SUNWELS Co.,Ltd.

An investigation by the Special Investigation Committee revealed cases in which medical fees were billed as 30-minute visits despite the actual visits being shorter, and cases in which billing was made as if an accompanying staff member was present when in fact none was. If the Company receives a designation revocation disposition under the Long-Term Care Insurance Act, this poses a significant risk that the entire corporate group would fall under the disqualification provisions, making new designations impossible for five years. Preventive measures against recurrence were resolved and are being implemented since February 2025, but depending on the progress of guidance and dispositions from the relevant authorities, there is a possibility of a material impact on the business, results of operations, and financial condition.

Profitability declined significantly due to the correction of prior-period financial statements related to the fraudulent billing issue and the review of the operational structure, resulting in a net loss of ¥925 million in the prior fiscal year and a net loss of ¥1,656 million in the current fiscal year. In addition, the Company is in breach of financial covenants under term loan agreements with commitment deadlines (balances of ¥321 million and ¥549 million), giving rise to material doubt about the going concern assumption. The Company has obtained a grace period for principal repayment from April 30, 2026 to September 30, 2026, and has secured near-term funding through receivables securitization and contributions from the Representative Director, but the success of the structural reform will be key to business continuity.

Following the market segment change to the Prime Market in July 2024, it was determined through the correction of prior-period financial statements that the Company did not satisfy the formal and substantive criteria for the change review, and on April 30, 2025 the Company received notice from the Tokyo Stock Exchange of entry into a grace period for re-examination due to a breach of its written oath. The Company has now filed a preliminary application (dated March 27, 2026) for a market segment change to the Standard Market and has been designated as a securities under supervision (under review). If conformity with the Standard Market criteria is not recognized by March 26, 2027, within one year from the preliminary application date, the Company may be delisted.

With the medical fee schedule revision effective June 2026, a new "Comprehensive Home-Visit Nursing Care Fee" was established targeting frequent home-visit nursing care within the same building, shifting the fee structure from the conventional fee-for-service basis per visit to a comprehensive per-day evaluation. At the same time, the same-building fee reduction has been subdivided and reductions based on the number of monthly visits at large-scale facilities have been introduced, necessitating a change in the operational structure that has traditionally been premised on high-frequency visits. This poses a risk of declining net sales and profit margins, and the Company is promoting a shift in its revenue model and a fundamental review of its cost structure as part of the structural reform implementation period in FY2027 (ending March 2027).

The Company submitted amendment reports stating that material weaknesses requiring disclosure existed as of the end of each of the 18th and 19th fiscal years' internal control reports. This stemmed from a situation in which the establishment of internal management systems failed to keep pace with rapid business expansion, and the Company has also submitted amendment reports for securities reports and other documents covering FY2022 (ended March 2022) through FY2024 (ended March 2024). As of the end of the current fiscal year, improvements have been made and the internal controls are evaluated as effective; however, continuous review in line with changes in the business environment is necessary, and any recurrence could have a material impact on business results and financial condition.

As a result of borrowings for capital expenditures associated with new facility openings, finance lease obligations, receivables securitization, and other factors, the balance of interest-bearing debt at the end of the current fiscal year reached ¥30,628 million, with an interest-bearing debt-to-equity ratio of 441.8%. Fluctuations in interest rate levels may affect business results, financial condition, and cash flows. Breaches of financial covenants have also occurred, making continued discussions with financial institutions essential.

Specialized professionals such as care workers, nurses, and physical therapists are chronically in short supply in the medical and nursing care industries, and competition for recruitment is intensifying. If personnel acquisition does not proceed as planned or if key personnel leave, this could result in a reduction in service scale at existing facilities or postponement of new facility openings, becoming a constraint on competitiveness and business expansion. The Company has implemented measures such as establishing a specialized recruitment department and improving employee benefits, but the industry-wide supply-demand tightness continues.

Business designations under the Long-Term Care Insurance Act require renewal every six years, and there is a risk of designation revocation if fraudulent billing, staffing standard violations, operational standard violations, or false reporting are found. Even if only a single business location has its designation revoked, the corporation falls under the disqualification provisions, making new designations and renewals impossible for five years from the revocation. Fraudulent billing cases have already been identified, and depending on the response of the relevant authorities, there is a possibility of a material impact on the business, results of operations, and financial condition.

Following media reports concerning fraudulent medical fee billing, a Special Investigation Committee was established to conduct an investigation, and the existence of inappropriate billing cases was confirmed. The nursing care business is founded on the trust of residents, families, and stakeholders, and loss of credibility due to fraudulent billing or scandal directly affects resident acquisition and occupancy rates. While the Company is working on implementing recurrence prevention measures and strengthening internal controls, restoring social trust may take considerable time.

Ryotatsu Naeshiro, the founder and Representative Director and President, has played a crucial role in overall management policy and strategy as chief executive officer since the Company's founding; however, following a board resolution to be made after the 21st Annual General Meeting of Shareholders scheduled for June 26, 2026, he is expected to resign as Representative Director while remaining as a Director. This represents a phase in which the risk of dependence on a specific individual has become apparent, and although the Company is proceeding with the development of its organizational structure, the change in top management could affect business results and financial condition. As the transition coincides with the structural reform implementation period, ensuring management continuity is a challenge.