Kaga Electronics : Consolidated Financial Statements and Independent Auditors’ Report

Kaga Electronics Co., Ltd.

and Consolidated Subsidiaries

Consolidated Financial Statements for the Year Ended March 31, 2023

and Independent Auditor's Report

Independent Auditor's Report

To the Board of Directors of Kaga Electronics Co., Ltd.

Opinion

We have audited the consolidated financial statements of Kaga Electronics Co., Ltd. and its subsidiaries (the "Group" or the "Company"), which comprise the consolidated balance sheet as of March 31, 2023, and the consolidated statement of income and comprehensive income, the consolidated statement of changes in net assets and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of March 31, 2023, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with accounting principles generally accepted in Japan.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in Japan. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Japan, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

PricewaterhouseCoopers Aarata LLC

Otemachi Park Building, 1-1-1 Otemachi, Chiyoda-ku, Tokyo 100-0004, Japan

T: [phone], F: [phone], www.pwc.com/jp/assurance

Revenue recognition and valuation of inventories related to transactions with EuroTec Japan, Inc., and estimation of allowance for doubtful accounts

(Notes to consolidated financial statements, 2. c. Inventories)

(Notes to consolidated financial statements, 2.j. Allowance for doubtful accounts)

(Notes to consolidated financial statements, 2.o. Recognition of significant revenue and expense) (Notes to consolidated financial statements, 2.p. Significant Accounting Estimates) 1. Valuation of inventories related to transactions with EuroTec Japan, Inc.

Key audit matter description		How our audit addressed the key audit matter
In the electronic components business, the	In order to evaluate the appropriateness of
Company that sells rotorcrafts recorded inventory	revenue recognition for transactions from
transactions with EuroTec Japan, Inc.	EuroTec, we performed the following principal
("EuroTec") 867 million yen (0.3% of total	audit procedures:
consolidated assets, 2,243 million yen in the	•	We obtained an understanding, evaluated the
previous consolidated fiscal year). The Company		design and implementation, and tested the
has also recorded allowance for doubtful accounts
	operating effectiveness of internal controls
of 4,387 million yen (1,868 million yen in the
	related to revenue recognition of rotorcrafts.
previous consolidated fiscal year) against the
•	In order to evaluate collectability of
outstanding receivables balance of 6,570 million
	consideration for the revenue recognition
yen (2.3% of total consolidated assets, 2,256
	from EuroTech, which is undergoing legal
million in the previous consolidated fiscal year)
	proceedings under the Civil Rehabilitation
related to EuroTec.
	Act, we performed the inspection of the
The revenue related to rotorcrafts is recognized		agreement with EuroTech, sales contracts
	between EuroTech and its end user, and the
when the goods are delivered to the customers
	payment vouchers for the sales.
since the legal ownership of goods, significant
•	In order to evaluate the validity of occurrence
risks associated with its ownership, and its
economic value are transferred, and performance		and cutoff for the sales of rotorcrafts, we
obligation is satisfied. The Company writes down		performed an inspection of aircraft
the carrying value of inventory when the net		registration certificates and the receipt.
realizable value is less than its cost. EuroTec is
undergoing legal proceedings under the Civil	In order to evaluate the valuation of inventory for
Rehabilitation Act, and the Company's inventories
transactions from EuroTec and the estimated
for which the sales orders were cancelled were
allowance for doubtful accounts related to
evaluated at net realizable value based on
receivables due from EuroTec, we performed the
appraised value that the market approach in the
following principal audit procedures:
basis of the future demand forecast and used-
•	We obtained an understanding, evaluated the
market price trends. In addition, for inventory
	design and implementation, and tested the
assets for which orders continue to be received,
	operating effectiveness of internal controls
the net selling price is calculated by considering
	related to the valuation of inventory for
EuroTec's cash flow prospects in the contract
	rotorcrafts and the estimated allowance for
amount.
	doubtful accounts.
Additionally, the Company recorded the	•	In order to evaluate the reasonableness of the
estimated uncollectible amount as the allowance		estimate of the net selling price of rotorcrafts,
for doubtful accounts for EuroTec using the		we performed the following principal audit
financial condition evaluation method.		procedures:
The sales transaction of rotorcraft ordered from		-	We asked the management to compare
		the future demand forecast and used-
Eurotech was a new business for the Company
		market price trends, and ensured
with quantitative significance and under an
		consistency of market distribution
agreement that was ongoing since before the
		situation and used-aircraft market price
previous consolidated fiscal year. Therefore, it is
		data including rotorcrafts and sales in
necessary for the Company to carefully examine
		the pre-owned aircraft market.

