on October 23, 2024, contributed approximately US$14.2 million in revenue from its launch through July 31, 2025. This title, based on the popular anime intellectual property So I'm a Spider, So What?, quickly became our second-highest grossing game during the fiscal year, surpassing Queen's Blade: Limit Break. Revenue generated from this game accounted for approximately 15.8% of our total revenue for fiscal year 2025. In addition, Arifureta: From Commonplace to World's Strongest - Rebellion Soul, launched on January 20, 2025, and based on the Arifureta: From Commonplace to World's Strongest franchise, contributed approximately US$9.3 million in revenue through July 31, 2025. Despite operating for just over six months in the fiscal year, this title became our fourth-highest grossing game for the year, contributing approximately 10.3% of our total revenue, immediately following Queen's Blade: Limit Break.

The overall increase in revenue was partially offset by a net decrease of approximately US$10.4 million from existing games, due to a decline in user engagement and in-game spending as these titles progressed through later stages of their respective lifecycles.

Revenue increased across all major geographic markets for the fiscal year ended July 31, 2025, compared to the prior fiscal year. Revenue generated from end-users in Japan increased by approximately US$7.1 million, or 12.8%, primarily driven by sustained performance of established titles and contributions from newly launched games. Revenue from South Korea increased by approximately US$6.1 million, or 188.0%, reflecting strong user growth following new releases and enhanced marketing initiatives. Revenue from North America increased by approximately US$3.3 million, or 80.1%, while revenue from Taiwan, Hong Kong and Macau collectively increased by approximately US$1.9 million, or 67.6%, due to continued brand recognition and higher player engagement. Revenue from Europe increased by approximately US$1.7 million, or 119.9%, and revenue from other regions increased by approximately US$1.8 million, or 165.8%, mainly attributable to expansion into new and emerging markets.

As a percentage of total revenue, Japan remained our largest market, contributing approximately 69.6% of total revenue in fiscal 2025, compared to 81.5% in fiscal 2024. Meanwhile, the combined contribution of South Korea, North America and Taiwan, Hong Kong, Macau increased to approximately 23.7% in fiscal 2025, up from 14.9% in fiscal 2024. This shift in geographic revenue mix reflects the Company's continued success in diversifying its market base and expanding its presence outside Japan, particularly across North East Asia, North America, and Europe.

Cost of Revenue

Our cost of revenue primarily consists of royalties paid to intellectual property holders, payroll and benefit cost associated with the provision of game developer support services, the maintenance of the Group's G123 game distribution platform, transaction fees for payment processing and etc.

Cost of revenue increased by approximately US$5.8 million, or 36.0%, to US$22.0 million for the fiscal year ended July 31, 2025, from US$16.2 million for the prior fiscal year. The increase was primarily attributable to higher revenue volume and the expansion of game titles on our platform during the current fiscal year. As a percentage of total revenue, cost of revenue represented approximately 24.4% in fiscal 2025, compared to 23.7% in fiscal 2024, reflecting a modest increase in proportion to total revenue as the Company invested further in game-related royalties, infrastructure, and operating support to sustain growth.

The largest component of cost of revenue was payroll and benefits, which totaled US$7.6 million or 8.4% of total revenue for fiscal 2025, compared to US$6.8 million or 10.0% of total revenue for fiscal 2024. Although payroll and benefits increased by US$0.7 million, or 10.5%, the ratio to total revenue decreased, primarily reflecting improved operating leverage as revenue grew faster than headcount-related costs.

Royalties paid to IP holders which also includes amortization of prepaid royalties increased by approximately US$1.9 million, or 70.3%, to US$4.6 million or 5.0% of total revenue in fiscal 2025 from US$2.7 million or 3.9% of total revenue in fiscal 2024. The increase, both in absolute and relative terms, was mainly due to higher revenue generated from licensed titles and new game launches, which resulted in greater royalty payments to IP licensors.

Transaction fees increased by approximately US$1.5 million, or 38.1%, to US$5.3 million or 5.8% of total revenue in fiscal 2025, compared to US$3.8 million or 5.6% of total revenue in fiscal 2024. The slight increase in the ratio of transaction fees to total revenue reflects the higher volume of in-game purchases processed across an expanding user base.

