D.Western Therapeutics Institute, Inc.

Due to the business characteristics whereby drug discovery research and clinical development expenses are incurred ahead of revenue, the Company has continuously recorded operating losses and negative operating cash flow, and events exist that raise material doubt about the going concern assumption. Although cash and deposits at the end of the current fiscal year under review stood at ¥1,709 million, if delays occur in bringing the development pipeline to market or if fundraising stalls, this could affect the continuity of the business. As countermeasures, the Company is securing funds through a combination of measures including securing royalty income, controlling development expenses, borrowings from financial institutions, and issuance of stock acquisition rights through third-party allotment.

Pharmaceutical research and development requires a long period and substantial investment from basic research through to obtaining approval, and the probability of success is extremely low compared to other industries. Confirmation of the safety and efficacy of both out-licensed pipeline products and new development candidates remains uncertain, and development may not proceed as planned. Such uncertainties could have a material impact on the financial position and operating results of the Group.

The Group's net sales consist of upfront income, milestone income, and royalty income; however, upfront and milestone income are not recorded on a recurring basis each fiscal period and fluctuate unstably. There is a risk that the timing of receipt of income may be delayed or income may disappear entirely due to changes in the development schedule of out-licensing partners, discontinuation of development, or failure to achieve sales plans. Except for the fiscal year ended December 2019, profit attributable to owners of parent and cash flow from operating activities have been negative, and there is a possibility that the Group may not achieve profitability in the future.

The Group's business model, in which income based on license agreements is highly dependent on out-licensing partners, provides no guarantee that out-licensing partners will advance development as originally planned. If changes to plans or suspension occur in the research and development activities of out-licensing partners, this would have a material impact on the Group's financial position and operating results. In addition, the industry-academia-government collaborative joint research agreement with Mie University is also essential to maintaining the Group's research and development structure, and similar risks exist if the agreement is terminated or amended.

The pharmaceutical industry is subject to extensive regulation at each stage of research, development, manufacturing, and sales under the Pharmaceutical and Medical Device Act and other related laws and administrative guidance in each country, and if sufficient data on quality, efficacy, and safety cannot be obtained, approval may not be obtained as planned. This applies equally to development candidates planned for out-licensing, and there is a risk that out-licensing itself under the originally planned terms may become difficult. If significant changes occur in the future to regulations such as the Pharmaceutical and Medical Device Act in various countries, this could also have a material impact on the financial position and operating results.

The Company issued stock acquisition rights with exercise price adjustment provisions allotted to SBI SECURITIES Co., Ltd. dated July 31, 2025, and the number of shares subject to such rights corresponds to 1,489,800 shares (2.7% of total shares issued) as of the end of the current fiscal year under review. If exercise of the stock acquisition rights proceeds, the value per share will be diluted; conversely, if exercise does not proceed, the Company may be unable to raise the planned funds, potentially forcing a review of its business plan. As long as the Company continues its fundraising policy centered on capital increases, additional dilution risk will remain in the future.

The Company's borrowings are subject to financial covenants and other compliance requirements, and if these covenants are breached, the Company could lose the benefit of the grace period on repayment, which could have a material impact on its financial position and operating results. Similar risks also exist if fundraising costs increase due to changes in financial conditions or rising interest rates. Under conditions of continuous operating losses, the risk of breaching financial covenants is potentially heightened.

As of the end of the current fiscal year under review, the Group holds 11 types of patent rights and patent applications; however, there is no guarantee that all pending patent applications will be granted, and even if granted, they may be superseded by superior competing technologies. In addition, if intellectual property disputes with third parties arise, this could have a material impact on business continuity, financial position, and operating results. Although patent searches are conducted, the Company recognizes that as a research and development-oriented company, it is difficult to completely avoid intellectual property issues.

In Japan, healthcare cost containment measures such as reductions in drug prices for prescription pharmaceuticals and promotion of generic drug usage continue to be implemented, and pressure to reduce drug prices is also increasing in overseas developed countries. These policy trends could affect the sales plans and revenues of out-licensing partners, potentially having a material impact on the Group's financial position and operating results through a decrease in royalty income received by the Group.

The Group is a small organization with 19 employees as of the end of the current fiscal year under review, and is highly dependent on specific personnel such as management, department heads, and other members. If the Group is unable to smoothly secure and develop excellent personnel, or if key personnel depart, this could have a material impact on business activities as well as financial position and operating results. The internal control system also remains commensurate with the scale of the organization, and strengthening the system in line with future organizational expansion is a challenge.