FRIENDLY CORPORATION

As a result of recording additional impairment losses in the current fiscal year, the Company has fallen into a state of negative net worth, and there exists a situation that raises material doubt about its ability to continue as a going concern. Although the Company breached the financial covenants of its commitment line agreement as of the end of the current fiscal year, it avoided acceleration of the loan by providing additional collateral. While the Company is promoting measures to improve sales, reduce costs, and strengthen performance management, the effectiveness of these measures is key to a recovery in business performance.

Rises in energy prices, labor costs, and raw material prices (particularly rice) have continued, contributing to operating losses and net losses recorded through the previous fiscal year. The same high-cost environment has continued in the current fiscal year, putting pressure on profitability. In response, the Company is expanding sales of the "Chuka Soba" category, which has a lower cost ratio, in-house production of sauces, changing suppliers, and continuously reviewing selling prices.

Depending on future business performance and the status of asset fair values, application of the "Accounting Standard for Impairment of Fixed Assets" may require additional impairment of fixed assets going forward. The Company recorded additional impairment losses in the current fiscal year as well, which contributed to the state of negative net worth. When closing unprofitable stores, in addition to impairment processing, losses on store closures may arise from the waiver of claims for the return of guarantee deposits and security deposits.

As of the end of March 2025, 100% of all stores were concentrated in the Kinki region (Osaka, Kyoto, Hyogo, Nara, and Wakayama prefectures), with Osaka Prefecture alone accounting for 65%. If a widespread major disaster such as a Nankai Trough megaquake were to occur, there is a risk that all stores would be affected simultaneously, potentially having a severe impact on business performance and financial condition. In November 2024, the Company opened a new store at Mitsui Outlet Park Marine Pia Kobe in Hyogo Prefecture, slightly advancing geographic diversification.

There is a risk that securing and retaining the personnel necessary for store operations may not proceed as planned, due to domestic population changes accompanying the progress of the declining birthrate and aging population, as well as economic conditions. As a response to staff shortages, the Company moved the closing time forward from 22:00 to 21:00 at all stores in September 2023, and there is a track record of labor environment constraints leading to lost sales opportunities. In addition, increases in labor costs resulting from amendments to labor-related laws and regulations may also affect business performance and financial condition.

Restaurant operations require a permit from the prefectural governor under the Food Sanitation Act, and in the event of a food poisoning incident, there is a risk of administrative dispositions such as disposal of food, suspension of business, or revocation of business permits. In addition, if environmental regulations such as the Food Recycling Act and the Containers and Packaging Recycling Act are strengthened, increased compliance costs may affect business performance. The Company addresses these risks through regular sanitation inspections and the application of strict standards to outsourcing partners.

If problems related to food safety occur, such as avian influenza, food mislabeling, or pesticide residues, changes in supply and demand may make it difficult to stably secure quality ingredients. In particular, the recent surge in rice prices has directly affected procurement costs, and the Company is responding by changing suppliers and reducing the proportion of products that use rice. Although the Company has established a quality assurance system for ingredients as well as sanitation management and inspection systems, supply disruptions caused by external factors may affect business performance.

Although the Company screens candidate locations based on trade area population, traffic volume, competitive store conditions, and rent, business performance may be affected if suitable properties matching the conditions cannot be found, preventing store openings as planned, or if the surrounding environment changes after a store opens. When closing an unprofitable store before the lease expires, in addition to impairment processing, losses may arise from the waiver of claims for the return of guarantee deposits and security deposits, and depending on the landlord's financial condition, there is also a risk that recovery of such deposits may become difficult. Even profitable stores may be forced to close due to circumstances on the landlord's side.

If viruses such as novel influenza or novel coronavirus spread nationwide and infections expand or become prolonged, store operations may need to be scaled back or suspended, potentially affecting business performance and financial condition. Since all stores are concentrated in the Kinki region, there is a risk that an outbreak of infection in a specific area would directly impact company-wide performance. During the past COVID-19 pandemic, the restaurant industry as a whole suffered a significant impact.

The commitment line agreement used by the Company includes financial covenants, which the Company breached as of the end of the current fiscal year. Although the Company has obtained consent from financial institutions that there will be no acceleration of the loan's due date, in exchange for providing additional collateral, there is a risk that future business performance could hinder continued access to financing. While the Company continues to maintain close coordination with financial institutions to stabilize its financial base, a deterioration in the financing environment amid ongoing negative net worth could have a material impact on management.