CHARM CARE CORPORATION

The Group's core business, paid nursing homes with care services, is designated under the Long-Term Care Insurance Act as "Specified Facility Residential Care for the Elderly" and depends on nursing care fee revenue. Nursing care fees are revised every three years, and a reduction was actually implemented in 2015; if an unfavorable revision is made in the future, it will directly affect revenue. In addition, if the Group fails to meet the designation criteria, it may be subject to administrative sanctions, which could lead to fee reductions or business suspension.

The Group's business is concentrated in the facility-based nursing care business, centered on paid nursing homes with care services, and diversification of operations is limited. If the Long-Term Care Insurance Act and the Act on Social Welfare for the Elderly are revised with the intent of shifting the system toward home-based care, the Group may be forced to fundamentally change its current business strategy. While demand is expected to expand due to the aging population, there is a structural vulnerability to changes in the external environment.

As the aging population progresses, new entrants from other industries and business expansion by competitors are accelerating, raising concerns about price competition and increased costs to improve service quality in the regions where the Group operates. If the total volume regulation on specified facilities is eased, an increase in new entrants may cause a decline in the occupancy rate of existing homes and a slowdown in the pace of occupancy at new homes. These directly affect the occupancy rate and profitability.

The Group primarily raises funds for new home openings and investments in the real estate business through borrowings from financial institutions. As of June 30, 2025, the balance of interest-bearing debt was ¥13,455 million, with an interest-bearing debt dependency ratio of a high 25.7%. Loan agreements with MUFG Bank, Resona Bank, and Mizuho Bank contain financial covenants, and breaching these covenants may result in demands for repayment or the requirement to provide collateral. An increase in funding costs due to a rise in market interest rates may also affect the Group's financial position.

The Group classifies its land and building lease agreements as operating leases on the grounds that they may be cancelled through designation of a successor lessee; however, the total outstanding lease payments related to these agreements amounted to ¥224,420 million as of June 30, 2025. If lease accounting standards change, or if the performance of individual homes or the market environment deteriorates, the leases could be reclassified as finance leases, bringing lease assets and lease liabilities onto the balance sheet and significantly reducing the equity ratio from its current level.

The Group provides deposits when leasing properties for new home openings, and the balance of lease deposits as of June 30, 2025 was ¥6,502 million, representing a high 12.4% of total assets. If the lessor's financial condition deteriorates and all or part of the deposits become unrecoverable, this could materially affect the Group's financial position and operating results. Although the Group thoroughly manages credit risk, the risk of subsequent deterioration in the lessor's business condition cannot be eliminated.

Operating paid nursing homes with care services requires meeting statutory staffing standards (qualification requirements and staffing ratios), and failure to meet these standards can lead to administrative sanctions. As labor shortages become more severe across the nursing care industry as a whole, the Group is taking measures such as actively recruiting new graduates and mid-career hires, restructuring career path systems, improving working conditions, and increasing operational efficiency through IT and AI adoption. However, if these measures fail to produce sufficient effect, it may become difficult to maintain the service delivery system, which could affect the Group's financial position and operating results.

Opening new specified facilities requires applying for and being selected in public tenders conducted by each prefecture and municipality under the total volume regulation, and failure to be selected as planned would hinder the execution of the business plan. Even after selection, if resident move-ins do not proceed smoothly, or if delays in securing employees make it difficult to provide services over an extended period, the profitability of new homes may be delayed, which could affect the Group's financial position and operating results.

Because the Group operates facilities for the elderly, risks such as falls, cluster infections, and food poisoning are inherent. During outbreaks of infectious diseases such as COVID-19, new resident move-ins may slow and occupancy rates may decline due to increased hospitalizations. The occurrence of accidents or infectious disease outbreaks could damage the Group's reputation and lead to claims for damages. Although the Group implements measures such as thorough gargling, hand-washing, and alcohol disinfection, and provides hygiene management guidance to catering contractors, these risks cannot be completely eliminated.

The Group has expanded into the real estate development business targeting healthcare properties and other real estate businesses, but changes in market conditions and the status of contract negotiations may result in impairment losses or losses on sale of held assets. In addition to delays or suspension of real estate development and construction costs exceeding initial estimates, if related laws and regulations such as the Building Lots and Buildings Transaction Business Act and the Building Standards Act are revised, abolished, or newly enacted, the Group may be unable to secure the originally expected profits, which could affect its financial position and operating results.