Server and communication costs increased by approximately US$1.5 million, or 56.4%, to US$4.0 million or 4.5% of total revenue in fiscal 2025, compared to US$2.6 million or 3.8% of total revenue in fiscal 2024. The increase in both amount and percentage was primarily driven by the growing demand for server capacity and bandwidth usage associated with higher concurrent users and new game launches.

The Company also recorded an impairment on prepaid royalties of approximately US$0.5 million or 0.5% of total revenue in fiscal 2025, representing a one-time write-down of certain advance payments for licensed content that are no longer expected to generate sufficient future benefits. There was no such impairment recorded in fiscal 2024.

Other miscellaneous costs decreased by approximately US$0.2 million, or 51.4%, to US$0.1 million or 0.2% of total revenue in fiscal 2025 from US$0.3 million or 0.5% of total revenue in fiscal 2024, primarily due to lower external service fees and platform maintenance expenses following continued stabilization of our infrastructure.

Overall, the year-over-year increase in cost of revenue, both in absolute value and as a percentage of revenue, was consistent with the Company's growth trajectory and expanding operational scale. The changes reflect the combined effect of higher revenue- driven variable costs, greater investments in licensed content and infrastructure, and a one-time impairment on prepaid royalties, partially offset by efficiency gains in payroll utilization and lower miscellaneous expenses.

General & Administrative Expenses

General and administrative expenses increased by approximately US$3.3 million, or 63.8%, to US$8.5 million for the fiscal year ended July 31, 2025, from US$5.2 million in fiscal 2024. As a percentage of total revenue, general and administrative expenses increased to 9.4% in fiscal 2025 from 7.6% in fiscal 2024, primarily reflecting continued expansion of our administrative infrastructure and public company compliance efforts following our U.S. listing.

The increase was mainly driven by higher payroll and benefit expenses, which rose by US$0.7 million, or 41.7%, to 2.7% of total revenue, due to additional headcount primarily at our Taipei and Shanghai offices to support local operations. Rent expenses increased by US$0.9 million, or 53.1%, to 2.9% of revenue, reflecting additional leased office spaces. Professional fees rose by US$0.8 million, or 162.3%, to 1.5% of revenue, primarily due to audit, legal, and advisory costs related to IPO and U.S. reporting requirements.

Other cost categories also increased, including depreciation and amortization, up 19.6% to 1.1% of revenue, office supplies up 444.21% to 0.4% of revenue, training and recruitment up 216.0% to 0.2% of revenue, and building management fees up 202.5% to 0.1% of revenue. These increases were associated with the establishment and expansion of regional offices.

Overall, the increase in general and administrative expenses reflects the Company's investment in personnel, facilities, and professional services to support its growing operations, geographic expansion, and ongoing compliance as a U.S.-listed public company.

Research and Development Expenses

For the fiscal year ended July 31, 2025, research and development expenses increased by approximately US$4.6 million, or 480.5%, compared to the prior fiscal year. The increase was primarily driven by an increase of approximately US$2.7 million, or 602.7%, in impairment charges related to advance payments made to third-party game developers and US$1.9 million, or 372.0% in payroll and related social insurance and housing fund. As a percentage of revenue, impairment charges increased to 3.5% in fiscal year 2025 from 0.7% in fiscal year 2024, while payroll expenses rose to 2.6% from 0.7%.

As of July 31, 2025 and July 31, 2024, valuation provisions for advances to game developers represented approximately 35.8% and 36.0%, respectively, of gross outstanding advance balances. These relatively high reserve ratios reflect the Company's earlier strategic decisions to collaborate with smaller or less-established developers and to pursue projects based on lesser-known IPs. Such projects generally carry higher commercial uncertainty, increasing the risk of underperformance and unrecoverable advances. While many of these developers had prior game-launch experience, the absence of consistent development models made it more difficult to evaluate the commercial potential of their new titles.

In addition, several games based on lesser-known IPs generated weaker-than-expected player engagement and monetization performance, further limiting the Company's ability to recover certain advance payments.