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whether the revenue recognition is appropriate.	•	In order to evaluate the reasonableness of the
The Company determined the net realizable value		estimated allowance for doubtful accounts
of inventories and the estimated uncollectible		related to receivables, we performed the
amount for receivables by taking into		following principal audit procedures:
consideration of the future demand forecast for		-	In calculating the estimated allowance
rotorcraft, used-market price trends, and			for doubtful accounts of receivables, we
EuroTec's proposed reproduction plan.
		confirmed the consistency with
These estimates are subject to a high degree of			Eurotech's proposed rehabilitation plan
		used by the Company regarding the
uncertainty, and may be subject to significant
		estimated uncollectible amount for
management judgment. Therefore, we determined
		rehabilitation claims of the receivables
that the matter is a key audit matter.
		for EuroTech.
		-	With regard to the other receivables, we
			vouched the available information of the
			proceeds from the sales to the end users
			of rotorcrafts, which is the source of
			collected funds.

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Valuation of unlisted securities shares including venture capital investments

(Notes to consolidated financial statements, 2.p Significant Accounting Estimates) 2. Evaluation of unlisted securities, including venture investments

Key audit matter description		How our audit addressed the key audit matter
The Group invests in newly formed companies in	In order to evaluate the investment securities
growth markets such as electronic devices for	including unlisted securities, we performed the
vehicles, environmentally friendly technology	following principal audit procedures:
solutions, communications, and new markets	•
such as medical/healthcare to generate	We obtained an understanding, evaluated the
innovation.		design and implementation and tested the
As of March 31, 2023, the Group recorded		operating effectiveness of internal controls
	related to the process of the valuation of
investment securities, including unlisted		investments in venture companies including
securities, of 1,058 million yen (0.4% of total		the valuation loss of the excess earning
consolidated assets) on the consolidated balance		capacity.
sheet, and a loss on valuation of investment	•	We inquired of officers and management of
securities of 348 million yen (1.1% of income		the Company regarding the assessment
before income tax) on the consolidated statements
	process of investments in venture companies
of income and comprehensive income.
	at the time of acquisition and the most recent
With respect to unlisted securities, investments in		financial status and operating results. We
	inspected the results of the analysis
venture companies may be acquired at a higher
	conducted by the Company on future
price than the net asset value, reflecting the future
	business environment forecasts and other
economic benefits arising from the investee's
	factors. In addition, we inquired about the
operations. The recent performance of the
	impact on the valuation of securities due to
investee is compared to the medium-to-long term
	estimates of the excess earning capacity of
business plan obtained at the time of acquisition.
	investee companies.
If the projected future economic benefits have
•	We obtained the assessment prepared by
significantly declined and are no longer expected
	management and considered whether the
to be realized, a valuation loss is recorded. The
	Company should recognize any impairment.
Company and its consolidated subsidiaries
	In addition, we compared the forecasted
recognize valuation losses only when the actual
	financial projections developed by the
value of the assets has declined significantly.
	investees' management to the valuation of
The assumptions used in the assessment of		the investments.
•	We inspected the evidence related to the
investment securities include unlisted securities
shares that involve management's judgment and		value at the acquisition to verify the accuracy
because of the high degree of estimation		of the acquisition cost.
uncertainty and the quantitative significance of
the investment securities balance, judgment is
required for the evaluation. Therefore, we
determined that this matter is a key audit matter.

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Other Information

The other information comprises the information included in a document containing audited consolidated financial statements, but does not include the consolidated financial statements and our auditor's report thereon. We have determined that there is no other information and thus have not performed any work on other information.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in Japan, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern and disclosing, as applicable, matters related to going concern.

Those charged with governance are responsible for overseeing the Group's financial reporting process.

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with auditing standards generally accepted in Japan will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with auditing standards generally accepted in Japan, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, while the purpose of the consolidated financial statement audit is not to express an opinion on the effectiveness of the Group's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's

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report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.

• Evaluate whether the presentation and disclosures of the consolidated financial statements are in accordance with accounting principles generally accepted in Japan, the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Convenience translation

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2023 are presented solely for convenience. Our audit also included the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis described in Note 1 to the consolidated financial statements.

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Interest required to be disclosed by the Certified Public Accountants Act of Japan

Our firm and its designated engagement partners do not have any interest in the Group which is required to be disclosed pursuant to the provisions of the Certified Public Accountants Act of Japan.

Kensuke Koda	Masaki Nitta
Designated Engagement Partner	Designated Engagement Partner
Certified Public Accountant	Certified Public Accountant
PricewaterhouseCoopers Aarata LLC
November 30, 2023

Notes to the Reader of Independent Auditor's Report:

This is a copy of the Independent Auditor's Report and the original report is kept separately by the Company.

