KITABO CO.,LTD

The Group has recorded consecutive operating losses since the 96th fiscal period, and in the current consolidated fiscal year recorded an operating loss of ¥137,437 thousand and negative operating cash flow of ¥294,524 thousand, giving rise to material doubt about the going concern assumption. As countermeasures, the Group is strengthening and rationalizing each business and has raised ¥261 million in funds through the exercise of stock acquisition rights from May 2025 to March 2026, and has determined that no material uncertainty exists as of the end of the current consolidated fiscal year. However, there is a risk that the financial foundation will remain vulnerable if fundamental profitability improvement is not achieved.

The Group conducts foreign-currency-denominated product sales and raw material purchase transactions, and fluctuations in exchange rates may directly affect business performance. As a countermeasure, the Group periodically executes forward foreign exchange contracts on foreign currency deposits, but it is explicitly stated that the impact of exchange rate fluctuations cannot be completely eliminated. In particular, since the Textile Business mainly supplies products to the Middle East, it also carries the risk of fluctuations in the currencies of that region.

The Spinning Business supplies products mainly for the domestic Japanese market, and the Textile Business mainly supplies products to the Middle East, so changes in economic trends and personal consumption in these regions may affect business performance. As a countermeasure, the Group continues efforts to closely exchange information with business partners and local markets and to reflect the latest trends in its products. In particular, the Textile Business, which is highly dependent on the Middle East market, has a vulnerability to changes in the political and economic situation in that region.

Product development is recognized as an important issue for securing stable profits, but due to human resource and financial constraints, product development may not progress, and if market changes cannot be adequately anticipated, competitiveness relative to other companies may decline, affecting business performance. As countermeasures, the Group is working to diversify into multiple businesses and to gather information on business development opportunities in new areas. Given the situation of consecutive operating losses, the capacity to invest in product development is limited, creating a risk that maintaining competitiveness will become even more difficult.

The Group holds tangible and intangible fixed assets, and if the market value of held assets declines significantly or the profitability of the business deteriorates, the application of impairment accounting may result in impairment losses on fixed assets, affecting business performance. Under the circumstances of consecutive operating losses, the environment is one in which impairment risk stemming from deteriorating business profitability tends to increase. There is no specific description of countermeasures, and the status of asset management could be a significant factor in performance fluctuations.

The Group is subject to restrictions under various laws and regulations, including the Companies Act, the Financial Instruments and Exchange Act, the Corporation Tax Act, the Labor Standards Act, and stock exchange listing rules, and increased costs to respond to future legal amendments and regulatory tightening may affect business performance. While thorough legal compliance is a policy, the risk of increased costs associated with changes in the regulatory environment cannot be eliminated. In particular, given the current fragile financial foundation, the impact of additional compliance costs on management could be relatively significant.

If unexpected natural disasters or accidents cause damage to a large portion of business offices and employees, business continuity may become difficult, potentially having a material impact on business performance. As a countermeasure, the Group has established emergency contact networks and introduced information systems for confirming employee safety in the event of a disaster. However, production halts due to damage to manufacturing sites carry the risk of a more serious blow to management given the already sluggish profitability.

Due to advance investment in new equipment and product procurement, cash flow from operating and investing activities has remained continuously negative, and working capital depends on overdraft facilities and long-term loan agreements from financial institutions. Although the Group has secured temporary financial leeway by receiving ¥261 million in payments through the exercise of stock acquisition rights from May 2025 to March 2026, there is a risk that cash flow will again become tight if early monetization of investments is not achieved. Maintaining loan agreements with financial institutions is a prerequisite for fundraising, and changes in loan terms directly affect management.

In the Healthcare Business, the Group is working to strengthen sales of the new product category of Crime/Disaster Prevention Security Management Systems, and to strengthen development of oral care products and health supplements centered on the consolidated subsidiary Chubu Pharmaceutical Industry. There is a risk of uncertain market acceptance for expansion into new products and new areas, with costs for development and sales incurred in advance while the timing of monetization remains unclear. Investment in new businesses while existing businesses continue to post consecutive losses may increase the financial burden on the Group as a whole.

In the Spinning Business, future demand decline is anticipated, and the Group aims to continue the business through rationalization, including thorough personnel reassignment, and through passing on processing costs. If the demand decline exceeds expectations, rationalization efforts alone may not be sufficient to improve profitability, potentially calling into question the continued existence of the business itself. Rationalization measures including personnel reassignment have a significant impact on employees, and also carry secondary risks such as talent attrition and reduced production capacity during the implementation process.