In response, the Company has strengthened its developer selection and project evaluation framework. The updated approach incorporates a more rigorous vetting process informed by data from prior development partnerships and emphasizes collaboration with developers demonstrating repeatable success. The Company is also expanding cooperation with developers who have previously achieved strong performance on its platform, enabling it to leverage proven capabilities and improve the predictability of future project outcomes.

Additionally, at the beginning of the fiscal year ended July 31, 2025, we established a new research and development center in Shanghai, which serves as a key hub for our technology and AI-driven innovation initiatives. In connection with this expansion, we hired 59 software engineers and project managers through July 31, 2025 to strengthen our internal capabilities in game platform technology, data analytics, and AI-based content development. The related increase in personnel and associated costs contributed to the US$1.9 million rise in payroll and benefit expenses within research and development for the year. These investments reflect management's continued focus on enhancing the Company's technological infrastructure and operational efficiency to support sustainable long-term growth.

Sales and Marketing Expenses

For the year ended July 31, 2025, sales and marketing expenses increased by approximately US$16.0 million, or 40.5%, compared to the prior fiscal year. As a percentage of total revenue, sales and marketing expenses remained relatively consistent at approximately 61.3% in fiscal 2025 and 57.6% in fiscal 2024. The overall increase in absolute terms was primarily driven by higher advertising spending to support the Company's growing portfolio of game titles and continued international expansion.

Advertising and promotion expenses increased by approximately US$15.4 million, or 41.0%, representing the majority of the overall increase, and accounted for 58.6% of revenue in fiscal year ended July 31, 2025 compared to 54.9% in the prior fiscal year. This growth was primarily attributable to intensified marketing campaigns supporting the launch of new games and efforts to expand our user base in key markets outside Japan, including South Korea, North America, and other overseas regions. These initiatives reflect the Company's strategic focus on geographic diversification and market share growth.

In addition, payroll and related expenses increased by approximately US$0.6 million, or 78.7%, to US$1.3 million, as a result of increased headcount and higher personnel-related costs within the marketing and user-acquisition teams. The expanded team structure allows for closer coordination between domestic and overseas marketing operations to support ongoing global campaigns. As a percentage of revenue, payroll and related expenses accounted for 1.4% and 1.0% of revenue in the years ended July 31, 2025 and 2024, respectively.

Overall, the increase in sales and marketing expenses was consistent with the Company's strategy to drive user acquisition and engagement through targeted promotional activities, while maintaining expense efficiency relative to revenue growth.

Interest Income, net

For the fiscal year ended July 31, 2025, interest income, net increased by approximately US$0.2 million, or 64.3%, to US$0.5 million, compared to US$0.3 million in the prior fiscal year. The increase was primarily attributable to higher interest yields on cash deposits, as the Company maintained a larger portion of its cash reserves in U.S. dollar-denominated deposits to benefit from favorable U.S. interest rate conditions. The increase also reflects higher average cash balances during the year, resulting from strong operating cash inflows.

Foreign Currency Transaction Gain (Loss)

For the fiscal year ended July 31, 2025, we recorded a foreign currency transaction loss of approximately US$0.3 million, compared to a foreign currency transaction gain of approximately US$0.8 million for the prior fiscal year. This represents a year-over-year decrease of approximately US$1.1 million, or 136.7%.

The variance was primarily attributable to fluctuations in the Japanese Yen exchange rate against the U.S. dollar during the year. In fiscal 2024, the Company recognized gains as a result of settlements and revaluations of U.S. dollar-denominated balances while the Yen depreciated against the U.S. dollar. In contrast, during fiscal 2025, the Yen experienced periods of partial appreciation and greater volatility, resulting in unfavorable foreign exchange movements on U.S. dollar-denominated assets and liabilities recorded by our Japanese subsidiary.

Other Income

For the fiscal year ended July 31, 2025, our other income increased by approximately US$0.1 million or 22.17%, compared to the prior fiscal year. The increase is primarily due to increase of approximately US$0.2 million or 86.1% in income generated from our investment in films and television programs.

