SHINWA WISE HOLDINGS CO.,LTD.

At consolidated subsidiary Shinwa Prive Co., Ltd., improper accounting treatment related to private sales was discovered spanning FY2019 (ending May 2019) through FY2024 (ending May 2024). Following an investigation by a third-party committee, corrected securities reports for prior fiscal years were filed. Identified causes include governance issues (absence of officers such as certified public accountants), concurrent holding of management and execution duties by the same personnel, and insufficient resources in the internal audit office. As recurrence prevention measures, the company has established a Governance Committee and a Risk Compliance Committee, rebuilt its internal audit structure, and revised internal regulations, but if the strengthening of these systems proves insufficient, it could disrupt business operations.

The Group has fewer than 50 employees, and its internal management structure remains scaled to this small size. In the previous consolidated fiscal year, a material weakness was identified in internal controls related to the financial closing and reporting process as well as business processes. If efforts to secure personnel and strengthen the management structure prove insufficient, the Group may be unable to respond organizationally in an appropriate manner, leading to reduced organizational efficiency and potential disruption to business operations. While the Group intends to actively strengthen its internal management structure and add personnel, structural constraints stemming from its small organizational size remain.

The Group's core auction-related business may be affected if listing volumes decline due to economic conditions or the entry of new competitors. While mid-priced modern art works show signs of bottoming out and high-priced works show an upward trend, the business structure is highly sensitive to changes in the external environment. As countermeasures, the Group is strengthening sales efforts to solicit quality listings, hiring international marketing personnel, improving the convenience of its live bidding system, and cultivating new customer segments.

The Group purchases and holds masterpiece-class works of modern art as strategic inventory, and significant fluctuations in economic conditions or the art market may necessitate a review of valuations. If sales do not proceed as planned, there is a risk that funds may become tied up over an extended holding period, and expected sales revenue may not be realized, potentially affecting business performance. While the Group's policy is to hold such works until optimal conditions for the timing, price, and buyer are in place, depending on market conditions, this could result in prolonged capital lock-up.

Although the authenticity of works listed for auction is entrusted to authoritative third-party appraisal institutions, if a work later found not to be genuine is mistakenly handled, this could damage the Group's credibility and affect business performance. Under the auction terms, if a work is proven not to be genuine within one year of the auction date, the Group is obligated to refund the purchase price to the winning bidder, which could also result in financial losses. Note that low-priced works and antiques for which authenticity determination is difficult are excluded from this guarantee.

To encourage listings, the Group adopts an advance payment system under which a portion of the sale proceeds is paid in advance at the time a sales consignment contract is concluded. If a consignor is unable to repay the advance payment for an unsold work, this could affect business performance. In addition, under lump-sum guarantee transactions in which the Group guarantees a minimum total hammer price for large listings, business performance could also be affected if the actual total hammer price falls short of the guaranteed amount. As a countermeasure, the Group has established a system in which the Board of Directors monitors anomalies, such as the degree of deviation from appraised values, based on an advance payment list prepared by the administrative department.

The Group has insured works in storage against theft and fire, but accidents caused by natural disasters such as earthquakes are not covered by insurance, and if works are damaged as a result, this could affect the Group's business performance and financial condition. In addition, under the auction terms, damages arising from the Group's willful misconduct or gross negligence may fall outside the scope covered by ordinary casualty insurance. A structural gap exists in insurance coverage for storage-related risks.

The Group is bound by confidentiality obligations regarding customer information under sales consignment contracts with auction consignors, and if information is leaked externally due to an unforeseen event, this could result in a decline in transaction volume due to loss of credibility as well as losses from damages claims. While the Group states that it exercises sufficient care in handling personal information, the limitations of its security infrastructure as a small organization represent a latent risk. As countermeasures, the Group continues personal information training and takes appropriate measures to strengthen information security.

The Group's auction business is subject to regulations under the Civil Code, Commercial Code, Consumer Contract Act, the Antique Dealers Act, and other laws, and since the auction business format is not yet fully recognized within Japan, future regulatory changes that hinder operations could affect business activities. In addition, as the range of items handled expands to include alcoholic beverages, jewelry and precious metals, Western art, and ivory, the Group may increasingly become subject to individual laws and regulations such as the Liquor Tax Act, the Act on Prevention of Transfer of Criminal Proceeds, the Electrical Appliance and Material Safety Act, and the Act on Conservation of Endangered Species. If items become unable to be handled in the future, the Group may be forced to revise its business plans, which could affect business performance.

The Group's overseas local subsidiaries prepare financial statements denominated in foreign currencies, and sharp exchange rate fluctuations could affect business performance and financial condition due to translation risk when converting to yen. In addition, a portion of long-term borrowings from financial institutions carries variable interest rates linked to market rates; while the Group uses interest rate swap transactions, valuation gains or losses from mark-to-market accounting at each fiscal period end could affect business performance. As these market risks depend on the external environment, the Group's ability to control them is limited.