Among the matters related to the business status, accounting status, etc. stated in the securities report (the “Securities Report”), the following are important risks that the management of Nareru Group Inc. (the “Company”) recognizes as having the potential to have a significant impact on its financial status, business results and cash flow situation of the consolidated company.
Please note that matters regarding the future in this document are based on judgments made by the group of companies of the Company (the “Group”) as of October 31, 2023, and do not cover all risks that may occur in the future.

1.Economic Trends in the Construction Industry

The Group operates a dispatching business mainly for the construction industry, and we believe that the demand for dispatch in the construction industry will continue to expand due to the shortage of human resources. However, the business performance of the Group is affected to a certain extent by domestic construction investment trends. If construction investment trends change significantly due to a decline in public and private construction due to deteriorating economic conditions, there is a possibility that working hours may be shortened, contract conditions may deteriorate, or mid-term termination of dispatching contracts may occur. As the Group dispatches many permanent engineers, during an economic downturn, the burden of the labor costs for those permanent engineers may become heavier, which could have an impact on the Group’s business performance and financial condition.

Although the Group is developing its business centered on dispatch for the construction industry, we are expanding our business into fields other than the construction industry, such as dispatch for the IT industry and the plant industry. Utilizing our know-how and experience, we operate our business in a way that diversifies risk so that it is not significantly affected by the business conditions of specific industries or customers.

2.Securing Engineer Human Resources

Acquiring engineers is the driving force behind the Group’s growth. The Group’s strength in recruiting is the Group’s strength, and the number of engineers hired and the total number of engineers employed are steadily increasing. In addition, in terms of recruitment channels, in addition to the use of traditional recruitment media, we are working to secure technical human resources by diversifying to use of in-house recruitment sites, recruitment agencies, and introductions to acquaintances. .

On the other hand, Japan’s total population is expected to continue decreasing. The supply and demand for engineers in Japan is tight, and depending on future trends in the engineer recruitment market, there is a risk that we will not be able to secure a sufficient supply to meet demand and recruitment costs may increase, which may affect the Group’s business results and it may affect your financial condition.

3.Labor Management

The Group employs approximately 3,000 engineers, and we hire a large number of engineers every year. In terms of regulations, upper limits on overtime hours will be applied to the construction industry from April 2024. As regulations regarding labor management become stricter, the Group is working to ensure the quality of human resources at the time of recruitment, enhance the management of engineers including labor management with an emphasis on compliance, strengthen the education and training system, and improve employee satisfaction. However, in the unlikely event that a violation of laws or regulations occurs due to inappropriate labor management, or a dispute arises with an engineer regarding occupational safety and health or employment relations, etc., it may affect the business operations of the Group. As a result, the business results and financial condition of the Group may be affected.

In addition, the engineers dispatched by the Group work at various sites at client companies. The Group strives to understand the risks of industrial accidents in the working environment of our dispatch destinations, but if the Group’s employees encounter an unexpected situation, the Group may face claims for compensation or loss of social credibility. This may affect business results and financial condition.

4. Licenses and Regulations

The Group operates as a worker dispatching business and paid employment placement business with license from the Minister of Health, Labor and Welfare, etc. The license and notification status of the Group as of the filing date of this securities report is as follows.

The Group is working to prevent violations of laws and regulations, and as of the filing date of the Securities Report, there have been no events that would lead to the revocation of such permissions or suspension of business. However, for some reason such as construction work that falls under the exemption prohibited by the Worker Dispatch Act according to instructions from the dispatch destination (note that construction management, CAD drawing, construction drawing, etc. carried out by dispatched technical employees of the Group are not included in such work), if the business license is revoked or the business is ordered to be suspended for some reason, this may hinder the Group’s business activities and may affect its business results and financial condition.
　Furthermore, paid employment placement businesses are also prohibited from introducing construction job seekers under the Employment Security Act. The Group provides employment placements for craftsmen (skilled workers) through the National Construction Contractors Association, a general incorporated association that has a paid employment placement business license for construction work (under Article 18 of the Act on Improvement of Employment of Construction Workers).
　
　In addition, when the Group is entrusted with work based on a quasi-delegation contract, we comply with relevant laws and regulations such as the “Standards for Classification between Worker Dispatching Business and Business Conducted by Contract (Ministry of Labor Notification No. 37).” If a problem such as fraudulent contracting occurs,the Group’s business results and financial condition may be affected due to a loss of social trust.

5.Large Amount of Debt

The Group has borrowed a large amount of money by entering into loan agreements with financial institutions, and the balance of borrowings as a percentage of total assets as of the end of October 2023 is 27.9%. In addition, the repayment deadline for the commitment line borrowing amount of 2 billion yen established based on the syndicated loan agreement is October 31, 2024. However, according to the provisions of the syndicated loan agreement, the Company may apply for a one-year extension of the commitment period up to two times, and if the commitment period is extended, the repayment deadline is the expiration date of the extended commitment period for the lenders who have accepted the extension. The commitment period expired and the repayment deadline was on October 31, 2023, but since the commitment period was extended by one year, the loan was refinanced on October 31, 2023 with an amount of 2,000,000 thousand yen. Although we will work to reduce borrowings in the future, if the variable interest rate portion of the interest rate on borrowings rises, it may affect the Group’s business results.