Contingent gain on recovery of previously impaired assets

For the fiscal year ended July 31, 2025, the Group recorded a one-time gain of approximately US$4.7 million in connection with the recovery of a bankruptcy claim related to a long-term cryptocurrency investment. In 2013, CTW Japan purchased cryptocurrency through MTGOX Co., Ltd., which subsequently filed for bankruptcy in 2014. At the time of the bankruptcy filing, the Group had fully impaired the carrying value of the related cryptocurrency, and no balance remained recorded on the consolidated balance sheet since the year ended July 31, 2014.

During fiscal 2025, CTW Japan received cash proceeds of JPY 700 million (approximately US$4.7 million) as its approved claim in the MTGOX bankruptcy estate. Because the related asset had previously been fully impaired, the entire amount of the recovery was recognized as a gain in "Other income (expense), net" in the consolidated statement of comprehensive income.

Management considers this gain to be non-recurring and not reflective of the Group's ongoing operations or recurring profitability. Excluding the effect of this one-time recovery, other income (expense) for the year remained generally consistent with the prior fiscal period. The recognition of this recovery resulted in a temporary increase in total other income for fiscal 2025 but does not represent a continuing source of earnings in future periods.

Income Tax Expense

For the fiscal year ended July 31, 2025, income tax expense decreased by approximately US$1.6 million, or 74.1%, to US$0.6 million, compared to US$2.2 million in the prior fiscal year. The decrease in income tax expense was primarily attributable to a decline in income before income tax expense, which decreased by approximately US$3.8 million, or 46.6%, year over year.

The Company's effective tax rate decreased significantly from 27.1% in fiscal 2024 to 13.1% in fiscal 2025. The decrease was primarily driven by a greater proportion of income generated by subsidiaries located in jurisdictions with lower statutory income tax rates. As reflected in the effective tax rate reconciliation, the tax rate difference for non-Japan subsidiaries reduced the consolidated effective tax rate by 21.7% in fiscal 2025, compared to a 6.8% reduction in fiscal 2024. This change reflects the Company's continued global expansion and the increasing operational contribution from regions such as Singapore, Taiwan, and other jurisdictions where corporate tax rates are lower than in Japan.

Management expects the effective tax rate to continue to be influenced by the geographic mix of earnings among subsidiaries and any future changes in local tax laws or international tax regulations affecting the Group's operating regions.

Net Income

As a result of foregoing, our net income decreased by about US$2.2 million or 36.4% from about US$6.0 million in the year ended July 31, 2024 to about US$3.8 million in the year ended July 31, 2025.

Recent Development

On August 7, 2025, we closed our IPO of 2,400,000 Class A ordinary shares at US$5.00 per share, generating gross proceeds of US$12.0 million. On May 7, 2026, our shareholders approved the change of our name from CTW Cayman to CTW. Our Class A ordinary shares continue to trade on the Nasdaq Capital Market under the ticker symbol "CTW".

On September 11, 2025, we announced the appointment of Golden Ocean FAC PAC ("Golden Ocean") as our new independent registered public accounting firm to audit our financial statements, effective September 5, 2025. The appointment was made after a careful and thorough evaluation process and has been recommended and approved by the audit committee of our board of directors, and subsequently approved by our board of directors. Golden Ocean succeeds YCM CPA INC. ("YCM"), our previous independent registered public accounting firm. On September 5, 2025, YCM was dismissed as the independent registered public accounting firm for us.

On August 7, 2026, we granted 100,000 share options to our Chief Financial Officer at an exercise price of US$2.48 per share under the 2025 Equity Incentive Plan. In August 2026, we paid US$0.6 million of conditional developer advances, and a new Tokyo office lease commenced on September 1, 2026.

5.B. Liquidity and Capital Resources

As of July 31, 2026, we had approximately US$14.4 million in cash and cash equivalents and net working capital of approximately US$7.5 million. As of July 31, 2025, we had approximately US$12.2 million in cash and cash equivalents and net working capital of approximately US$9.7 million. Restricted cash totaled approximately US$0.6 million at July 31, 2026, including noncurrent collateral for our U.S. office lease, and is presented separately from unrestricted cash and cash equivalents.

