ATSUGI CO., LTD.

Since 2018, the sharp decline in inbound tourism-related demand and changes in work styles and clothing trends triggered by the COVID-19 pandemic have caused Legwear demand to trend downward. Manufacturing costs have risen due to the depreciation of the yen, increases in raw material costs, sustained high logistics costs, and rising labor costs; although price adjustments have been implemented, operating profit has not yet reached a level of profitability, and circumstances exist that raise material doubt about the going concern assumption. As countermeasures, the Group is expanding high-value-added products, investing in automation at its China factories, strengthening its supply structure in ASEAN, and improving cash flow through the sale of cross-shareholdings and other assets; at present, it has been determined that no material uncertainty exists.

The Textile Business, the core of the Group's operations, is exposed to market risks such as declining demand due to changes in fashion trends, reduced sales of seasonal products due to unusual weather, an increase in low-priced products amid deflation, and rising imports of low-priced products from overseas. In particular, demand for Legwear has been on a structural downward trend due to changes in clothing trends since the COVID-19 pandemic, which may affect business results and future plans. The Group is working to diversify demand by expanding high-value-added products and entering the healthcare and medical-use markets.

As the Group has shifted its production bases overseas, it has transactions denominated in foreign currencies, and exchange rate fluctuations may affect profit or loss from trading and investment activities. The depreciation of the yen has been a factor pushing up raw material costs and manufacturing costs, and has already contributed to the deterioration in business performance. Although the Group seeks to reduce risk through hedging transactions, exchange rate fluctuations beyond forecasts may affect business results and financial condition.

The Group has relocated its main production bases to China, and risks exist such as tightened regulations by the Chinese government, difficulty securing personnel, and appreciation of the renminbi. Should these risks materialize, business activities in China could be disrupted, which may affect business results and future plans. As a risk diversification measure, the Group is strengthening its supply structure in ASEAN.

Sharp fluctuations in crude oil prices could raise the purchase prices of nylon yarn, a key raw material for socks, the Group's core product, as well as electricity and heavy oil, which may affect business results and future plans. Rising raw material costs have already contributed to higher manufacturing costs, directly leading to deteriorating profitability. The Group is seeking to reduce costs by improving production efficiency through automation investment at its China factories.

With respect to fixed assets held by the Group, if a significant deterioration in the operating environment reduces business profitability such that recovery of the invested amount can no longer be expected, an impairment loss may occur and affect business results. Given the current situation in which continued operating losses have reduced profitability, impairment risk has relatively increased. The Group is seeking to improve cash flow by proceeding with the sale of cross-shareholdings and other assets.

Although the Group records allowances for doubtful accounts based on estimates derived from the condition of customers and historical bad debt occurrence rates, deterioration in customers' financial condition or other unforeseen reasons may necessitate an increase in the allowance for doubtful accounts. In a deteriorating market environment, the financial condition of business partners is also prone to worsening, and if credit risk materializes, it will adversely affect business results and financial condition.

If a large-scale product recall or damages claim arising from a product defect occurs that cannot be covered by insurance, or if an unfavorable ruling is made against the Group in a dispute related to intellectual property, business results and financial condition may be adversely affected. In the textile and apparel industry, intellectual property disputes concerning materials and designs can also arise, requiring the ongoing development of a management system.

If a disaster, power outage, or other event causing operational disruption occurs at the head office or at production and logistics bases, it may significantly affect the Group's business and operating results. Should the impact of an infectious disease become prolonged, it may affect the Group's overall business operations and performance through reduced production or suspension of operations. Because production bases are concentrated in China, the risk is particularly significant in the event of a natural disaster or political turmoil occurring there.