KYOKUTO SECURITIES CO., LTD.

As a registered business operator under Article 29 of the Financial Instruments and Exchange Act, the Company is required to comply with the Financial Instruments and Exchange Act, its enforcement order, and other related laws and regulations, as well as the various rules of the Tokyo Stock Exchange, Osaka Exchange, Nagoya Stock Exchange, and the Japan Securities Dealers Association. If registration is revoked or business is suspended due to violations of laws and regulations by officers or employees, continuation of business activities may become difficult, materially affecting business performance and financial position. If the capital adequacy ratio falls below the statutory level (120% or 100%), the Company may also be subject to an order to change business methods, a business suspension order, or registration revocation.

If the stock and bond markets stagnate or contract due to deterioration in economic conditions, investors' willingness to invest may decline, leading to a decrease in trading orders and a reduction in various commission revenues, including brokerage commissions. A decline in the number of newly listed companies and contraction of the equity issuance market may also lead to a decrease in underwriting commissions and other fees. Since the Group operates solely in a single business domain (the financial instruments business), it has no other business to supplement revenue, resulting in a structure in which deterioration of market conditions has a direct and rapid impact on business performance and financial position.

The Group employs a Face to Face in-person sales model and has not built the systems necessary for online trading and similar services, so if required to provide services in the fintech field, it may lose revenue opportunities due to delays in infrastructure development. As deregulation makes entry into the financial instruments business easier and competition intensifies with operators offering new products and services utilizing information technology, there is a risk that market competitiveness may decline due to delays in improving operational efficiency and limits to cost reduction. These factors may affect business performance and financial position going forward.

In addition to bank borrowings, the Group raises funds in the market through call money, and there is a possibility that monetary tightening, market turmoil, or a downgrade in credit rating could make it difficult to raise necessary funds or force fundraising under unfavorable conditions. The Group raises foreign currency funding in connection with the sale of foreign-currency-denominated securities and proprietary trading; if foreign currency funding becomes difficult due to turmoil in the foreign exchange markets or other factors, there is a risk of credit impairment or monetary loss due to settlement failure. As countermeasures, the Group has arranged a syndicated loan based on a commitment line agreement, holds highly liquid assets, and has established a liquidity contingency plan.

The Group conducts proprietary trading in stocks, bonds, and other instruments, and there is a possibility that a decline in market liquidity or market price fluctuations exceeding expectations could render hedging transactions and position management ineffective, resulting in substantial losses. In addition, the Group engages in over-the-counter derivative transactions for the purpose of hedging foreign exchange risk on foreign-currency-denominated positions, but there is also a risk of settlement failure due to a counterparty's inability to continue operations. A deterioration in credit rating could also reduce the Group's ability to conduct derivative transactions, and these factors may affect business performance and financial position.

There is a possibility of misconduct such as intentional or negligent violations of laws and regulations by officers and employees, improper use or leakage of undisclosed information, or collusion with information recipients, and it is difficult to completely eliminate illegal acts through the development of internal control systems and compliance training alone. Intentional illegal acts may be carefully concealed and remain undiscovered for long periods; if discovered, the Company may be held liable as an employer or otherwise legally responsible, directly or indirectly affecting business performance and financial position. The Group has established a Risk Management Committee and has put in place a system to report deliberation content to the Representative Director and President and the Board of Directors.

If computer hardware, software, or networks experience failures due to human error, unauthorized external access, computer viruses, disasters, or other causes, losses or liability for damages may arise. If important customer data or personal information is leaked or destroyed, the Group may lose the trust of stakeholders in addition to becoming liable for damages. The Group has taken measures such as formulating cybersecurity response policies and emergency response plans, and establishing system monitoring, redundancy, and backups, but it is difficult to completely eliminate unforeseen attacks.

The Group holds fixed assets such as investments in affiliated companies, securities held for pure investment purposes, and real estate, and there is a possibility that substantial valuation losses (impairment) may arise due to declines in real estate prices or obsolescence caused by deterioration in economic conditions, or declines in the market prices of securities. Such impairment directly affects business performance and financial position. In addition, if the statutory effective tax rate used in recording deferred tax assets changes due to tax reform, this could also affect the financial position.

The Group employs a Face to Face in-person sales model, and since each employee's high level of responsiveness and proposal capability is the source of added value, securing and developing capable human resources is an important management challenge. If the Group fails to make progress in securing or developing human resources, it may hinder future business development and affect business performance and financial position. The Group actively recruits capable personnel throughout the year and works to enhance its employee training system, but given the characteristics of its single business model, the quality of its human resources is directly linked to its competitiveness.

The Group has taken measures to exclude transactions with anti-social forces and to prevent improper use for money laundering and terrorist financing, but even with a thorough system in place, it may not be possible to eliminate all such risks. If such incidents occur, the Group may receive corrective orders from regulatory authorities and suffer a decline in social credibility, which may affect business performance and financial position. Since customer trust in the Company as a financial instruments business operator is fundamental to its business, reputational risk could also lead to a decline in earning power.