Our principal sources of liquidity have been cash generated from our operations and, in Fiscal 2026, the proceeds of our IPO. Based on our current operating plan, we believe that our available cash and funding are sufficient to meet our working capital needs and planned cash requirements for at least 12 months from the date of this annual report. Our future cash requirements will depend on many factors, including our revenue growth, marketing activities, development spending, developer advances, IP licenses and lease commitments. We also may invest in or acquire complementary businesses, applications or technologies.

The following table sets forth a summary of our cash flows for the periods indicated:

Operating activities

For the year ended July 31, 2026, our net cash used in operating activities was approximately US$3.2 million, which was primarily attributable to (i) net loss of approximately US$4.1 million; (ii) an adjustment of added non-cash items of a net amount of approximately US$6.9 million, which primarily include US$2.9 million of amortization of right-of-use asset, US$2.6 million of depreciation and amortization expenses, US$2.6 million in impairment of advance to game developers and US$2.0 million of share-based compensation, partially offset by US$2.4 million of deferred income tax benefit and US$0.7 million of non-cash foreign currency exchange gain; (iii) net decrease in cash and cash equivalents of about US$6.0 million related to changes in operating assets and liabilities, which primarily consists of US$6.0 million increase in advance to game developers for games under development, US$1.4 million increase in prepaid royalties for new IP licenses, US$0.7 million increase in prepaid expenses and other current assets, payment on leases of approximately US$2.9 million and an increase of US$0.4 million in other non-current assets. The use of cash and cash equivalents from the changes in operating assets and liabilities is partially offset by increase of about US$4.4 million in accrued advertising expenses due to timing of payments and increase of about US$1.5 million in tax payable.

For the year ended July 31, 2025, our net cash provided by operating activities was approximately US$0.1 million, which was primarily attributable to (i) net income of approximately US$3.8 million; (ii) an adjustment of added non-cash items of a net amount of approximately US$9.8 million, which primarily include US$2.7 million of depreciation and amortization expenses, US$3.6 million in impairment of advance to game developers and prepaid royalties and US$2.5 million of amortization of right-of- use asset; (iii) net decrease in cash and cash equivalents of about US$13.5 million related to changes in operating assets and liabilities, which primarily consists of US$3.9 million increase in advance to game developers and US$2.0 million increase in prepaid royalties for new IP licenses related to new games that were expected to be released in the year ending July 31, 2025 and decrease in accrued advertising expenses of approximately US$3.3 million due to timing of payments and payment on leases of approximately US$2.5 million.

For the year ended July 31, 2024, our net cash provided by operating activities was approximately US$1.6 million, which was primarily attributable to (i) net income of approximately US$6.0 million; (ii) an adjustment of added non-cash items of a net amount of approximately US$5.1 million, which primarily include US$2.1 million of depreciation and amortization expenses, US$1.6 million of amortization of right-of-use asset and about US$1.7 million deferred tax expenses; (iii) net decrease in cash and cash equivalents of about US$9.5 million related to changes in operating assets and liabilities, which primarily consists of US$4.6 million increase in advance to game developers and US$2.1 million increase in prepaid royalties for new IP licenses related to new games that were expected to be released in the year ending July 31, 2025 and increase of prepaid expenses and other current assets of about US$1.5 million due to significant increase in prepaid consumption taxes in Japan and decrease of about US$1.9 million in operating lease liabilities due to periodic lease payments made. The use of cash and cash equivalents from the changes in operating assets and liabilities is partially offset by increase of about US$0.9 million in accrued advertising expenses due to overall increasing in advertising expenditure.

Investing Activities

For the year ended July 31, 2026, we used approximately US$4.7 million in investing activities, primarily consisting of US$4.1 million of capitalized software development costs, US$0.4 million for property and equipment and US$0.1 million for films and television programs, partly offset by proceeds from disposals of property and equipment. The increase in investing cash outflows compared to Fiscal 2025 primarily reflected capitalized software development.

