MUSCAT GROUP Inc.

Operating cash flow was negative ¥406 million in the previous consolidated fiscal year and negative ¥676 million in the current consolidated fiscal year, marking two consecutive years of negative operating cash flow, giving rise to material events that raise significant doubt about the going concern assumption. As countermeasures, the Company is working to improve the profitability of existing brands and reduce costs, and has raised a total of ¥1,453 million through third-party allotments of new shares and borrowings during the current consolidated fiscal year, with prospects for continued fundraising in the following fiscal year. Cash and deposits at the end of the current consolidated fiscal year stood at ¥689 million, an increase of ¥145 million from the previous fiscal year-end, but structural risk from continued dependence on external fundraising remains.

The Company is subject to a wide range of laws and regulations including the Act against Unjustifiable Premiums and Misleading Representations, the Act on Specified Commercial Transactions, the Pharmaceuticals and Medical Devices Act, the Act on the Protection of Personal Information, and the Food Labeling Act, and there are also risks of stealth marketing issues and copyright/portrait right infringement in influencer marketing. If legal violations occur or new regulations are enacted or interpretations change, this could affect financial position and operating results through administrative sanctions, damage claims, and brand image impairment. As countermeasures, the Company has established its own evaluation criteria for influencer selection, contractual obligation provisions, and a collaborative framework with retained legal counsel.

There is a risk that differentiation of the Group's traditional brand production methods could become difficult due to the entry of competitors with superior financial and human resources, specification changes or discontinuation of external tools and platforms, and the spread of new technologies such as generative AI. If these risks materialize, the core competitive advantage of product planning and marketing capability leveraging community data could be undermined, potentially affecting financial position and operating results. As countermeasures, the Company is working on securing and developing specialized personnel, actively utilizing new technologies including generative AI, and expanding the functionality of its proprietary tools.

There is a risk that existing brand image could be temporarily or permanently damaged due to rapid changes in consumer preferences and values, as well as the instant spread of negative reputation through social media. Delayed responses to social expectations regarding sustainability, diversity, and fairness could also damage trust relationships with consumers, potentially leading to a decline in brand value. As countermeasures, the Company has strengthened its social media monitoring system, enhanced product planning capability based on consumer insights, and established a rapid response framework for reputation risk.

If personal information is leaked due to unauthorized access, cyberattacks, or internal misconduct, or if legal violations occur in the process of collecting or using personal information, this could result in damage claims, administrative sanctions by regulatory authorities, and loss of trust, potentially affecting financial position and operating results. The Company terminated its Privacy Mark certification in July 2025 and is currently preparing to obtain ISMS (ISO27001) certification, raising concerns about a gap in the management framework during the transition period. As countermeasures, the Company has strengthened access authorization management, continuously reinforced system security, and conducted regular training and education for all officers and employees.

The advertising services in the brand partner domain depend on major social media platforms such as Instagram, Facebook, X, TikTok, and LINE, and if user usage trends change, advertising terms and conditions are revised, or platform usage is restricted or suspended due to geopolitical risks, the Company may be forced to change its marketing methods and structure, potentially affecting financial position and operating results. As countermeasures, the Company is continuously researching the latest usage trends and regulatory developments, and diversifying its marketing methods and the media platforms it uses.

The Company has recorded goodwill arising from past business combinations, and if the profitability of subsidiaries and other entities declines significantly, the recoverable amount may fall below the book value of goodwill, potentially requiring impairment treatment. If the performance of acquired companies deteriorates or PMI is delayed amid the Company's active pursuit of M&A strategy, this could have a material impact on financial position and operating results. As a countermeasure, the Company has established a framework for continuous monitoring of post-acquisition performance and business environment, along with early assessment of recoverable amounts.

The Company has adopted a stock option system aimed at providing incentives to directors and employees, and is considering the granting of additional stock acquisition rights going forward. In addition to stock acquisition rights already granted, if additional stock acquisition rights granted in the future are exercised, the value of shares held by existing shareholders could be diluted. Furthermore, given the ongoing need for external fundraising, additional dilution risk also exists from third-party allotments of new shares and similar measures.

Amid increasing and more complex non-routine accounting estimates driven by active M&A and organizational restructuring, the comprehensiveness of review items in the financial reporting process and the management's evaluation and approval framework were not sufficiently established and operated, resulting in an error in the recognition of valuation losses on shares of affiliated companies, which constituted a material weakness to be disclosed in internal controls over financial reporting. As recurrence prevention measures, the Company has standardized subsidiary performance reporting, improved monitoring of accounting estimate items, and reinforced staffing and training in administrative departments, but establishing an adequate framework following the transition to a holding company structure remains an ongoing challenge.

General Incorporated Association MOM and Harujukai Medical Corporation are consolidated subsidiary corporations of the Company, but this consolidation is based on a determination of substantive control under the current interpretation of the Medical Practitioners' Act and the Medical Care Act, and if there is a legal amendment or a change in interpretation by the supervisory authority, the control relationship could be denied, potentially forcing exclusion from consolidation. Discussion regarding partnerships between non-profit corporations and for-profit companies in the medical field is becoming more active, and there is a risk of changes in the regulatory environment. As countermeasures, the Company continues to gather and analyze information in collaboration with specialized legal counsel and is considering alternative business and partnership models.