KONAKA CO.,LTD.

In the consolidated fiscal year under review, the Company recorded operating losses and ordinary losses for the sixth consecutive period, and the current ratio stood at 92.9%, with current liabilities exceeding current assets. Furthermore, there are borrowings from financial institutions that have breached financial covenants, and events have been recognized that raise material doubt about the going concern assumption. While the Company has judged that there is no material uncertainty due to the review of its business portfolio, the enhancement of cash on hand through the sale of fixed assets and securities, and ongoing discussions with financial institutions, structural improvement in profitability remains an urgent priority.

The Company and its consolidated subsidiary Samantha Thavasa Japan Limited have entered into a syndicated loan agreement (outstanding borrowing balance: ¥6,509 million for the Company, ¥4,632 million for Samantha Thavasa), which includes financial covenants such as maintaining consolidated ordinary income and net income at 90% or more of planned values, and maintaining net assets at 90% or more of the previous period's level. If these covenants are breached, the Company could lose the benefit of the maturity extension, potentially having a material impact on cash flow. As of the end of the consolidated fiscal year under review, a breach of these financial covenants has already occurred, and the Company is addressing this through ongoing discussions with its lending financial institutions.

The Company values shares of affiliated companies based on the financial condition of those affiliates, and if performance deteriorates significantly, it may be necessary to record a provision for losses on affiliated company operations or to recognize an impairment loss on the shares. In addition, the Company provides working capital loans to affiliated companies and guarantees on their borrowings from financial institutions, and deterioration in the management of affiliated companies could result in the recording of an allowance for doubtful accounts or the need to fulfill debt guarantees. A fundamental structural reform is underway at the consolidated subsidiary Samantha Thavasa Japan Limited, and its outcome is directly linked to the financial condition of the Company's group as a whole.

In April 2025, it was discovered that a portion of held personal information had been leaked due to unauthorized program execution on the server of the order-made business format "DIFFERENCE." The increasing sophistication and cunning of cyberattacks, including ransomware attacks, raises the risk of personal information leakage or loss, suspension of store operations, and damage to brand image. The Company has undertaken measures such as investigating the cause, formulating and implementing recurrence prevention measures, reporting to the relevant authorities, and notifying affected customers, and is strengthening its monitoring system in collaboration with external specialist organizations.

The majority of fixed assets consist of store fixed assets in the Fashion Business, and future deterioration in performance or changes in land prices could result in the recording of an impairment loss on fixed assets as an extraordinary loss. In the business environment marked by operating losses for six consecutive periods, the risk that undiscounted future cash flows used in impairment testing fall below book value is increasing. The recording of an impairment loss would have a direct impact on the Company group's performance and financial condition.

The core Fashion Business is subject to significant seasonal fluctuations, with the proportion of sales in the fourth quarter structurally lower than in other quarters. Sales are also significantly affected by domestic and overseas economic and consumption trends as well as unseasonable weather, meaning that deterioration in the external environment directly impacts performance. If a decline in consumer sentiment coincides with unseasonable weather due to climate change, the impact on profitability could be amplified.

The Fashion Business opens stores through leasing land and buildings, and deposits, guarantee money, and construction cooperation funds are provided as funds at the time of store opening. There is a risk that continued use of the land or recovery of receivables could become difficult due to bankruptcy of the landowner, and if a substitute tenant cannot be introduced upon early termination for the Company's own reasons, there is a risk of forfeiting deposits and guarantee money. Losses may also arise if changes in the surrounding location environment necessitate a change in business format or store closure due to declining profitability.

The Company's group operates stores under a wide variety of brands tailored to location conditions and property concepts, and positions brands as an important management resource. If the brand strategy fails to be accepted due to changes in customer preferences and lifestyles, this could lead to a decline in sales and customer attrition, affecting performance. Responding to the diversification and rapid change in consumer needs, particularly in the fashion industry, remains an ongoing challenge.

The performance and financial condition of the Company's group are affected by fluctuations in foreign exchange rates, which impact the yen-equivalent value of assets and liabilities arising from foreign currency-denominated transactions, as well as the prices of foreign currency-denominated goods and raw materials. In a weak yen environment, there is a risk that rising procurement costs for goods will put pressure on profitability. Although the Company has implemented various measures to mitigate foreign exchange risk, it recognizes that fluctuations in exchange rates could have a material impact on its business, performance, and financial condition.

The Food Service Business is subject to regulation under the Food Sanitation Act, and if hygiene issues occur, such as the occurrence of food poisoning or the use of unauthorized additives by suppliers, business licenses could be revoked or business suspension could be ordered. The Education Business complies with the Child Welfare Act and the guidelines for supervision of unlicensed childcare facilities, and revocation of licenses or business suspension could affect performance. As measures to address legal regulations in each business, the Company conducts regular hygiene inspections and manages operations based on a cleanliness manual.