For the year ended July 31, 2025, we used about US$1.2 million in investing activities which primarily consists of US$0.6 million to purchase property and equipment, US$0.3 million used to invest in films and television programs of Japanese anime, and US$0.4 million used to provide a loan to a third-party game developer to support their operations.

For the year ended July 31, 2024, we used about US$1.2 million in investing activities which primarily consists of US$0.7 million used for purchase of property and equipment and about US$0.6 million in investments in films and television programs.

Financing Activities

For the year ended July 31, 2026, financing activities provided approximately US$10.5 million, primarily from our IPO. We received US$10.6 million in cash at closing after underwriting discounts and issuance costs deducted at closing and paid an additional US$0.1 million during Fiscal 2026. Total net cash proceeds after all cash offering costs were approximately US$9.4 million. This amount differs from cash received at closing because total offering costs also include costs paid before the IPO and amounts paid separately.

For the year ended July 31, 2025, we used about US$1.1 million in financing activities, including primarily US$1.1 million related to payment of deferred offering costs.

Capital Expenditures

Our Fiscal 2026 capital expenditures comprise purchases of property and equipment, investments in films and television programs and capitalized internal-use software development costs, and totaled approximately US$4.7 million.

Our capital expenditures were approximately US$1.2 million and US$1.3 million for the years ended July 31, 2025 and 2024, respectively.

We expect our capital expenditure to continue to be significant in the foreseeable future as we expand our business, enhance research and development capabilities, and improve operation efficiency and production capacity.

Our future capital requirements may be uncertain and actual capital requirements may be different from those we currently anticipate. To the extent the cash flows from our business activities are insufficient to fund future capital requirements, we may need to seek equity or debt financing. We will continue to make capital expenditures to support the expected growth of our business.

Tabular Disclosure of Contractual Obligations and Commitments

The following table sets forth our undiscounted obligations under commenced operating leases as of July 31, 2026:

These undiscounted payments are distinct from recorded lease liabilities of approximately US$6.3 million. A signed Tokyo lease had not commenced at July 31, 2026 and is excluded from the table. It commenced on September 1, 2026 and requires approximately US$0.2 million of rent and an additional security deposit of approximately US$33,000.

Additional developer advances of up to approximately US$4.8 million are conditional upon contractual milestones, including delivery and launch, and are not unconditional payment obligations. We paid US$0.6 million under these arrangements in August 2026. Unfunded registered capital and related commitments totaled approximately US$0.2 million at July 31, 2026.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

5.C. Research and Development

We believe that continued investment in research and development is key to our future growth. For the fiscal years ended July 31, 2026, 2025 and 2024, our research and development expenses were approximately US$3.8 million, US$5.5 million and US$0.9 million, respectively. In Fiscal 2026, we also capitalized approximately US$4.1 million of internal-use software development costs. These amounts reflect our continued investment in technology and content to improve users' gaming experience and increase operating efficiency. See "Item 4. Information on the Company-4.B. Business Overview-Our Platform-Our Pipelines."

5.D. Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended July 31, 2026 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial condition.

5.E. Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted by the United States of America ("U.S. GAAP"), which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. In each case, the determination of these items requires management judgements based on information and financial data that may change in future periods. When reviewing our financial information, you should consider: (i) our selection of accounting policies; and (ii) the results to changes in conditions and assumptions.

We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

Use of estimates and Assumptions

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates, and assumptions that affect: (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these judgments, estimates, and assumptions based on our historical experience, knowledge, assessment of current business and other conditions, and our expectations regarding the future based on available information. This forms our basis for making judgments about matters that are not readily apparent from other sources. Given that the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application. When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies, and the sensitivity of reported results to changes in conditions and assumptions. Our critical accounting policies and practices include: (i) revenue recognition; (ii) advance to game developers; (iii) prepaid royalties; and (iv) income taxes. See "Note 2 - Summary of Significant Accounting Policies" to our consolidated financial statements for the disclosure of these accounting policies. We believe the following accounting estimates involve the most significant judgments used in the preparation of our financial statements.

