TOP CULTURE Co.,Ltd.

In FY2025 (ending October 2025), the company achieved consolidated net sales of ¥17,333 million, but recorded a consolidated operating loss of ¥391 million and a consolidated net loss attributable to owners of the parent of ¥731 million, marking the fourth consecutive fiscal year of operating losses. As a result, the company recognizes that conditions exist that raise material doubt about its ability to continue as a going concern. As countermeasures, it is promoting the early withdrawal from unprofitable stores, revenue generation through the introduction of new services, reduction of head office expenses, and securing of funds by maintaining relationships with financial institutions.

Regarding the listing maintenance criterion for the Standard Market requiring a tradable market capitalization of ¥1.0 billion or more, as of October 31, 2025, the company's tradable market capitalization was below ¥1.0 billion, falling short of the criterion. If the company fails to meet this requirement, it may be unable to maintain its listing on the Standard Market, which could adversely affect the stock price or liquidity. The company plans to address this through execution of its medium-term management plan, shareholder returns, and strengthened IR activities.

In the book, video/music software sales and rental, and game recycling business, the franchise agreement with Culture Experience Co., Ltd. underpins the core of brand strategy, store development, and sales data management. Although the non-compete clause has been lifted by memorandum, there is no guarantee that this will not change in the future, and if the relationship with the company ceases to function normally, it could have a material impact on the company's business results. The company strives to maintain the relationship by handling only merchandise that has undergone legitimate procedures as a franchise member.

As internet distribution services for content such as music and video shift to subscription models, and combined with the spread of smartphones, demand for music and video software rental and sales at physical stores continues to shrink. The competitive environment with e-commerce is also constantly changing, and the emergence of new technologies, new services, and new market entrants could affect business results. The company is responding by offering diversified content through large-scale complex stores and by promoting omnichannel strategies, but if lifestyle changes occur more rapidly than expected, the impact on business results could be greater.

As stores have grown larger and merchandise offerings have expanded, competition has arisen with business formats beyond traditional bookstores and rental shops, and competition with domestic and overseas internet retail and content distribution services has also increased. If deregulation of the resale price maintenance system progresses, books and music CDs could move to free price competition, and excessive price competition could affect business results. The company seeks differentiation by enhancing the experiential value of physical stores and promoting omnichannel strategies, but a misstep in these measures could lead to a decline in customer support.

The company's store-opening model centers on large-format complex bookstores with sales floor areas of 1,000 to 3,000 tsubo. Amid rising costs of various materials and an ongoing trend of rising construction costs in the greater Tokyo area, if the opening of large-format stores becomes concentrated in a particular period, the investment burden could increase sharply, affecting business results. Large-format stores require a longer investment payback period than small and medium-sized stores, and a delay in reaching the expected profit level relative to plan could also affect business results. The company seeks to limit initial investment by basing its store openings primarily on leased land and buildings.

A significant deterioration in the business environment or decline in market value could reduce the profitability of owned fixed assets and lead to impairment losses, affecting the company's financial position and business results. In addition, the new lease accounting standard (Accounting Standards Board of Japan Statement No. 34), announced in September 2024, will be applied from the beginning of FY2028 (ending October 2028), and is expected to result in the new recognition of right-of-use assets and lease liabilities for operating lease transactions, which could adversely affect related management indicators. There are also concerns about the impact on financial position and business results if impairment losses on right-of-use assets occur in the future.

The company aims to expand multi-store operations in the eastern Japan area, but store openings are generally premised on leasing land and buildings, and the pace of openings is affected by negotiations with landlords and landowners as well as procedures under the Large-Scale Retail Store Location Law. The possibility of limited room for store openings in certain regions due to store expansion by other companies' franchisees cannot be ruled out, and there may be cases where opening stores as planned proves difficult. Under the medium-term management plan, the company had planned to close 19 stores and open 3 new stores by the end of FY2025 (ending October 2025), but actual results were limited to 14 store closures and 2 new store openings, resulting in a deviation from the plan.

The company has established personal information management regulations and manuals in accordance with the Act on the Protection of Personal Information, but if thorough management is not achieved, it could result in social sanctions or claims for damages that affect business results. In addition, in the purchase and sale of recycled goods under the Secondhand Articles Dealer Act, if there are material deficiencies in regulatory compliance at the store level, the company could face sanctions such as revocation of permits or denial of new permits, affecting business development. Deficiencies in on-site operations related to ordinances for the healthy development of youth also pose a risk of damaging corporate credibility and brand value.

If a large-scale earthquake, typhoon, or other natural disaster or unforeseen accident occurs at the locations of the head office, distribution centers, or stores, it could cause physical damage to facilities and distribution networks, impeding business operations and affecting net sales and business results. The company group operates stores primarily in Niigata and Nagano prefectures, resulting in a high concentration of exposure to regional natural disaster risk. The annual securities report does not disclose specific details of a business continuity plan (BCP).