ARDEPRO : Notice Concerning Designation of Security on Alert, Imposition of Listing Agreement Violation Penalty, and Postponement of the Announcement of Recurrence Prevention Measure 158KB

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News Release: ARDEPRO Co., Ltd.

(8925 TSE Standard)

November 30, 2023

Notice Concerning Designation of Security on Alert, Imposition of Listing Agreement Violation Penalty, and Postponement of the Announcement of Recurrence Prevention Measure

In addition to being designated as Security on Alert by the Tokyo Stock Exchange, Inc. ("TSE"), ARDEPRO Co., Ltd. ("the Company") is also required to pay a listing agreement violation penalty. The details are as follows. In addition, the Company has also made the decision to postpone the announcement of recurrence prevention measures, which was initially scheduled for today.

1. Reason for Designation of Security on Alert and Listing Agreement Violation Penalty The Company received the following notice from TSE.

ARDEPRO Co., Ltd. (hereinafter "the Company") disclosed an investigation report of an external investigation committee concerning inappropriate accounting processing on Sept. 28, 2023 and disclosed corrections based on the investigation report to its past earnings report on Sept. 29, 2023.

These disclosures revealed that real estate transactions led by the Representative Director and President constituted a part of round-tripping that took place, and that the Company conducted accounting processing to record sales, sales costs, and operating income for the round-trip transactions that did not actually exist, and disclosed false information regarding the earnings report for the third quarter of the fiscal year ended July 2023, in violation of the listing rules. The aforementioned corrections to the earnings report resulted in a more than 50% decrease in the Company's sales and a more than 20% decrease in its operating income for the same period.

Furthermore, in light of the above investigation report, the Company corrected its disclosures related to several real estate transactions and matters relating to controlling shareholders, etc. on Sept. 29, 2023 and Oct. 12, 2023.

These corrections revealed that the Company made false disclosures in violation of the listing rules by stating, in its timely disclosure materials, that several real estate transactions led by the Representative Director and President were conducted with a party with no capital nor with which there was a personnel relationship despite the fact that they were actually conducted with a limited liability company that was substantially controlled by a major shareholder of the Company.

In addition, the Company was found to have made disclosures in violation of the listing rules as it failed to appropriately describe the real estate transactions in the disclosure of matters relating to controlling shareholders, etc.

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The following deficiencies were acknowledged to be largely behind the disclosures.

• The Company had implemented measures to prevent inadequacies in response to a designation as Security on Alert in the past. After the removal of the designation as Securities on Alert, over time, deficiencies were found in the operation of these measures. The check-and-balance system for preventing wrongdoing was not functioning properly as, for instance, management did not take adequate actions to correct several deficiencies.
• The management team, including the Representative Director and President, lacked awareness of compliance. For instance, the Representative Director and President prepared and submitted to the audit firm response letters confirming the balance under the names of business partner, and a director conducted acts that were suspected of being a breach of contract with the business partners.
• The Representative Director and President conducted transactions while concealing from the board of directors and other meetings the fact that the counterparties of the real estate transactions were limited liability companies with which the Company invested through silent partnerships. As a result, the board of directors did not appropriately verify the fairness and appropriateness of the transactions where major shareholders with whom the Company had a close relationship were involved and whether these transactions fell under business transactions with related parties, resulting in the invalidation of its internal control system.

Since the Company made inappropriate disclosures concerning company information which has an important impact on investors' decisions on whether to invest in the Company in violation of listing regulations, TSE determines the internal control structure of the Company to be in severe need of improvement and designates the Company Security on Alert.

TSE deems that this is a case of inappropriate disclosure of information that has a material impact on investors' investment decisions, conducted in violation of the listing rules, and that improvements to the Company's internal management system in particular are highly necessary. As such, TSE designates the Company's stock as a Security on Alert.

In addition, since the internal controls were invalidated by the management lacking compliance awareness, and false disclosures were made for multiple fiscal years without the required verification while the effective operation of recurrence prevention measures established in the past was not maintained, TSE deems that this case has undermined the confidence of shareholders and investors in the TSE market. As such, TSE shall impose a listing agreement violation penalty on the Company.

1. Date of Designation of Security on Alert November 30, 2023 (Thursday)
2. Duration of Designation of Security on Alert

Generally speaking, following the 1-year improvement period starting November 30, 2023,

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the Company will submit an "Internal Control System Confirmation" document to TSE and undergo a removal of the designation investigation. Provided no problems with the internal control system are found in the results of this investigation, the designation will be removed. On the other hand, if problems with the internal control system are found, the listing will generally be revoked. However, if there is considered to be possibility for improvement, the designation of Security on Alert will be continued and the improvement period will be extended for an additional six months. In addition, the listing may be revoked at any time, even during the designation of Security on Alert period, if there is determined to be no further possibility for internal control system improvement.

4. Listing Agreement Violation Penalty

The Company is required to pay TSE 28.8 million yen as a listing agreement violation penalty.

5. Future handling

Regarding this matter, the Company is deeply sorry for the worry and inconvenience caused to its shareholders, investors and all other parties concerned.

Following the receipt of the Outside Investigative Committee's investigation report on September 22, 2023, the Company planned to establish and announce recurrence prevention measures based on the content of the report by the end of November, 2023.

However, following the designation of Security on Alert at this time, the Company determined that its utmost priority was establishing effective recurrence prevention measures to ensure the designation of Security on Alert will be removed after the 1-year improvement period ends, and has chosen to postpone the announcement of recurrence prevention measures planned for today in order to establish a more in-depth improvement plan for rebuilding and enhancing its governance and internal control systems to achieve this. Moving forward, following the completion of the establishment of effective recurrence prevention measures, the Company will promptly issue a notification, and all executives will continue working together and doing their utmost to regain your trust.

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