STUDIO ATAO Co., Ltd.

The proportion of merchandise procurement outsourced to Sakata Corporation reached 86.7% of the total in the fiscal year ended February 2025, resulting in significant dependence on the company for production management and procurement. If stable merchandise procurement becomes unfeasible for any reason, this could have a material impact on the Company's financial position and operating results. While efforts are being made to reduce this risk by securing alternative business partners and shifting to direct contracts with individual production factories, the development of alternative arrangements remains a work in progress.

Under the former basic EC sales agreement with Digisearch & Advertising Co., Ltd., intellectual property rights related to the internet site and customer information were structured to belong to that company, and as a result, the issue of misidentification of the ATAO brand by former EC members has continued even after termination of the agreement. With the migration to the newly self-operated EC site "ATAOLAND+", continued aggressive investment in sales promotion expenses and other costs will be necessary to re-expand internet sales and store sales, and if progress does not proceed as planned, this could affect the Company's financial position and operating results. The representative director of that company and his asset management company hold 17.78% of the Company's voting rights, and the related party relationship continues.

The Company procures the majority of its merchandise from Sakata Corporation based on quoted purchase prices, and has thus far maintained relatively stable procurement prices. However, if the Company is forced to accept price increase demands from manufacturers due to a sharp depreciation of the yen or rising prices, merchandise procurement costs will rise, which could affect the Company's financial position and operating results. Due to the structure of its procurement, foreign exchange risk is indirectly passed through to procurement costs, and no direct hedging measures are described.

The Company's net sales are subject to significant seasonal fluctuation; in both the 20th and 21st fiscal periods, approximately 33% of net sales were concentrated in the fourth quarter, while the second quarter accounted for only about 19-20%. In the second quarter of the 20th fiscal period, the Company recorded an operating loss of ¥3,779 thousand, and combined with the effects of internet sales promotion strategies and shipping timing, quarterly performance fluctuates significantly. Due to the high degree of dependence on specific quarters, poor sales performance during those periods can have a significant impact on full-year results.

The fashion brand industry to which the Company belongs is subject to rapid changes in trends, and product life cycles tend to be short. While the Company seeks to reduce this risk through product development that is less susceptible to trends and the operation of multiple brands, sudden shifts in trends could result in inventory obsolescence and declining sales, which could affect the Company's financial position and operating results. Since maintaining brand value is fundamental to the Company's earnings base, delays in responding to trends pose a risk that could spread throughout the entire business.

Kuninori Seo, the founder and Representative Director and President, plays a central role in product planning, brand production, and management policy decisions, resulting in a high degree of dependence on him. While the Company is working to strengthen its organizational structure through personnel development and delegation of authority, if he becomes unable to continue management execution for any reason, this could have a material impact on the Company's financial position and operating results. The small scale of the organization (67 employees) is also a factor that heightens the risk of dependence on a specific individual.

The Company makes decisions on new store openings based on market research conducted through limited-time pop-up shops; however, if sales performance falls short of expectations due to competitors opening stores or other factors, losses on disposal of fixed assets or impairment losses may arise in connection with changes in business format, store closures, or relocations. As of the end of February 2025, the balance of tangible fixed assets stood at ¥218,293 thousand, and the balance of leasehold and guarantee deposits reached ¥118,672 thousand. Penalty payments may also be required in the event of early contract termination, raising concerns about the impact on the Company's financial position.

The Company holds customers' personal information through its EC and store businesses and is subject to obligations under the Act on the Protection of Personal Information. While the Company has implemented measures such as establishing personal information management regulations, utilizing VPNs, implementing virus countermeasures, and password management, if an information leak occurs due to intentional acts or negligence by related parties or outsourcing partners, this could affect the Company's financial position and operating results through legal liability, including damages claims, and damage to brand image.

If malicious rumors spread explosively on social media and other internet platforms, regardless of their accuracy, this could damage the Company's brand image and affect its business, financial position, and operating results. Even after termination of the agreement with the former EC site operating company, the issue of misidentification with similar brands has continued, making brand protection highly challenging. Similar risks could also arise if inappropriate conduct, such as violations of laws and regulations, comes to light.

The Company is a small organization with 7 directors and 67 employees (as of the end of February 2025), and hiring and developing personnel in line with business expansion, as well as establishing an internal management structure, remain challenges. If the internal management structure fails to keep pace with rapid business expansion, this could make appropriate business operations difficult and affect the Company's financial position and operating results. Ensuring the effectiveness of corporate governance and the appropriate operation of the internal control system are recognized as ongoing management challenges.