In addition, the loan agreements entered into by the Group include financial covenants as described in “5. Accounting Status 1. Consolidated Financial Statements, etc. Notes 17. Borrowings and Assets Provided as Collateral” of the Securities Report.

In order to deal with the risk of violating financial covenants, the Group periodically checks various figures related to financial covenants and strives to secure stable profits and funds. If any of the provisions are violated, the borrowings may be repaid all at once, which may have an impact on the Group’s financial position.

6. Impairment of Goodwill

6. Impairment of Goodwill
The Group has recorded a large amount of goodwill (goodwill ratio of 62.6% to total assets as of the end of October 2023). The goodwill was mainly generated from the acquisition of shares of World Corporation in November 2019.

Since we have adopted IFRS, we do not have to bear the burden of amortizing goodwill each fiscal year, but if the profitability of the business covered by the goodwill declines, we may record an impairment loss.

Although we are working to improve the profitability of our business, if we were to record an impairment loss, this could have an impact on the Group’s business results and financial position.

7.Dependence on Representative

Ryo Kobayashi, the founder and representative director of the Group, indirectly owns our shares through his asset management company. He has extensive experience and knowledge regarding dispatching business for the construction industry, and plays an important role in determining and executing management policies and business strategies.

The Group is working to share information among officers and executives at meetings of the Board of Directors, etc., and strengthen the management organization, and is working to establish a management system that does not rely too heavily on him. If it becomes difficult to continue, the Group’s business results and financial position may be affected.

8.Information Security and Personal Information Management

The Group holds a large amount of personal information on employees, including engineers, and job applicants. The Group recognizes that the proper management of personal information is extremely important, and we instill the proper handling of personal information through continuous education and training for executives and employees. In addition, we maintain and operate personal information regulations and take security measures regarding personal information in our information systems.

If personal information were to be leaked, the Group’s business results and financial condition could be affected by claims for damages and loss of social trust.

9.Impact of New Coronavirus Infection

In Japan, the spread of the new coronavirus infection that began in 2020 has seen repeated increases and decreases in the number of infected people, but economic activity is returning to normal as infection control measures and vaccinations become more widespread. Although we have taken measures to prevent the spread of infection, if the new coronavirus infection spreads explosively again in the future due to virus mutations, face-to-face sales and recruitment activities may be restricted. In addition, if construction work is suspended or the number of construction projects decreases at client companies in the construction industry, etc. to which we dispatch human resources, the Group’s business results and financial position may be affected.

10.System Failure

The Group strives to operate our information systems stably, but if a major failure occurs in our information systems due to natural disasters, accidents, computer viruses, unauthorized access, or other cyber-attacks, the Group’s business operations and business results may be affected.

11.Dependency on Specific Subcontractors

The Group’s main business is the dispatching business, mainly for the construction industry, and we also receive orders and deliver working drawing for the industry. The Group mainly outsources this work to our business partner, Eisei Corporation.

　Although we are considering alternatives to outsourcing as appropriate, we rely on outsourcing for working drawings. If we are unable to secure the labor force of an outsourcing company due to an increase in the number of orders, or we are unable to secure subcontractors that meets our standards, the Group’s business results and financial position may be affected.

12.M&A, Business Alliances, New Businesses, etc.

As part of our growth strategy, the Group may pursue M&A, business alliances, and the establishment of new companies in order to acquire management resources for business expansion. When implementing these measures, we will conduct sufficient preliminary research and consideration, but if the business deviates significantly from the originally envisioned business plan, there is a possibility that the business results and financial position of the Group will be affected.

13.Natural Disaster

The Group has sales offices all over the country, and the Group’s engineers work at customer sites across the country. In the event of a natural disaster such as an earthquake, tsunami, or typhoon, we will respond promptly and accurately, but if an unexpected large-scale disaster occurs and business operations at our sales offices become difficult or a customer’s construction work is interrupted, the Group’s business operations and business results may be affected.

14.Status of Major Shareholders

The Group receives investments for pure investment purposes from funds which Advantage Partners provide with services (the “AP Funds”), and as of the filing date of the Securities Report, Investment Business Limited Liability Partnership Advantage Partners V, AP Cayman Partners III, L.P., Japan Fund V, L.P., and Advantage Partners Investment Partnership No. 80 hold a total of 1,560,600 shares of the Company’s stock (18.5% of the total number of issued shares). In addition, Takashi Nishimura, an outside director and member of the Audit and Supervisory Committee of the Company, are dispatched by Advantage Partners. The AP Funds sold the majority of the Company’s shares when the Company’s stock were listed, but it continues to hold a certain amount of the Company’s shares even after the listing. The director dispatched by Advantage Partners is expected to retire in the future, taking into consideration the future ownership of AP Fund’s shares in the Company.

We have heard from Advantage Partners that although the timing and method of future disposal of the shares have not yet been determined, they will take a manner that minimizes the impact on the market price, but, depending on their future holding/disposal policies, the liquidity and stock price formation of the Company’s shares may be affected. Additionally, Advantage Partners’ interests regarding management and other matters of the Group may differ from those of other shareholders.