IZAWA TOWEL co., ltd.

Many of the Company's products are imported from overseas production factories, and sudden fluctuations in the settlement currency (mainly US dollars) directly affect the financial position and operating results. In the fourth fiscal period, quarterly foreign exchange gains and losses fluctuated widely, ranging from ¥384,432 thousand to −¥687,054 thousand, showing a pronounced impact on business performance. As a countermeasure, the Company conducts forward foreign exchange contracts based on projected purchase amounts, and as of February 28, 2025, had entered into US dollar buy forward exchange contracts totaling ¥9,734,025 thousand. However, hedge accounting is not applied, and it may be difficult to smooth out the impact in the event of sudden fluctuations.

The Company is highly dependent on its main supplier, Sunvim Group Co., Ltd. (China), which accounted for 49.6% of purchases in the fiscal year ended February 2025. If product supply is halted or restricted due to deterioration in the supplier's business condition, bankruptcy, or changes in the political and economic situation or natural disasters in the production region, this could have a material impact on the Company's business activities. As a countermeasure, the Company has set a production location diversification target for the fiscal year ending February 2028 of 40% China, 30% India, and 30% other regions, and is proceeding with supply chain correction and diversification.

If production is halted or distribution networks are disrupted due to changes in the political and economic situation, terrorism, conflict, large-scale natural disasters, etc. in the countries and regions where products are produced and distributed, this may affect the financial position and operating results through production delays and delivery delays. In particular, the concentration of production in China heightens geopolitical risk. The Company is addressing this by pursuing diversification of production locations (40% China, 30% India, 30% other) with a target of the fiscal year ending February 2028.

Representative Director and President Shoji Izawa plays an important role in advancing the business, and if he becomes unable to perform his duties due to unforeseen circumstances or if a successor cannot be secured, this may affect the financial position and operating results. In addition, if intensifying competition with other companies for talent acquisition results in recruitment and training not proceeding as planned, causing personnel to leave the Company, this could lead to a decline in labor productivity. As a countermeasure, the Company is promoting information sharing and delegation of authority through the Board of Directors and sales meetings, and is working to build an organizational management execution structure.

Delivery and sales timing may change depending on the inventory status and sales trends of customers, potentially causing revenue and profit recognition to shift to the following quarter or fiscal year. Concentration of sales among specific customers may amplify the impact of such timing mismatches. As a countermeasure, the Company works to reduce this risk by monitoring customer conditions in a timely manner and diversifying its customer base.

Two funds for which JAFCO provides investment advisory services are the largest shareholders, and they may continue to influence important matters such as the election and dismissal of officers through the general meeting of shareholders. In addition, if these funds sell their held shares on or off the market after listing, or if the market perceives such a possibility, this could adversely affect the market price of the Company's shares due to deteriorating supply-demand balance. The funds plan to sell a portion of their held shares at the time of listing, but are expected to retain some holdings even after listing.

The Company carries forward goodwill recognized in connection with the 100% acquisition of the former Izawa Towel Co., Ltd. shares in August 2021, and the balance of goodwill recorded as of the end of the current fiscal year amounts to ¥3,325,405 thousand (amortized on a straight-line basis over 20 years). If future profitability declines, an impairment loss may be recorded, which could have a material impact on the financial position and operating results. As a countermeasure, the Company is working to improve profitability through regular monitoring of business performance and the recruitment and training of talented personnel.

The ratio of interest-bearing debt to total assets as of the end of the most recent fiscal year was 39.3%, and since the Company has borrowings at variable interest rates, rising interest rates would affect cash flow. In addition, the syndicated loan (contract amount ¥3,755,000 thousand) from three banks—The Bank of Fukuoka, Mizuho Bank, and Resona Bank—carries financial covenants such as a requirement that current profit or loss not be a loss for two consecutive periods, and if business performance deteriorates, early repayment of the loan may be required. In August 2023, the Company refinanced its long-term borrowings to reduce interest expenses.

Since sales currently depend on the domestic market, business performance may fluctuate significantly due to a decline in domestic consumption caused by the declining birthrate, aging population, and population decrease, as well as changes in the policies of customers that account for a large proportion of sales. If market contraction exceeds expectations or the Company fails to adequately respond to market changes, this may affect the financial position and operating results. The Company aims for sustainable growth by expanding market share through the introduction of products that meet consumer needs.

Product procurement costs may rise due to increases in raw material and fuel prices, rising wages, a weakening yen, and rising transportation costs. If cost increases precede revisions to selling prices, profit margins may be compressed, affecting the financial position and operating results. As a countermeasure, the Company is changing suppliers, improving loading efficiency for imported cargo, and regularly reviewing selling prices.