KITAC CORPORATION

The Group's dependence on orders from government agencies is extremely high, exceeding 80%, with Niigata Prefecture as a particularly major customer. If the government implements structural reforms or significant reductions in public works spending, the order environment could deteriorate directly and substantially, potentially having a material impact on business performance. While the Group states that it strives to avoid and respond to this risk after recognizing it, no specific diversification measures are described.

Amid the continuing trend of restrained public works spending, intensifying bidding competition is increasing downward pressure on order unit prices. If price competition becomes further intensified, it could affect the Group's business performance through declining profitability. Combined with the high degree of dependence on government agencies, this creates a structure in which the impact of a deteriorating market environment on business performance is difficult to limit.

The Group operates a real estate leasing business, and financing associated with real estate acquisitions can temporarily increase interest-bearing debt and lower the current ratio. While this has not reached a level that pressures management at present, if future interest rate increases coincide with a deterioration in operating cash flow, the financial burden could increase, potentially affecting business performance.

The Group applies accounting standards related to impairment of fixed assets and recognizes impairment losses when the recoverable amount of grouped fixed assets falls below their book value. If asset values decline due to changes in the business environment, including the real estate leasing business, this could affect business performance and financial condition through the recording of impairment losses.

For work in progress on contracted projects where future losses are anticipated, the Group records the estimated loss amount as a provision for losses on contracted work, based on total expected revenue and total expected cost. The recording of this provision itself affects the Group's financial condition and operating results, and if losses exceeding the estimate occur, this could become an additional factor contributing to a deterioration in business performance.