Kitahama Capital Partners Co., Ltd.

The Group recorded an operating loss of ¥989 million, an ordinary loss of ¥1,184 million, and a net loss attributable to owners of the parent of ¥1,268 million for the fiscal year under review, marking seven consecutive fiscal years of operating and ordinary losses and eight consecutive fiscal years of net losses. These circumstances give rise to a material doubt regarding the going concern assumption. As countermeasures, the Group is proceeding with the issuance of the 15th series of stock acquisition rights (raising ¥48 million) and initiatives in the battery storage facility development business; however, material uncertainty remains at present. The consolidated financial statements do not reflect the impact of this uncertainty.

The financial and real estate markets, which are the Group's core business areas, are exposed to the risk of a renewed global financial and economic crisis triggered by factors such as slowing economic growth in China and emerging countries, political instability in the Middle East, and economic uncertainty in EU countries. If the real estate market deteriorates beyond the Group's projections and asset values decline more than initially anticipated, this could lead to stalled responses from private fund investors and financial institutions, significantly pressuring the Group's earnings. While the Group seeks to mitigate this impact through diversification of investment targets, it is difficult to completely eliminate the risk of market fluctuations.

The Group's principal revenue sources are rental income from owned real estate and management fees from funds, with revenue growth premised on the expansion of the asset size of the funds and SPCs it manages and operates. If the performance of the managed funds and SPCs declines due to various factors, this could lead to lower valuations and prevent the asset size from expanding as expected. Because the revenue base is structurally limited, there is a high risk that deteriorating fund performance would directly impact business results.

As a result of personnel reductions accompanying business restructuring, dependence on specific officers and employees, including the Representative Director, has increased. If, for any reason, these specific officers or employees become unable to perform their duties, this could have a material impact on the Group's business results and future business activities. There is a risk that a sufficient alternative structure to reduce this dependence has not yet been adequately established.

The Group provides silent partnership (tokumei kumiai) investments, limited partnership investments, or loans that are subordinate to non-recourse loans to SPCs, as well as investments and loans to operating companies, which carry higher credit risk compared to ordinary trade receivables. If the financial condition of an investee or borrower deteriorates, recovery of invested capital may become difficult, potentially affecting business results and financial condition. Although the Group conducts due diligence to address this, the risk cannot be completely eliminated.

When SPCs for which the Group provides arrangement and asset management services procure non-recourse loans, it is customary to submit documentation indemnifying the lender against losses arising from certain specified events, such as fraud, tortious acts due to willful misconduct or gross negligence, or violations of environmental laws and regulations. If an indemnifiable event occurs and causes loss to the lender, the Group may bear indemnification liability, which could impact its business results. Although this is not a guarantee of the loan obligations in general, the risk of occurrence of events falling within the scope of indemnification cannot be eliminated.

SPCs managed and operated by the Group may raise funds through non-recourse loans from financial institutions, and if new SPCs are formed with floating-rate financing, an increase in interest rates could raise interest payments and affect the earnings of the SPCs. While financing has traditionally been arranged at fixed rates to eliminate the impact on fund performance, this may not be the case for future new fund formations. There is a risk that changes in the interest rate environment could spill over to affect the Group's business results and financial condition.

The Group's business is subject to direct and indirect regulation under laws such as the Act on Securitization of Assets, the Act on Limited Partnership for Investment, the Companies Act, and the Civil Code. Changes in the interpretation or amendment of these laws, or the establishment of new regulations, could necessitate changes to business content or result in new costs. In addition, if any fact constituting grounds for disqualification or revocation arises with respect to licenses, permits, or registrations held by the Group, this could impede business operations and have a material impact on business results. While the Group works with specialists to respond to changes in tax and accounting systems, there is a risk that the establishment of new systems or changes in interpretation could affect business operations.

The Group is a small organization with 38 employees as of the end of the fiscal year under review, and its internal control system remains commensurate with this organizational scale. If recruitment activities do not proceed as planned, or if employees with advanced expertise depart en masse, the establishment of an organizational structure appropriate to the scale of the business could be delayed, potentially affecting business execution and expansion. While the Group intends to continue strengthening personnel and internal management systems in line with business expansion, there is a risk that intensifying competition in the labor market could make it difficult to secure personnel as planned.

If, due to changes in accounting standards or other factors, the Group is deemed to exercise substantive control over funds and SPCs it manages and operates, such funds and SPCs could become subject to consolidation, affecting the Group's financial condition and operating results. The criteria for determining whether a special purpose company qualifies as a subsidiary were revised under accounting standard amendments in 2006 and 2011, and there is a risk that similar changes in standards could occur in the future. An expansion of the scope of consolidation could bring about unexpected fluctuations in financial indicators.