KOTOBUKIYA CO., LTD.

The Company manufactures and sells hobby-related products by paying royalties to copyright holders of anime, comic, and game content, and licensing to use such copyrights forms the foundation of the Company's business operations. If royalty rates are increased or contracts with copyright holders are terminated, this could have a direct impact on business performance. In particular, contracts with overseas copyright holders are prone to differences in contract interpretation due to differing business customs, creating a risk of additional royalty payments or retroactive payment of penalties. The Company addresses this by thoroughly conducting legal review of all contracts.

If a large earthquake, tsunami, typhoon, flood, or other natural disaster, the spread of an infectious disease such as COVID-19, or an unforeseen accident occurs in the areas surrounding outsourced manufacturing plants and warehouses, or the Company's directly-operated stores, manufacturing, logistics, sales, and procurement activities may be disrupted. If human casualties occur, normal business activities may become impossible, which could have a material impact on business performance and business development. The Company classifies this as a "particularly important risk" and places special emphasis on its impact on business continuity.

The Company is promoting overseas expansion primarily targeting the two major markets of North America and Asia, but this entails foreign exchange risk, political instability, differences in culture and customs, region-specific legal and tax systems, and intellectual property risks such as counterfeit products. If sudden changes occur in the political, economic, or legal systems of various countries, this could affect business performance and business development. The Company intends to strengthen its overseas expansion by developing its sales structure and promoting the development of proprietary products for overseas markets.

The Company is a fabless company and relies mainly on external contractors in Guangdong Province, China for the manufacture of products such as Figures. If a contractor changes its transaction policies, experiences a deterioration in its revenue structure, a decline in supply capacity, quality problems, or a suspension of business, this could have a significant impact on business performance. The Company is expanding its manufacturing outsourcing partners to other regions of Asia besides China and within Japan, but at present its main manufacturing base remains in China.

Manufacturing of the Company's products depends mainly on external contractors in China, and market risk, credit risk, and geopolitical risk related to that region could affect business performance and business development. In addition, if changes in China's economic conditions cause local raw material costs and labor costs to rise beyond the Company's expectations, this could push up procurement costs and adversely affect business performance. Due to the structure of the fabless business model, the Company inherently bears the risk of geographic concentration of manufacturing bases.

The Company's products are primarily manufactured by external contractors in China and imported on a US dollar basis, making the business structure susceptible to foreign exchange rate fluctuations. The Company also exports overseas on a US dollar basis, but currently imports exceed exports, and in a yen depreciation phase, rising procurement prices could adversely affect business performance. Exchange rate fluctuations affect both procurement prices and selling prices, and changes in sales volume resulting from price fluctuations could also affect business performance.

The products handled by the Company are affected by the seasonality of personal consumption (long holidays, year-end and New Year holidays, etc.), and hobby-related products such as character goods tend to have short life cycles due to rapidly changing trends. Since it takes approximately one to two years from planning to sale, if the Company is slow to respond to changes in customer preferences, or if consumer purchasing activity stagnates due to a sharp economic downturn, this may necessitate recording write-downs or disposal losses on products, which could affect business performance. Given that the wholesale business, which accounts for approximately 60% of sales, is an order-based model, attention must also be paid to the risk of excess inventory arising from a gap between sales volume and manufacturing volume.

The Company holds trademark rights related to "KOTOBUKIYA" and works to prevent infringement of intellectual property rights by third parties. If a third party infringes on the Company's intellectual property rights, this could damage the Company's brand image, and conversely, if the Company infringes on a third party's intellectual property rights, this could give rise to an obligation to pay damages; either case could affect business performance. As overseas expansion increases, addressing intellectual property risks such as counterfeit products has become increasingly important.

The Company acquires and manages a large amount of customer information and confidential information, and strives to build an information management system through the establishment of personal information protection regulations and thorough internal training for all employees. Should a leak, falsification, or unauthorized use of personal information occur, this could affect the Company's business and performance through the burden of response costs, claims for damages, and loss of credibility. While the Company continues to strengthen its information management system, external threat risks such as cyberattacks cannot be completely eliminated.

Representative Director and President Kazuyuki Shimizu and Director and Executive Vice President Hiroyo Shimizu play important roles in driving the Company's business strategy, resulting in a high degree of dependence on both individuals. If an unforeseen accident or other event were to make it difficult for either of them to carry out their duties, this could affect business development and financial results. The Company is focusing on developing and strengthening human resources to avoid excessive dependence, but at present, the presence of these two individuals remains a significant risk factor in management.