RISKS ASSOCIATED WITH THE SECURITY

The basic rights of Bondholders are the right to repayment of principal upon final maturity of the Bonds and the right to conversion into company ownership when clearly defined conversion conditions are met.

There are no restrictions on the free transferability of the Bonds.

Market Risk

Market risk is the risk of a change in the market value of a particular security.

Due to price changes on the market, investors must be aware that if they wish to sell bonds at market price, it may significantly differ from the nominal value of the funds they invested. Koykan assesses market risk as high.

Bond Call Risk

Koykan has the right to call the bonds. A call means early partial or full repayment of the bond’s principal.

Fixed Interest Rate Risk

An investor in a bond with a fixed interest rate is exposed to the risk of a price drop of such a bond due to changes in market interest rates. If the market interest rate rises, the price of a fixed interest rate bond typically falls until its yield approximately aligns with the market rate. If the market interest rate falls, the price of the fixed-rate bond typically rises until the yield aligns with the market rate.

Koykan assesses the risk of changing market interest rates as moderate.

Liquidity Risk

The capital market in the Republic of Croatia is still underdeveloped. Investors should be aware that they might not be able to easily sell their bonds and obtain funds at the desired higher price. There is also a risk that they may not be able to sell the security at the desired price. Koykan assesses bond liquidity risk as high.

Inflation Risk

Inflation risk represents the change in purchasing power of the currency in which the Bond is denominated, thereby affecting the real value of the Bond. If the inflation rate is higher than the nominal return on the investment in the Bonds, the real return is negative.

Koykan Credit Risk and Principal Repayment Guarantee

Credit risk is the risk of default by the debtor – non-payment, or the possibility that funds provided will not be returned timely and/or in full, or not according to the planned schedule. Koykan will manage credit risk by actively monitoring its liquidity, planning its obligations, and aiming to meet its obligations in accordance with good business practices.

Koykan does not guarantee the safety of the investment nor the return of the placement beyond its business condition and success. Koykan does not guarantee returns on the issued security.

Koykan considers credit risk to be moderate.

Risk Related to the Taxation of Income from Bonds

At the time of writing this document, coupon interest is not taxable. Capital gains tax applies if the bonds are sold at a higher price than the purchase price within two years of acquisition.

There is a risk of changes to these favorable regulations for bond buyers. Koykan cannot influence Croatian tax laws.

Interest payments from Bonds are not subject to VAT.

Financing Bond Investments with Borrowed Funds

Financing bond investments through loans or margin loans can significantly increase investor risk. If the investment is financed with borrowed funds, the investor must factor in loan repayment costs when calculating returns or losses in case the bond’s market price drops significantly. Investors should not assume that the loan will be repaid solely from income generated from the bond investment. Instead, they should carefully evaluate their financial position to ensure they can repay loan interest and principal and absorb potential losses instead of making profits. In margin loans, the bonds are pledged to the lender, and in case of a sudden price drop, there is a risk that the investor may have to sell all/part of the bonds to meet a margin call.

Transaction Costs / Fees in Secondary Bond Trading

Transaction costs may arise in secondary bond trading. These costs may reduce or eliminate potential trading profits. They often appear as fixed fees for lower-value transactions or variable (percentage-based) fees for larger transactions. Beyond direct transaction costs, investors should also consider post-transaction costs (e.g. bond custody fees, account maintenance fees). Investors should familiarize themselves with all associated costs before making an investment decision.

RISKS ASSOCIATED WITH THE ISSUER (KOYKAN)

By investing in financial instruments, investors expect a return, but all investments carry risks that may significantly impact investor profits or losses. Every investor should be well-informed and review all available risk information before making investment decisions.

The listed risks represent the minimum considerations for potential investors in Koykan Bonds. The following are the most significant risks inherent to Koykan and do not include additional risks unknown to or deemed unimportant by Koykan but which could still significantly impact operations and financial performance.

Potential investors are advised to carefully consider all disclosed risks. However, prior to making an investment decision, it is essential to independently assess Koykan’s financial condition, potential, and associated risks.

Financial Risks

In its operations, Koykan is exposed to numerous financial risks, particularly:

• credit risk;
• interest rate risk;
• currency risk;
• liquidity risk;
• price risk.

Credit risk is the risk of debtor default – non-payment, or failure to return funds on time and in full. Koykan manages this by monitoring liquidity, planning obligations, and adhering to good business standards.

Koykan does not guarantee investment security or returns beyond its financial condition and success.

Koykan considers credit risk to be moderate.

Currency risk involves future currency devaluation or appreciation. It arises from fluctuations in exchange rates, especially between the euro and the US dollar, euro and Swiss franc, and other currencies Koykan may use.

Koykan operates primarily in euros. If operations involve foreign currencies, it will purchase them to cover expenses. Koykan will not take speculative positions in foreign currencies.

Koykan considers currency risk minimal.

Liquidity risk is the inability to secure sufficient cash to meet current obligations. Koykan manages this by maintaining adequate cash reserves and forecasting cash flow on monthly, quarterly, annual, and long-term bases.

Koykan manages this risk by maintaining reserves and regularly comparing forecasted and actual cash flows, matching asset and liability maturities.

Koykan considers liquidity risk exposure moderate.

Operational and Project Risk

Operational risk relates to business operations and execution. Koykan actively manages and improves its processes.

Koykan considers exposure to operational risk moderate.

Macroeconomic Risk

This risk is linked to national economic conditions, price stability, geopolitical stability, and general business cycles. It includes exogenous shocks to small open economies like Croatia.

Koykan is minimally exposed to this risk.

Political Risk

This includes risks related to national political instability, government changes, and economic policy. Political decisions can significantly affect Koykan’s operations. Croatia is a stable EU, NATO, and Schengen member, using the euro since January 1, 2023.

Political stability can positively or negatively affect businesses. Broader political risks include legal and regulatory changes, sovereign default, and political violence (e.g., strikes, protests, sabotage, terrorism, civil war, revolutions).

Given Croatia’s political climate, Koykan considers this risk low.

Risk of Changes to Tax and Other Regulations

This is significant for potential investors. Frequent changes in Croatia’s tax laws—rates, bases, and other rules (especially EU harmonization)—can affect Koykan’s finances and jeopardize investment plans.

Koykan seeks to protect its identity through intellectual property rights, detailed on its Investor Relations website.

While currently compliant with regulations, future changes (especially regarding research classifications) could significantly affect asset value.

Koykan has very limited ability to manage this risk.

Koykan considers this risk moderate.

Ownership Structure Change and Financial Instability Risk

This risk involves potential changes to Koykan’s ownership structure that could affect operations. If Koykan seeks new funding through capital increases or strategic partnerships, ownership changes may occur.

This risk is considered moderate.

Counterparty Risk

Koykan will outsource significant operations to specialized third parties. It cannot guarantee these parties will fulfill obligations satisfactorily or within budget.

Koykan considers this risk elevated.

Other Koykan Risks

Concentration risk arises from exposure to a single party, group, sector, region, or product. Koykan is highly exposed to this form of risk.