BALMUDA Inc.

In the fiscal year ended December 2025, the Company recorded a consolidated operating loss of ¥866 million, an ordinary loss of ¥904 million, and a net loss attributable to owners of the parent of ¥1,596 million. The Company breached the financial covenant (maintaining net assets at 75% or more of the amount as of the base date) under overdraft agreements with two client banks, and also recorded negative operating cash flow, giving rise to material doubt about its ability to continue as a going concern. The Company is pursuing measures such as launching new products, improving its cost structure, and continuing to utilize the overdraft facility, but as these measures are still in progress and final agreement with the financial institutions concerned has not yet been reached, material uncertainty remains. The financial statements have been prepared on a going concern basis, and the impact of this uncertainty has not been reflected in the financial statements.

The Group does not own manufacturing plants and operates a fabless model, sourcing all products from domestic and overseas manufacturing subcontractors. If the supply chain is disrupted due to deterioration in relationships with manufacturing subcontractors, delays in securing alternative suppliers, deterioration in the business condition of business partners, political or social turmoil in Japan or overseas, natural disasters, conflicts, or other factors, product supply could be halted, which may have a material impact on the Group's financial position and operating results. The Company strives to secure alternative suppliers and strengthen relationships, but complete elimination of this risk remains difficult.

In the fiscal year ended December 2025, overseas sales accounted for 33.1% of total sales, of which sales to the Korean distributor THE LIMO Co., Ltd. accounted for 18.1%, indicating a high degree of dependence on a specific distributor. If this and other overseas distributors change their sales strategies or discontinue handling the Company's products, sales could be directly and adversely affected. Political and social turmoil in various countries and changes in legal regulations are also risk factors that could disrupt local sales.

The majority of products are purchased in foreign currencies from overseas manufacturing subcontractors in China, Taiwan, and elsewhere, while the domestic sales ratio stood at 66.9% in the fiscal year ended December 2025. Accordingly, yen depreciation negatively affects business performance through higher procurement costs. Although the Company is pursuing foreign exchange risk hedging measures, sharp fluctuations in exchange rates could impact its financial position and operating results. Promotion of foreign exchange risk hedging is also positioned as one of the key measures in the response plan to resolve the going concern issue.

Developing products with unique functions and refined design is fundamental to the Company's business, but there are compound risks including failure to achieve expected functionality, abandonment of development due to the emergence of competing products, development delays or cost overruns, and lack of market acceptance for new products. In particular, since the launch of new products such as Sailing Lantern and The Clock is a key measure toward resolving the going concern issue, the success or failure of these new products is critical to the Company's business turnaround. The Company is promoting efficient use of R&D expenses through selection and focus of development projects, but there is a possibility that sufficient effects will not be achieved.

Given the characteristics of high-priced, differentiated products, it is difficult to forecast sales based on the sales trends of similar products, and changes in consumer behavior due to the emergence of competing products and rising prices further reduce forecasting accuracy. In particular, air conditioning appliances such as fans are highly susceptible to the effects of climate change, increasing the difficulty of sales forecasting. Errors in sales forecasting can lead to lost sales opportunities due to insufficient inventory or asset impairment due to excess inventory, which may affect the Company's financial position and operating results.

Gen Terao, the founder and Representative Director and President, leads product development and plays an extremely important role in management and business operations. The Company is working to reduce this dependence through information sharing at the Board of Directors, delegation of authority, and recruitment of external personnel, but if he becomes unable to be involved in management for any reason, this could have a material impact on the Company's financial position and operating results. In addition, he holds 67.86% of the total number of issued shares (excluding treasury shares), and there is a risk that any future sale of his shares could affect the market price and trading conditions of the Company's shares.

Raw material procurement is handled by manufacturing subcontractors, and if unexpected surges in raw material prices or deterioration in procurement conditions occur due to sudden changes in supply and demand, manufacturing delays or increases in product costs may become unavoidable. The Company is taking measures such as using alternative materials through design changes and supplying its own procured materials to manufacturing subcontractors, but if these measures are insufficient, this could affect the Company's financial position and operating results. Cost reduction for existing products is also listed as a key measure in the response plan to resolve the going concern issue.

The Company strives to maintain and improve quality and reliability through strengthening its quality control department and reviewing its product development process, but if unexpected product defects occur, after-sales service costs or recall costs may be incurred. Although the Company has product liability insurance and other coverage, if insurance proceeds are insufficient to cover such costs, this could affect the Company's financial position and operating results, and there is also a risk of customer attrition due to loss of social credibility and damage to brand value.

The Company holds personal information and confidential information of customers, business partners, and employees, and if an information leak occurs, this could lead to loss of trust and the burden of countermeasure costs. If systems for order processing and accounting are affected by unforeseen circumstances resulting in falsification, leakage, or destruction of important data, or system outages, this could disrupt business continuity and affect the Company's financial position and operating results. The Company strives to build and operate an information management system, but this does not guarantee complete prevention.