SANKO MARKETING FOODS CO.,LTD.

The Group has recorded operating losses for three consecutive fiscal years through the previous consolidated fiscal year, and in the current consolidated fiscal year also recorded an operating loss of ¥666 million, an ordinary loss of ¥647 million, a net loss attributable to owners of the parent of ¥816 million, and operating cash flow of ¥-585 million, giving rise to events that raise material doubt about the going concern assumption. As countermeasures, the Company has raised capital of ¥310 million through exercise of the 6th series stock acquisition rights and ¥597 million through the 1st series unsecured bonds and the 7th series stock acquisition rights, and is also pursuing the establishment of a sixth-sector industrialization model for the fisheries business and the rebuilding of the store profit base. Since the effects of structural reform take a certain amount of time to materialize, cash flow management and strengthening relationships with financial institutions remain ongoing challenges.

Complex factors such as diseases including BSE and avian influenza, abnormal weather, unseasonable weather, natural disasters, foreign exchange fluctuations, and the prolongation of Russia's invasion of Ukraine may cause difficulty in procuring ingredients or increases in procurement prices. For the Group, whose core business is restaurant operations, food ingredient costs are a major cost item, and rising procurement costs directly affect financial condition and operating results. The Group seeks to stabilize procurement by building its own supply chain (SANKO Fleet, SANKO Kaisho, and Sogo Shokuhin) through the sixth-sector industrialization model for the fisheries business.

If existing store sales decline more than expected due to contraction of the restaurant market or intensifying competition, or if cost reduction measures do not prove effective, this may affect operating results. Due to the entrenchment of telework and continued reluctance to go out, consumer behavior has dispersed from urban centers to suburban areas, and declining demand for large-scale, upper-floor "comprehensive izakaya" format stores in prime locations in the greater Tokyo area has already been a major cause of deteriorating performance. The Group is promoting new store openings and business format development that reflect changing needs (such as "Akamaruya Sengyoten" and "Mametai Shoten") to rebuild its profit base.

All directly-operated stores are leased properties, and cancellation or termination due to circumstances on the landlord's side may force closure even of stores performing well. In addition, if security deposits or guarantee deposits become wholly or partially unrecoverable due to a landlord's bankruptcy or other reasons, this poses a risk to financial condition. Furthermore, unexpected costs associated with store closures may arise, such as the inability to terminate fixed-term lease agreements early, cancellation penalties, and restoration costs.

If a food safety incident such as food poisoning occurs, this may affect financial condition and operating results through disposal of ingredients, damages compensation, and temporary suspension of business operations. In addition, if a material error occurs in ingredient labeling, this poses a risk of decreased store sales due to loss of credibility and costs associated with reviewing suppliers and key ingredients. The Group has implemented measures such as obtaining restaurant business permits and appointing food hygiene managers under the Food Sanitation Act, establishing traceability, conducting on-site inspections of production areas and processing plants, and complying with standards for additives and microbiological testing.

If personnel recruitment and training for the expansion of directly-operated and contract-operated stores and for new business development do not proceed as planned, expansion plans for each business may be delayed or discontinued, affecting operating results. In addition, if the scope of social insurance coverage for part-time employees is expanded, this poses a risk of increased labor costs due to higher social insurance premium burdens. The Group is addressing this through recruitment of new graduates, mid-career hires, and overseas personnel, promotion of part-time employees to full-time staff, and expansion of tiered training and evaluation systems.

The Group holds fixed assets such as equipment centered on its operating stores, and if profit or loss arising from the operating activities of directly-operated stores continues to be negative, application of the "Accounting Standard for Impairment of Fixed Assets" may result in recognition of impairment losses, affecting financial condition and operating results. In an environment where operating losses have already been recorded over multiple periods, conditions are conducive to the materialization of impairment risk. The Group is addressing this through implementation of profitability improvement measures and conversion or closure of unprofitable stores.

The sixth-sector industrialization model for the fisheries business, positioned as a pillar of the Group's profitability improvement, may affect operating results due to unforeseen events such as declining marine resources, fluctuations in domestic and overseas fish consumption demand, and structural changes in fisheries distribution. The Group carries a fixed cost structure including the consolidation of SANKO Kaisho and Sogo Shokuhin as subsidiaries, capital investment in the Numazu processing plant, and full purchase commitments by the SANKO Fleet, making it highly susceptible to demand fluctuations. The Group seeks to diversify business risk through adding value to underutilized and unutilized fish species and developing sales channels for corporate customers.

The Group considers M&A with expected synergy effects to be an effective means of business expansion, and if contingent liabilities not identified through prior due diligence arise after an acquisition, or if business operations do not proceed as planned, this may affect financial condition and operating results. The Group has already made SANKO Kaisho, a fisheries intermediary wholesaler, a subsidiary (November 2021) and Sogo Shokuhin, a fisheries wholesale company at Toyosu Market, a subsidiary (July 2022), meaning M&A risk has already materialized in practice. The Group seeks to reduce risk through prior due diligence (financial, legal, and business).

The Group operates restaurant businesses through local joint ventures mainly in the Asia region, supplying Japanese ingredients, and if political and social instability, deterioration of economic conditions, changes in laws and policies, or foreign exchange rate fluctuations in these foreign countries impede overseas business development, this may affect financial condition and operating results. The Group is also working to acquire licensing agreements for "Tokyo Chikara Meshi" in the Asia region, and exposure to geopolitical and foreign exchange risk may expand going forward. While the Group seeks to diversify risk through entry via local joint ventures, specific details of hedging measures have not been disclosed.