Modalis Therapeutics Corporation

The Group has recorded continuing operating losses and negative operating cash flow, and conditions exist that raise material doubt about the going concern assumption. Cash and deposits at the end of the current consolidated fiscal year stood at ¥2,812,367 thousand, and while the Group judges that it has secured funds for business activities for the next consolidated fiscal year, it does not yet have a sufficiently stable source of revenue. As countermeasures, the Group is working on continuing research and development centered on MDL-101 (for LAMA2-CMD), pursuing partnering negotiations, and reducing costs through the optimization of the research and development structure.

Pharmaceutical development requires substantial R&D investment and long periods of time, and it is not rare for development not to proceed as planned—resulting in decisions to extend or discontinue programs—due to factors such as failure to identify useful efficacy in clinical or preclinical trials. If the launch timing is delayed, additional funding will be required and the remaining patent term will be shortened; if the launch is abandoned, the R&D funds invested may not be recovered. As a countermeasure, the Group's policy is to diversify risk through collaboration with partner companies and portfolio management of the pipeline.

As a research and development-oriented company, the Group requires substantial R&D funding and has continuously recorded operating losses during the long period of upfront investment, and currently does not yet have a sufficiently stable source of revenue. If the Group is unable to secure funds at the necessary times, there is a possibility that material concerns regarding the continuation of the business may arise. As a countermeasure, until a stable source of revenue is secured, the Group's policy is to implement fundraising and other measures at appropriate times to strengthen its financial base.

In the CRISPR field, new patents continue to be generated even as fundamental patents remain in dispute, and the overall picture of intellectual property rights in related fields remains chaotic. If the Group or its licensors fail in the procedures to obtain necessary licenses, they may be unable to use licenses on commercially reasonable terms, or may be unable to use them at all, which could materially affect business strategy. As a countermeasure, the Group seeks to protect the patents related to each product, including its own patents, while concurrently considering the introduction of necessary patents.

In addition to CRISPR/Cas9, various genome editing technologies exist (ZFN, TALEN, various Cas families, etc.), and multiple competitors have been established, including Chroma Medicine and Tune Therapeutics, which advocate epigenetic regulation. The Group is in a state of intense competition with numerous domestic and international companies and research institutions, including major global corporations, and there is no guarantee that the Group can continue to maintain its competitive advantage. As a countermeasure, the Group upgrades each core technology and monitors the latest technology trends, and for pipelines judged unable to maintain a competitive advantage, the Group reviews the portfolio as appropriate, including discontinuation.

Domestic and international regulations related to gene therapy drugs may be constantly changed and reviewed to respond to the latest technological innovations, creating risks that development policies previously accepted may no longer be permitted, or that drug approvals may not be granted as expected or may take longer than expected to obtain. In addition, if advanced medical care promotion policies in medically advanced countries such as the United States and Japan are adopted in ways unforeseeable by the Group, this could materially affect business strategy and operating results. As a countermeasure, the Group's policy is to monitor regulatory trends and, where necessary, engage with authorities through industry associations.

The Group has entered into important license agreements fundamental to its business with the University of Tokyo, Editas Medicine, and the Broad Institute. If factors arise that impede the continuation of these agreements, or if the agreements are amended on terms unfavorable to the Group, or if they are not renewed upon expiration, this could materially affect the Group's business, results of operations, and financial condition. At present, no factors impeding the continuation of any of the agreements have arisen, but the risk of violating termination clauses in any of the agreements cannot be denied. As a countermeasure, the Group strives to maintain good relationships while complying with laws and regulations, including through oversight by the Board of Directors.

The collaboration model pipeline includes clauses allowing termination by partners, and agreements may be terminated before expiration due to changes in a partner's management policy or deterioration of its business environment. Furthermore, since clinical trials and approval applications after out-licensing are led by the partner, the Group cannot control them, creating risk that delays or abandonment could result in loss of milestone income and royalties. In addition, industry reorganization and M&A could rapidly change a partner's management structure; as a countermeasure, the Group's policy is to diversify risk through portfolio management of the pipeline.

The Company may flexibly implement fundraising centered on capital increases in connection with the future expansion of research and development activities, and an increase in the number of shares issued may dilute the value per share. In addition, on August 25, 2025, the Company issued the 17th series of stock acquisition rights (with an exercise price adjustment clause) allotted to EVO FUND; as of the end of the month preceding the filing date, potential shares consisted of 8,752,500 shares (9.8%) related to stock options and 6,580,000 shares (7.3%) related to these stock acquisition rights, against a total of 89,554,098 issued shares. As a countermeasure, the Company's policy is to allocate raised funds to research and development and aim for stable future profit growth in order to minimize dilution.

As of the end of the month preceding the filing date, the Group is a small organization consisting of 6 directors, 3 employees, and 14 subsidiary employees, and business activities are heavily dependent on management, including Representative Director and CEO Haruhiko Morita, and a small number of research and development personnel. If the Group is unable to smoothly secure and develop excellent personnel, or if personnel attrition occurs, this could disrupt business activities and materially affect operating results and financial condition. As a countermeasure, the Group strives to establish HR systems and a corporate culture in which diverse personnel can thrive, and to recruit under competitive conditions, including through the introduction of stock acquisition right plans and post-vesting stock compensation plans.