Expected credit loss

Our accounts receivable, other receivables, loans to third-party, and deposits are within the scope of ASC 326. ASC 326 introduces an approach based on expected credit losses on financial assets at amortized cost. Upon adoption of ASC 326, we estimate the expected credit losses for accounts receivable using the roll-rate method on a collective basis when similar risk characteristics exist. The roll-rate method stratifies the receivables balance by delinquency stages and projects the receivables balance forward in three-month increments using historical roll rates. In each year of the simulation, losses on the receivables are captured, and the ending delinquency stratification serves as the beginning point of the next iteration. The loss rate calculated for each delinquency stage is then adjusted for both current and forecasts of economic conditions. The management then applied the adjusted loss rate to respective receivables balance. For other receivables, loans to third party and deposits, we use the loss-rate method to evaluate the expected credit losses on an individual basis. When establishing the loss rate, we make the assessment on various factors, including historical experience, credit-worthiness of debtors, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from the debtors. We also provide specific provisions for allowance when facts and circumstances indicate that the receivable is unlikely to be collected.

Expected credit losses are included in general and administrative expenses in the consolidated statements of comprehensive income. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Valuation provision for advance to game developers

We entered into game service agreements with selected game developers with a proven track record of successfully launching games that drive substantial in-game purchases or strong end-user engagement to provide game developers among other things, game distribution services. To support the game developers in the development of games, we also agree to provide them non-interest bearing advances to game developers to support their game development activities. These advances are repaid through future revenue shares after games developed are released and distributed through our game distribution platform. We assessed the recoverability of the advances to game developers upon initial recognition and subsequently whenever there are indications that the carrying value of the advance to game developers may exceed the amount of consideration we expect to receive in the future. In such evaluation, we consider factors including but not limited to a) the popularity of the original intellectual property ("IP") on which the developed game is based; b) the technology and experience of the game developers; and c) our previous experience with similar IPs and games. Advances to game developers that do not meet the capitalization criteria or are subject to impairment are recorded as research and development expenses immediately.

Impairment of prepaid royalties

We contracted with licensors and distribution affiliates to obtain licenses related to their intellectual property assets that are derived from their Japanese animation products. Certain of these contracts include minimum guaranteed royalty payments which require us to pay the minimum guaranteed royalty payments in advance. The prepaid royalty payments related to niche titles with low expected monetization are expensed when incurred. Prepaid royalties expected to be recovered through future royalty payment deductions are initially capitalized and subsequently expensed as they are offset against future royalty payments. Each quarter, we evaluate the expected future realization of the prepaid royalties by comparing the undiscounted future cash flows and the carrying value of the prepaid royalties. If an impairment exists, then the related assets are written down to fair value. The amortization and impairment expenses related to royalties are recorded in the IP costs in the consolidated statements of comprehensive income.

Internal-use software

We account for software developed, obtained or modified for our internal needs, including software used to operate the G123 platform, under ASC 350-40. Following our prospective early adoption of ASU 2025-06, capitalization begins when management has authorized and committed to funding a project and it is probable that the project will be completed and used for its intended function, after significant development uncertainty has been resolved. Qualifying payroll and external direct development costs are capitalized; preliminary activities, training, maintenance, data conversion and general overhead are expensed. Enhancements qualify only when they add functionality and meet the capitalization criteria.

Capitalization ceases when the software or a functionally independent component is substantially complete and ready for intended use. Capitalized costs are amortized on a straight-line basis over an estimated three-year useful life from that date and are reviewed for impairment or abandonment. Significant judgments include whether completion and use are probable, whether development uncertainty has been resolved, which costs qualify and when software is ready for use.

Share-based compensation

We measure employee and nonemployee equity awards at grant-date fair value and recognize compensation over the requisite service period, or immediately for awards vested at grant. Option valuation requires estimates including expected volatility, expected term, risk-free interest rates and expected dividends. We account for forfeitures when they occur and allocate compensation expense to the functions in which recipients provide services.

Impairment of long-lived assets

Long-lived assets with finite lives, primarily property and equipment and investment in films and television programs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset's carrying value, then the asset is deemed to be impaired and written down to its fair value.

Income taxes

We account for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the combined financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

An uncertain tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.