SHINTO PAINT COMPANY, LIMITED

In the current consolidated fiscal year, the Company recorded operating income of ¥255 million and ordinary income of ¥393 million, but recorded a net loss attributable to owners of parent of ¥593 million, marking the fifth consecutive year of net loss. With the outstanding balance of borrowings at a high level of ¥5,100 million, and with the risk of additional compensation expenses related to the inappropriate conduct still remaining, a situation exists that raises material doubt regarding the going concern assumption. As countermeasures, the Company is promoting fixed cost reductions through production rationalization, realization of business alliance synergies with Dai Nippon Toryo Company, Limited, and stabilization of its financial base through a commitment line agreement totaling ¥6.0 billion concluded in December 2025, and has determined that no material uncertainty currently exists.

In FY2022 (ended March 2022), inappropriate conduct was identified, including obtaining JWWA K139 certification through improper test conditions and using non-designated raw materials while failing to report such usage. Although all certification suspensions have currently been lifted, there remains a risk of litigation being filed if compensation negotiations with customers and others fail to reach agreement, and it continues to be difficult to reasonably estimate the amount of compensation expenses that may arise. The Company continues to work on strengthening its quality control system, but depending on the outcome of future mediation, litigation, or negotiations, there is a possibility of a material impact on its financial position and operating results.

Prices of the various raw materials used by the Group fluctuate due to domestic and international supply-demand conditions and geopolitical issues, and recent surges in raw material prices have affected business performance. Delays in passing on cost increases to product prices directly compress profitability, and if procurement becomes difficult due to tight supply-demand conditions, production and sales activities may also be disrupted. The Company strives to reduce procurement risk by diversifying suppliers, but complete avoidance is difficult.

The Group procures working capital and capital expenditure funds mainly through borrowings from financial institutions, and the outstanding balance of borrowings, at ¥5,100 million, is at a high level relative to total assets. In December 2025, the Company concluded a commitment line agreement totaling ¥6.0 billion arranged by MUFG Bank, Ltd., and has drawn down ¥5.0 billion under it; in the current environment of rising interest rates, if interest rates rise further, an increase in interest expenses could affect the Group's financial position and operating results.

The Group exports domestically manufactured products overseas and imports raw materials from overseas, with the structure such that export value of products exceeds import value of raw materials. When the yen appreciates, export competitiveness declines and export proceeds decrease, while when the yen depreciates, costs increase due to higher raw material purchase prices. Overseas affiliated companies hold foreign currency-denominated liabilities, giving rise to foreign exchange loss risk from depreciation of local currencies, and the risk of exchange rate fluctuations cannot be completely hedged.

With domestic paint demand remaining roughly flat, the Group's products face intense price competition due to competitors' expansion of production capacity, among other factors. Although the Company strives to reduce costs, if it is unable to overcome this price competition, profitability may decline. Structural changes in the market environment pose a challenge to maintaining competitiveness over the medium to long term.

The Company conducts sales and purchase transactions of paint products with its parent company, Dai Nippon Toryo Company, Limited, and there is a risk of conflict of interest whereby prioritizing the parent company's interests could impair the interests of minority shareholders. As a countermeasure, at the Board of Directors meeting held on May 29, 2025, the Company resolved to establish a voluntary advisory body, the "Independent Officers Committee," and is working to ensure fairness and reasonableness. If changes occur to the content of contracts or transactions in the future, this may affect the Group's financial position and operating results.

The Group has opportunities to handle confidential customer information through its business activities, and with the increasing sophistication and complexity of cyberattacks, risks such as unauthorized access, ransomware infection, information leakage, and business suspension are rising. If such events occur, the resulting damages claims and decline in social credibility could have a material impact on the Group's financial position and operating results.

Impairment losses may arise on fixed assets held by the Group due to declining profitability from a significant deterioration in the business environment or a decline in market prices. In addition, much of the land held by the Group has been revalued in accordance with the Act on Revaluation of Land, and if land prices decline significantly, losses may arise from the application of impairment accounting, which could affect the Group's financial position.

The Group's growth and profitability depend on securing and developing excellent personnel with expertise in manufacturing, sales, research and development, and administration. Amid intensifying competition for talent in the labor market, if hiring and training do not proceed as expected, this may lead to a decline in business competitiveness, which could affect the Group's financial position and operating results.