CL HOLDINGS Inc.

Because the Group outsources product manufacturing to partner companies under a fabless business model, if defective products occur in connection with large-value orders, the resulting burden of price discounts, re-orders, and product recalls could have a material impact on business performance. The Group has obtained and continuously renewed ISO9001 certification since January 2008, and strives to prevent such occurrences by establishing quality control and production management systems.

Business performance may fluctuate significantly due to changes in customer companies' marketing budgets, the presence or absence of new product launches, changes in marketing methods, and the success or failure of winning large-scale orders. Given the characteristics of the advertising and sales promotion industry, performance is highly susceptible to customers' decision-making. Customer concentration, with the top 10 customers accounting for roughly 40% of sales, is also a factor that amplifies the degree of fluctuation.

The Group has adopted a fabless business model, fully outsourcing product manufacturing to partner companies. If a partner company becomes insolvent or ceases operations, delivery delays or the need for re-production may occur, particularly in connection with large-value orders, which could have a material impact on business performance. Similar risks may also materialize if changes occur in the transactional relationship with partner companies.

The products and services provided by the Group are subject to regulations such as the Act against Unjustifiable Premiums and Misleading Representations, the Product Liability Act (PL Act), and the Food Sanitation Act. If a violation is discovered, it could have a material impact on business performance through damages compensation and loss of social credibility. The Group has established a system for prior legal compliance checks and has taken out PL insurance and insurance for businesses handling personal information to prepare for potential incidents. No cases of violation of the PL Act have occurred in the past.

The Group holds confidential information from customer companies and a large volume of personal information obtained through campaign entries, its own e-commerce operations, and market research. If an information leak occurs, it could have a material impact on business performance through damages compensation and loss of social credibility. There is also a risk of information leakage, data destruction, or system outages caused by cyberattacks, unauthorized access, or computer viruses. The Group obtained Privacy Mark certification in May 2006 and has implemented measures such as thorough internal and external information management, employee training, and insurance coverage.

The Group directly procures some of the products it supplies to customers from overseas, primarily China. In the event of significant yen depreciation or turmoil in the economic or political situation of the sourcing countries, disruptions in product procurement or increases in procurement prices could have a material impact on business performance. The Group recognizes that, given the current state of change in the global economic environment, this risk is likely to materialize.

The Group applies IFRS, under which straight-line amortization of goodwill is not required. However, if the recoverable amount falls below the carrying value of goodwill due to a deterioration in the business performance of the acquired company, impairment processing becomes necessary. In addition, if the profitability of fixed assets such as stores declines due to changes in demand structure, impairment losses may need to be recognized, which could affect financial position and business performance.

Commitment line agreements and similar contracts are subject to financial covenants. If these covenants are breached, repayment of borrowings may be demanded, and failure to comply could result in the loss of the benefit of time, potentially affecting business performance and financial position. There is also an impact on other comprehensive income and financial position resulting from fluctuations in the share prices of investment securities (listed and unlisted shares, etc.) and changes in the assumptions underlying fair value measurement.

The Group enters into capital and business alliances with the aim of strengthening resources and expanding revenue opportunities, executing such alliances following due diligence by external experts and prior deliberation by the Board of Directors. However, if the initially expected effects are not sufficiently realized due to unforeseen subsequent events or changes in the environment, this could affect business performance and financial position.

The Group is rapidly expanding its business, and establishing a management system commensurate with the scale of operations remains a challenge. If delays in securing and developing human resources cause the management system to fall behind the scale of business, this could affect business performance and financial position. Compared with other industries, the advertising and sales promotion industry is highly dependent on securing and developing capable talent, and a shortage of human resources could constitute a material risk to business continuity.