The impact of foreign exchange rate fluctuations is not zero, but the impact of foreign exchange rate fluctuations on the Company’s results of operations will be minor due to the low ratio of overseas sales and the lack of a large number of overseas business transactions. If the yen continues to appreciate, the amount of the acquisition in yen terms will be less.

We prefer to borrow at floating interest rates, so there will be an impact from rising interest rates. However, we believe that the impact on our core business will be negligible because the current domestic borrowing costs remain sufficiently low.

As an example, let us consider a hypothetical case in which our funding rate suddenly rises by +1%, although this is unlikely to be realistic.

Once the NEN and ONTSU M&A complete, our interest-bearing debt will be approximately 50.0 billion yen, of which 1%, or 0.5 billion yen, will be an additional cost. Since this additional cost of 0.5 billion yen represents only 3.8% of our full-year EBITDA forecast of 13.0 billion yen, we believe that the impact on our cash flow will be negligible. In the same case of the above-mentioned 105.0 billion yen of interest-bearing debt and 29.0 billion yen of EBITDA, the impact would be only 3.6% of the same.

In addition, this is an estimate based on the assumption that all borrowings are at variable interest rates, but in reality there are also borrowings at fixed interest rates, so the actual impact will be even smaller.

Based on these estimates, we believe that the impact of the increased interest burden resulting from higher interest rates will be negligible, as domestic borrowing costs remain sufficiently low, given our strategy of growth through M&A and our plan to achieve 60% EBITDA growth year over year.

Reasons for the public offering – There are four reasons

• 1. To eliminate the market’s greatest concern of our public offering, with our growth driver based on M&A, while minimizing the dilution
• 2. To enable M&A execution with full speed by removing capital restrictions in order to face the ever-increasing M&A pipelines
• 3. To fortify our rock solid relationship with the banks, by strengthening our financial position while we have sufficient debt capacity
• 4. To improve the liquidity of our stock, which has been an issue for our stock
• 1.Public offering with minimal dilution of share value

As M&A is our growth strategy, we place the highest priority on Cash EPS, and we have raised 10.0 billion yen for future M&A by completing a public offering while minimizing the dilution of Cash EPS.

First, the stock price level at the time of the announcement was after the close of July 16, which was the highest price since listing for two consecutive business days, a timing that allowed for minimal dilution. In addition, as of the evening of the announcement, the company had already formed a significant excess demand from overseas institutional investors. Although the nominal dilution of the number of shares due to the issuance of new shares was approximately 7%, the closing price of the stock on July 17, the next business day, was only -2.5%, enabling same-day pricing based on excess demand and minimizing market risk. Also, the pricing resulted in the smallest discount (3.04%) in the range.

Based on the above, we succeeded in raising 10.0 billion yen while minimizing the impact of the dilution event, which had been our greatest concern, on Cash EPS in practice, i.e., the dilution of the share value, which is the asset of existing shareholders.

Furthermore, the 10.0 billion yen in cash raised through the public offering was deposited last Wednesday, July 31, and is present in our bank account as of today.

If this ¥10.0 billion is used in a manner that does not increase our consolidated cash flow, such as repayment of past financing, we believe that this public offering will be substantially dilutive to the value of our shares.

On the other hand, if used in a manner that increases our consolidated cash flow by more than 7%, which is the nominal dilution rate of this offering, this offering would not be dilutive; rather, the offering would provide funds to increase the theoretical value of our shares through public offering. In simplified terms, for example, the hurdle is whether the increase will be +0.9 billion yen or more compared to our projected EBITDA of 13 billion yen, and in practice, the leverage effect of the debt financing will further lower the hurdle.

In turn, we will use all of the 10.0 billion yen for M&A to be announced after today. We do not plan to use this amount to repay the borrowings for the M&As that have already been announced and completed, and for the M&As that have already been announced but not yet completed, NEN and ONTSU, we have received funding approvals from Mizuho Bank and Sumitomo Mitsui Banking Corporation, respectively, to borrow the entire amount of the consideration for the share acquisition.

Based on the above, the Company believes that this public offering is a measure not only to limit dilution, but also to significantly increase share value by accelerating M&A activities in the future.

