SDS HOLDINGS Co.,Ltd.

Although the Group achieved profitability at the operating income level, it recorded a net loss attributable to owners of the parent, giving rise to a possibility of significant concern regarding cash flow. The Group therefore recognizes that events exist which raise substantial doubt about its ability to continue as a going concern. As a countermeasure, the Group has entered into a basic commitment line agreement with the representative director for a maximum limit of ¥300 million and judges that this is sufficient to cover working capital needs; however, the risk remains that cash flow could deteriorate due to delays in the recovery of business performance or changes in the external environment.

The Group has continued to record losses over an extended period, making it difficult to raise funds through borrowing from banks and other financial institutions. As a result, the Group depends on borrowings from investors and equity financing. If fundraising becomes difficult due to delays in the recovery of business performance or changes in economic conditions, or if the Group is forced to raise funds on significantly unfavorable terms, this may adversely affect its business and results of operations.

Net assets at the end of the consolidated fiscal year under review amounted to only ¥741 million, indicating a fragile financial base. The Group is considering promoting the energy-saving equipment-related business, establishing a low-cost structure, and strengthening capital through equity financing; however, if these initiatives are delayed, the Group could fall into a state of negative net worth, which may have a material adverse effect on its business and results of operations.

The Group's construction operations depend on the specific construction business license under the Construction Business Act (held by Shodensha Co., Ltd.). If this license is revoked or its renewal is denied, this could impede business execution and have a material impact on results of operations. In addition, the Group company Yellow Capital Orchestra Co., Ltd. holds a license under the Building Lots and Buildings Transaction Business Act, and any abolition or amendment of related laws and regulations, or the introduction of new regulations, may also affect business performance.

The Group's business performance is highly dependent on trends in the domestic housing market. A sluggish economy, deterioration in the employment environment, changes in interest rate policy, fluctuations in land prices, and rises in the prices of materials such as lumber may reduce customers' willingness to purchase housing. As countermeasures, the Group is pursuing full-scale entry into the renovation business and scrutinizing real estate procurement with an emphasis on profitability; however, if the market environment deteriorates beyond expectations, this may affect the Group's financial position and results of operations.

The Group faces competition with other companies over pricing and transaction terms. If competitors set prices without regard to profitability, the Group may lose business opportunities. In particular, when competing against larger rivals with lower funding costs, the Group's profits may decline, adversely affecting its business activities, financial position, and results of operations.

As of March 31, 2026, the Group is a small organization with 7 officers and 21 employees, and its internal control systems remain commensurate with the current organizational scale. While the Group intends to strengthen its workforce and enhance its internal control systems as its business expands, if it is unable to secure the necessary personnel or if the development of its control systems is insufficient, this may affect business execution and expansion, and the increase in fixed costs resulting from organizational expansion may also adversely affect business performance.

In developing the energy-saving related business, human resources are the most critical management resource, and a certain period of training is required before newly hired personnel can offer comprehensive proposals to customers. If the Group is unable to secure the personnel it seeks, or if such personnel leave the Group, this may adversely affect business execution. Given the Group's small organizational scale, there is also concern regarding its high degree of dependence on specific personnel.

The Group handles large volumes of confidential information and customer data, and recognizes the prevention of information leakage as an important management issue. In the event of an information leak, the Group may face claims for damages, administrative sanctions by regulatory authorities, and response costs, as well as a decline in trust among customers, business partners, and shareholders, which may adversely affect its business and results of operations.

Although the Group strives to instill a compliance mindset and develop its internal control systems, unforeseeable or unpreventable misconduct could result in significant damage. In addition, there is a risk that risk management functions may not operate adequately in the event of new business expansion, rapid growth of existing businesses, or sudden changes in external factors, and given the Group's small organizational scale, the limitations of its control systems are a matter of concern that may become more apparent.