Smile Holdings Inc.

The licensed childcare business depends on various subsidies under regulations such as the Child Welfare Act and the Act on Support for Children and Child Rearing. If national or local government policy changes lead to subsidy reductions or stricter regulation of nursery school operations by corporations, business activities may be constrained, potentially affecting business results and financial condition. The enactment or revision of related laws and regulations constitutes a similar risk factor. No specific countermeasures by the Group have been disclosed at this time.

Most operated nursery schools have been licensed following facility-by-facility review by local governments. Although there have been no past instances of license revocation, if a license is revoked for any reason or a new facility fails to obtain a license, this would impede the continuation of facility operations or expansion plans. Given the nature of the licensed business, a significant portion depends on administrative decisions, making this a risk directly linked to the stability of the business foundation.

The Group's business is concentrated in support for children and child-rearing, and if the expected number of enrolled children cannot be secured due to the declining birthrate, this would directly affect business results. As of April 2025, the number of children on waiting lists stood at 2,254, a declining trend, and demand for childcare is expected to contract over the medium to long term. The structure is such that policy and market trends related to children and child-rearing support have a significant impact on the Group's overall business results.

Providing high-quality childcare and early childhood education services requires securing and developing diverse personnel, including holders of nursery teacher qualifications. If the planned number of staff cannot be secured, this would delay new facility opening plans or hinder the operational plans of existing facilities. The Group is implementing measures such as strengthening its HR department, an employee referral system, use of specialized recruitment agencies, and enhancement of training programs; however, the shortage of nursery teachers is a structural issue affecting the entire industry.

Capital expenditures associated with new business expansion are financed through borrowings from financial institutions, and the ratio of interest-bearing debt to total assets rose from 30.1% in FY2025 (ended March 2025) to 39.5% in FY2026 (ending March 2026). If rising borrowing rates or changes in the policies of financial institutions with which the Group transacts make it difficult to procure necessary funds, this could lead to delays or cancellation of new facility openings, potentially affecting business results. The rise in financial leverage increases vulnerability to changes in the financial environment.

Representative Director and President Masafumi Nakanishi (who holds 69.5% of the Company's shares including through his asset management company) and Director and Vice President Ayumi Doi have served as the top management since the Company's founding and play important roles in facility and educational program development and management strategy. If either or both of them become unable to continue in their management roles, this could have a material impact on business results. The Group is advancing delegation of authority to other directors and executive staff, aiming to build early on a management structure that does not depend on specific individuals.

The Group utilizes M&A as a growth method, including making WITH Holdings Co., Ltd. a wholly owned subsidiary in May 2026. If a sudden change in the external environment or delays in the integration process result in the failure to achieve the planned business targets, this could affect the financial condition and business results through goodwill impairment, among other factors. Comprehensive due diligence covering financial, legal, and business aspects is conducted in the selection of target companies and acquisition decisions, but there remains uncertainty regarding the realization of synergies after integration.

When opening new facilities such as postpartum care facilities, in addition to capital expenditures for property acquisition and interior construction, initial costs such as advertising expenses, hiring of specialized personnel, and training are incurred, and operating income tends to be in deficit in the first year of opening. If customer acquisition does not proceed as expected, the period of operating losses could become prolonged, potentially affecting business results. The Group plans nationwide expansion centered on the postpartum care service launched in June 2026, and the significance of this risk is expected to increase going forward.

If the performance of operated facilities deteriorates, or if there is no prospect of improvement in performance even after a certain period following a new opening, impairment of tangible fixed assets may become necessary, potentially affecting business results. As the fixed asset balance increases along with the expansion in the number of facilities, there is a risk that deterioration in the profitability of individual facilities could spread to the overall financial position. No specific measures to prevent impairment are disclosed in the Annual Securities Report.

The Group holds a large amount of personal information, including the names and addresses of children and guardians. If a leakage incident occurs, this could affect business results through loss of social credibility and disruption to facility operations. The Group strives to build a management system based on internal regulations, but risks such as cyberattacks and internal misconduct cannot be completely eliminated.