On the other hand, the stock market is currently suffering from a historical correction. As a result, the book value of overseas institutional investors who participated in the current public offering is 2,042 yen, which is a significant deviation from the current stock price level. Although a cyclical correction in the stock market is practically inevitable, we believe that the only way to reward all of our investors who have entrusted us with their funds, both before and after the public offering, is to announce our ample M&A pipeline in front of us one by one as soon as possible, regardless of the market environment, and to promptly return the fruits of transformational growth.

From this perspective, we will explain in the following section (2) that this public offering will remarkably strengthen our M&A structure going forward.

• 2. M&A execution with full speed with least ever capital constraints

We believe that this public offering will allow us to remove capital constraints and to enable M&A execution with full speed in order to face the ever-increasing M&A pipelines owing to our enhanced sourcing capabilities after listing on the stock exchange.

First of all, our ability to source new M&A pipelines have greatly improved in the one year since we went public. In the past, our mainstay was sourcing from the inner circle of the industry, but over the past year, we have received daily introductions of potential M&A projects from approximately 50 financial institutions and 100 M&A brokers. The number of M&A sourcing pipelines during the previous fiscal year was 170, while the number of cases during the three months of 1Q in the current fiscal year, has already reached 99.

One of the remarkable results was that, we were able to announce a tender offer for ONTSU Co., Ltd., while obtaining the agreement from the target company, although we entered the karaoke industry quite recently. We believe that this is an example of M&A in the entertainment industry that has never been seen before. In addition, we have already announced that the major companies in our group, mainly in the amusement arcade and karaoke businesses, have achieved YoY growth through PMI.

In addition, as of today, we have 10.0 billion yen in our bank account, which was raised through a public offering. This is the first time since our incorporation that we have a vast amount of hard cash in our bank account that can be used for M&A. This is because all of the 5 billion yen raised through the IPO was for business capital expenditure, and was not used for M&A. As we have financed almost all M&As since our IPO using bank loans, the fact that we have an abundant cash that can be used for M&As, is something entirely new and exciting to us.

In addition, it is customary in a normal public offering for any new share issuance to be restricted by a so-called (issuer) lock-up to protect investors, and M&A in the form of shares is generally restricted. In our recent public offering, we are also restricted from raising funds through the issuance of new shares for a period of six months. However, as M&A is our growth strategy, we believed that restricting M&A using our stock (with new share issuance) was not what investors wanted.

Therefore, we have structured the offering in such a way that we are only allowed to issue in the event of an stock deal M&As (e.g., M&A through share exchange) up to 5% of the outstanding shares after the completion of the offering. In this way, we have taken care to maximize our ability to execute M&A transactions so that the public offering will not be a constraint on growth.

Furthermore, in light of the fact that it would have been virtually impossible to commence equity offering in the current market environment, the fact that we already have 10.0 billion yen for future M&A in hand prior to this macro stock price correction is significant for our long-term M&A activities. In addition, the funds we raised through the public offering was at a Cash EPS-based P/E multiple of 29x, and in order to deploy the funds to Cash EPS accretive M&A, the target company theoretically needs to have the same or less than 29x P/E multiple, making it an even stronger source of funds in this Japan-wide stock price correction phase. This 10.0 billion yen is a powerful source of funding.

The M&A pipeline has been expanding day by day since we went public, and we have a clear pathway for the use of proceeds of 10.0 billion yen. We are fully motivated by the belief that we will be able to meet the expectations of our shareholders in the medium to long term through this M&A activity. We intend to leverage this 10.0 billion yen by debt financing through the expansion of our borrowing capacity, and to carry out M&A that will increase Cash EPS as quickly as possible, thereby providing investors with transformational growth.

• 3. Strengthening of financial institutions’ support systems and debt capacity

Since going public, we have procured almost all of our M&A projects through borrowings, and as a result, the burden of M&A financing has been borne almost entirely by financial institutions. Under these circumstances, in light of the further acceleration of our M&A strategy, we were able to further strengthen our solid relationships with financial institutions by demonstrating our ability to raise funds in the stock market while we still had sufficient debt capacity.

While the cash flow index shows that the Company has a comfortable margin in terms of debt capacity, the Company has continued to conduct M&A through borrowing with an eye on Cash EPS, and the “absolute amount” of net assets, which domestic rating agencies place importance on, has been a small issue. However, we believe that the public offering will increase our net assets by 1.5 times, from approximately 20 billion yen to 30 billion yen, and that direct market financing, including corporate bonds, may become a reasonable option for the Company.

In addition, the ¥10.0 billion in public offering will greatly improve our debt capacity. Let us explain in detail.