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Kaga Electronics Co., Ltd. and Consolidated Subsidiaries

Consolidated Balance Sheet
At March 31, 2023
											Thousands of
											U.S. Dollars
			Millions of Yen		(Note 1)
ASSETS			2022				2023			2023
CURRENT ASSETS:
Cash and bank deposits	¥	41,051		¥	52,600		$ 393,923
Notes receivable-trade			1,449			1,534		11,492
Electronically recorded monetary claims			9,258			9,683		72,517
Accounts receivable-trade			110,240			117,881		882,810
Short-term investment securities			264			195		1,463
Merchandise and finished goods			46,230			41,375		309,855
Work in process			2,363			2,277		17,056
Raw materials and supplies			14,013			12,552		94,007
Others			9,388			7,624		57,098
Allowance for doubtful accounts			(275)		(153)	(1,147)
Total CURRENT ASSETS			233,984			245,572			1,839,077
NONCURRENT ASSETS:
PROPERTY, PLANT AND EQUIPMENT
Buildings and structures			15,033			15,680		117,434
Accumulated depreciation			(8,108)		(8,990)	(67,326)
Buildings and structures, net			6,925			6,690			50,107
Machinery, equipment and vehicles			14,181			16,187		121,226
Accumulated depreciation			(8,132)		(9,721)	(72,800)
Machinery, equipment and vehicles, net			6,048			6,466			48,426
Tools, furniture and fixtures			5,697			5,880		44,042
Accumulated depreciation			(4,667)		(4,777)	(35,780)
Tools, furniture and fixtures, net			1,030			1,103			8,261
Land			5,074			5,859		43,881
Construction in progress			313			39			292
Total PROPERTY, PLANT AND EQUIPMENT			19,393			20,158		150,969
INTANGIBLE ASSETS
Goodwill			98			48		363
Software			3,021			2,617		19,601
Others			42			36			270
Total INTANGIBLE ASSETS			3,163			2,702		20,235
INVESTMENTS AND OTHER ASSETS:
Investment securities ※1			10,313			12,144		90,949
Deferred tax assets			2,189			2,162		16,193
Guarantee deposits			1,068			1,280		9,587
Insurance funds			915			920		6,892
Distressed receivables			2,295			4,842		36,263
Others			1,171			1,298		9,727
Allowance for doubtful accounts			(2,355)		(4,864)	(36,426)
Total INVESTMENTS AND OTHER ASSETS			15,598			17,784			133,187
Total NONCURRENT ASSETS			38,155			40,645			304,391
Total ASSETS	¥	272,139		¥	286,217		$ 2,143,469
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Kaga Electronics Co., Ltd. and Consolidated Subsidiaries

Consolidated Balance Sheet

At March 31, 2023

												Thousands of
												U.S. Dollars
			Millions of Yen		(Note 1)
LIABILITIES			2022					2023			2023
CURRENT LIABILITIES:
Notes and accounts payable-trade	¥	86,493		¥	79,232		$ 593,371
Short-term loans payable			23,858				19,585		146,674
Accrued expenses			7,138				8,400		62,907
Income taxes payable			2,834				6,011		45,018
Provision for directors' bonuses			301				465		3,485
Others ※2			12,291				13,852			103,739
Total CURRENT LIABILITIES			132,918				127,547		955,196
NONCURRENT LIABILITIES:
Bonds payable			-				10,000		74,889
Long-term loans payable			25,136				10,600		79,382
Deferred tax liabilities			2,046				2,634		19,728
Provision for directors' retirement benefits			123				143		1,073
Net defined benefit liabilities			2,095				2,148		16,092
Asset retirement obligations			572				627		4,701
Others			3,446				2,778			20,805
Total NONCURRENT LIABILITIES			33,421				28,932			216,673
Total LIABILITIES			166,339				156,479		1,171,870
NET ASSETS:
SHAREHOLDERS' EQUITY
Share capital			12,133				12,133		90,867
Capital surplus			14,818				14,820		110,988
Retained earnings			77,423				95,945		718,532
Treasury shares			(5,643)			(5,614)	(42,043)
Total SHAREHOLDERS' EQUITY			98,732				117,285			878,345
ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in the fair value of available-for-sale securities			1,299				2,534		18,977
Deferred gains or losses on hedges			(2)			(18)	(141)
Foreign currency translation adjustment			5,439				9,568		71,655
Remeasurements of defined benefit obligations			210				239			1,792
Total ACCUMULATED OTHER COMPREHENSIVE INCOME			6,948				12,322			92,283
Non-controlling interests			120				129			970
Total NET ASSETS			105,800				129,737			971,599
Total LIABILITIES AND NET ASSETS	¥		272,139		¥		286,217		$ 2,143,469

The accompanying notes are an integral part of these financial statements.

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