NAIGAI CO.,LTD.

The Group recorded an operating loss in the fiscal year under review, and operating cash flow has also remained negative on a continuing basis, giving rise to circumstances recognized as raising material doubt about the going concern assumption. As countermeasures, based on the 6th Medium-Term Management Plan "N-Challenge 2027" announced on February 3, 2025, the Group is promoting accelerated structural reform of the department store business, expansion of profitability in the e-commerce business and mass retailer business, improvement of inventory efficiency, and reduction of fixed costs, with the aim of achieving positive operating cash flow. In terms of funding, cash on hand has been secured, including continued financing from financial institutions, and it has been determined that no material uncertainty regarding the going concern assumption currently exists.

Sales from licensed brands account for approximately 80% of the Group's total sales, and if a license agreement cannot be continued due to unforeseen circumstances, this could have a material impact on management. The high degree of dependence on specific licensed brands constitutes a structural vulnerability. As countermeasures, the Group continuously reviews and appropriately restructures its brand portfolio and works to reduce the proportion of licensed brands by cultivating its own in-house brands.

Approximately 90% of the Group's sales come from the domestic market, and sales to department stores and mass retailers, its main sales channels, account for approximately 60% of total sales; accordingly, changes in the management policies, store openings/closures, and business performance of these business formats could significantly affect the Group's performance. High dependence on specific distribution channels poses a risk that undermines the stability of earnings. As countermeasures, the Group is focusing on building an appropriate sales channel portfolio and expanding direct sales-type business models such as retail formats and e-commerce.

The Group procures products manufactured overseas, and unexpected yen depreciation could increase product procurement costs, potentially having a considerable adverse effect on business performance. Both import transactions and trademark royalty payments are structurally exposed to the impact of exchange rate fluctuations. As a countermeasure, the Group implements forward foreign exchange contracts and other hedging measures in a timely manner within the scope of ordinary transactions to hedge risk as much as possible.

As the Group operates a fabless business model, outsourcing the production of all products to cooperating factories in Japan and overseas, political and economic turmoil in production regions, human rights issues at cooperating factories, deterioration of their business conditions, production management troubles, and logistics disruptions could lead to production stoppages and delivery delays, resulting in lost sales opportunities. As countermeasures, the Group regularly confirms compliance status at cooperating factories, holds detailed discussions on operating status and production capacity at the time of ordering, monitors progress at each production stage, and issues instructions to restructure production lines as necessary.

If unforeseen quality trouble or a product liability incident occurs, this could damage the corporate and brand image and result in substantial losses. Although the Group conducts pre-shipment inspections through its quality control department or third-party inspection organizations, such risk cannot be completely eliminated. As a countermeasure, the Group has established a Quality Control Committee directly under the Sales Headquarters, thoroughly manages product planning specifications based on a quality control manual, and mandates factory inspections and receiving inspections to thoroughly eliminate defective products at the earliest possible stage.

If a serious information security incident occurs due to a cyberattack or other unforeseen accident, this could affect management through a decline in social credibility and corporate image. The Group handles personal information, and cyber risk remains a continuing threat amid advancing digitalization. As countermeasures, the Group has established and thoroughly disseminated a personal information management policy to employees, conducts regular compliance training, and carries out appropriate operational management based on its information asset management policy.

The occurrence of an accidental large-scale disaster such as an earthquake or fire could impede business continuity. Impacts on the entire supply chain are also anticipated, posing a risk that production, logistics, and sales functions could all halt simultaneously. As a countermeasure, the Group has established a BCP Committee directly under the Sales Headquarters and has built a BCP framework with close coordination across the entire supply chain, aiming to resume business operations in as short a time as possible.

If a pandemic caused by an unknown virus or similar agent imposes severe restrictions on the political and economic environment, this could have a material impact on performance through supply chain dysfunction and stagnation of the consumer market. The Group's fabless structure dependent on overseas production and its sales structure dependent on department stores and mass retailers are factors that heighten vulnerability during a pandemic. As a countermeasure, the Group's BCP plan, activated in the event of a pandemic, prioritizes ensuring the safety of employees above all else, and the Group has established a framework enabling business continuity.