In discussions with financial institutions, we have announced that Net Debt / EBITDA 3.0x is the standard for debt capacity and that the current index is 2.0x, which will be greatly improved by this capital increase through public offering. We will mechanically calculate the theoretical total amount of interest-bearing debt to bring the index to 3.0x by raising interest-bearing debt through M&As. To do this, we will make certain assumptions regarding our cash and cash equivalents, EBITDA, and Net Debt of the target company.

First, we assume that the 10.0 billion yen from the public offering will temporarily increase cash and deposits, but that the entire amount will be used for M&A and will ultimately be zero, so cash and deposits before the public offering will remain unchanged at 18 billion yen.

Next, let us discuss the increase in EBITDA. The increase in Net Debt (the numerator of Net Debt / EBITDA) means that we will execute M&As, which will result in the consolidation of the target company’s EBITDA and an increase in consolidated EBITDA (denominator), so the numerator and denominator will increase simultaneously. Since it is necessary to make an assumption as to how much EBITDA will increase when interest-bearing debt increases, we will assume an M&A entry multiple with EV / EBITDA of 5.0x (for your reference, the EV / EBITDA of the three most recently announced M&As, NEN, ONTSU, and C’traum, were 3.6x, 5.6x, and 1.8x, respectively). For example, using 10.0 billion yen for M&A would increase EBITDA by 2 billion yen.

Finally, the Net Debt of the target companies we have acquired in the past has been a mixture of positive and negative (Net Cash), and the increase in Net Debt after M&A has been uneven. For the purpose of making this calculation neutral, we assume that the Net Debt of the target company is zero (i.e., cash-free and debt-free).

Based on the above assumptions, after this ¥10.0 billion public offering, we can mechanically determine the interest-bearing debt and EBITDA that would bring Net Debt / EBITDA to 3.0x, resulting in interest-bearing debt of ¥105.0 billion, cash and cash equivalents of ¥18.0 billion, and EBITDA of ¥29.0 billion. However, by mechanical calculations, the 10.0 billion yen in proceeds from this public offering will enable us to raise an additional 55.0 billion yen in interest-bearing debt.

In reality, debt capacity through M&A is affected by the amount of goodwill and net assets, the speed of M&A, and the overall perspective of the target company, etc. However, we present this as a theoretical mechanical calculation based on certain assumptions, limited to Net Debt / EBITDA 3.0x, which is a quantifiable indicator. Net Debt / EBITDA 3.0x, which is a quantifiable indicator.

• 4.Improvement of stock liquidity

While the majority of our shareholders since our IPO have been stable shareholders (see below for details), we have been receiving comments about improving the liquidity of our shares, especially from institutional investors with large investment funds who are considering new investments in our shares in the market.

First, “Hidetaka Yoshimura Midas B Investment Limited Partnership” held approximately 38%, “Midas Capital G Fund Limited Liability Partnership” held approximately 5%, and the Company’s officers and employees held approximately 24% in total. In addition, at the time of the IPO, Asset Management One Inc. acquired 564,900 shares (1.52%) of the Company’s stock through a private placement as described in the “Amended Securities Registration Statement (Initial Public Offering)” disclosed on July 19, 2023, and the Company’s holding policy at that time was “expected to be a long-term holding. The Company’s policy is to hold the shares for a long period of time. As stated in the “Amended Securities Registration Statement (Initial Public Offering)” disclosed on July 10, 2023, we received an Indication of Interest from Capital Group for 4.19% of the shares (total acquisition price: 2,711 million yen), which was also disclosed as “our holding policy is to hold the shares for the medium to long term. (Since this is only an expression of interest, the actual allocation of shares in the IPO is not disclosed.)

Due to the nature of our company’s stock being listed on a liquid stock market, we are not in a position to make reference to shareholder trading, but it is true that the majority of our shareholders are relatively illiquid and stable, while our company’s performance is expanding compared to last year.

Under these circumstances, we have been striving to improve liquidity through a stock split, and as a fundamental improvement, we have obtained an agreement from Midas Capital G Fund Limited Liability Partnership for a partial secondary offering (1.5%, approximately 2 billion yen), while issuing 10.0 billion yen in new shares. Although there is a macro adjustment phase, as a result, trading volume has increased significantly, and we believe that with the improvement in liquidity, the groundwork has been laid for large institutional purchases in the secondary market in the medium to long term.