Major risks to the New Art Group (“the Group”) and its business operations, etc., which are considered to have a possibility of significantly impacting the judgement of investors are as follows.

Based on its recognition of the possibility of occurrence of these risks, New Art Holdings Co., Ltd. (“the Company”) makes its best efforts to avoid their occurrence, and to respond in the case of their occurrence. Although some of the risks listed here relate to future matters, they are based on judgements made as of the end of the current consolidated fiscal year.

1. Bridal Jewelry Business

[1] Industry situation, and conditions surrounding the industry (low birth rate, late marriage, etc.)

The Group’s mainstay products are bridal jewelry items such as engagement rings and wedding rings. With the progressively declining birthrate and growing trend towards late marriage, the bridal jewelry market is expected to shrink in the medium to long term. The number of marriages taking place per year has actually fallen, from a peak of around 1.1 million in 1972 to around 0.59 million in 2018. There are also predictions that the bridal jewelry market is in a shrinking trend, and there is a possibility that this could impact the Group’s business results.

At this present time, market shrinkage as a result of the progressively declining birth rate and tendency towards late marriage is not yet having a major impact on the Company’s business results. However, as a future strategy to respond to this risk we are considering the development of products and services that will enable us to approach a wider range of customers aside from the bridal market.

[2] Changes in retail prices and customer spend

According to research by a private-sector research company, retail prices for diamond engagement rings are in a downward trend. At the same time, there is a continuing upward trend in precious metal (platinum, etc.) bullion prices in the long term, although there is also some impact from raw material supply-demand balance and currency exchange rate fluctuations.

With regard to retail prices for bridal jewelry items, which are the Group’s mainstay products, there is still a trend for customers to place importance not only on low price but also quality and service, partly because these items are often viewed as once-in-a-lifetime purchases (keepsakes).

The Group aims to create products that achieve brand differentiation and offer a high level of added value, and for this reason adjusts retail prices to match raw material cost prices. However, in the event of depreciation of the yen progressing beyond anticipated levels, or if the Group is forced to engage in a price war (i.e. low-price competition) as a result of an increase in the number of rival companies and diversification of sales channels, then there is a possibility that these risks could impact the Group’s business results. In addition to introducing high-quality products, the Group will also work to build an organizational structure that will enable it to appeal to customers with regard to other attractive features aside from price, through the development of new products.

[3] Sales strategies specialized towards bridal jewelry

The Group’s share in the bridal jewelry market is estimated at around 8%, and we believe that there is sufficient room for growth based on our unique business model. Due to factors such as the stability of the market itself and the Group’s numerous advantages (which include cost leadership through the direct purchase of high-quality diamonds, strong brand strategy to overwhelm competitors, a well-established feedback system with extensive experience and expertise for constantly ascertaining the needs of customers and reflecting them in our products, and human resources with specialized knowledge), we believe that the potential risk of specialization towards the bridal jewelry market remains low in the short- to medium-term.

However, since sales of bridal jewelry account for the majority of the Group’s net sales revenue, there is a possibility that changes in the situation in the bridal jewelry market could impact the Group’s business results. We are therefore engaged in efforts to reduce this risk by advancing the development of new products and initiatives in new areas other than the bridal market.

[4] Media used to attract customers

The Group is currently bolstering efforts to attract customers for the Bridal Jewelry business via the Internet, in addition to the wedding information magazines and referrals from partner companies that we have traditionally placed a primary focus on. We view the performance of all methods for attracting customers calmly from an overhead perspective, and will constantly consider ways to maintain a good balance of advertising styles. We strive to operate with a focus on cost-effectiveness, and aim to attract more customers across the board by implementing highly reliable marketing strategies through the effective allocation of expenses.

[5] Procurement methods and development of purchasing staff

The Group purchases loose diamonds from Israel and Belgium.

In particular, Israel Shiraishi, Ltd. (the Group’s consolidated subsidiary in Israel) purchases loose diamonds from local diamond dealers at the Israel Diamond Exchange and sells products directly to the Company (as the parent company). Direct purchasing via routes such as this enables us to omit the distribution process, and enables us to cut procurement costs. In order to maintain this procurement structure, we appoint experienced purchasing personnel both at the Company and at Israel Shiraishi, Ltd.

Although the Group plans to continuously train and develop purchasing personnel, in the likely event that multiple purchasing personnel were to leave the company at once then there is a possibility that it could impact the Group’s purchasing activities.

[6] Overseas situations

The Group’s main procurement source for the Bridal Jewelry business is Israel Shiraishi, Ltd., a consolidated subsidiary located in Israel, which buys loose diamonds and other items at the Israel Diamond Exchange. Although the diamond exchange has not been closed even during the breakout of war in neighboring countries in recent times, depending on the degree to which the situation in the Middle East worsens it may become necessary to suspend activities in Israel and evacuate staff from the consolidated subsidiary to elsewhere in order to ensure their safety, as a top priority. In such an eventuality, the Group plans to procure loose diamonds and other items from alternative suppliers in Belgium or other diamond markets. However, there is a possibility that such circumstances could temporarily impact the Group’s purchasing activities.

[7] Price fluctuations and international market prices for loose diamonds

The purchasing price of loose diamonds is influenced by fluctuations in international distribution prices in the global diamond market, and by currency exchange rate fluctuations in the same way as bullion prices. Despite growing demand in emerging countries which have displayed remarkable economic growth in recent years, we believe that we will be still able to purchase and sell the comparatively small-sized types of diamond used in engagement rings in a relatively stable market environment moving forward.

However, in the event of sudden price fluctuations, there is a possibility that such fluctuations could impact the Group’s earnings.

[8] Price fluctuations for precious metal bullion

The Group purchases platinum, gold and other precious metal bullion as raw materials for its jewelry. In some cases, the price of bullion is subject to significant increases due to international situations, and there is a possibility that sudden price fluctuations could impact the Group’s earnings.

[9] Impact on business results due to currency exchange rate fluctuations

The Group is able to utilize forward exchange contract derivative transactions, not for speculative purposes, but rather to reduce the impact of currency exchange rate fluctuations when purchasing loose diamonds from overseas.

The Group has established Derivate Transactions Management Regulations, and endeavors to ensure appropriate execution of duties with regard to such transactions.

[10] Store opening strategies

The Group places a key focus on profitability when considering opening stores in major Japanese cities. Due to the price range of the products that we offer, and the need to maintain our brand image, we also consider prime locations on main streets in our list of possible store locations. However, such locations are subject to adverse factors such as soaring rent rates, and as such there is a possibility that we may become unable to ensure profit margins in such locations. The Group is also considering the relocation of stores in such areas, and is working to avoid risks through strategic store opening with a key focus on rent information; while at the same time working to build an organizational structure that will enable store management, store opening and store closure planning with an emphasis on profit margins.

[11] Natural disasters

The Group invests energies into appropriate maintenance of machinery, equipment and other facilities to enable stable and continuous operation of its stores and head office. However, there is a possibility that the Group’s systems and sales locations may incur damage from earthquakes, fires or other natural disasters. Depending on the extent of such damages, there is a possibility that they could negatively impact the Group’s business results and financial standing.

[12] Information security

The Group works to make regulations regarding the handling of important information (including personal information) known amongst its employees, ensure thorough education of employees, and build networks that ensure network security. However, in the event of leakage of personal information or other important data due to unauthorized access from the outside, falsification or manipulation of website content, loss of important data due to infection by computer viruses or other such incidents, there is a possibility that such incidents could interfere with business operations, damage the Group’s corporate image, result in claims for damage compensation, litigation, or other such action in pursuit of liability. There is a possibility that such incidents could impact the Group’s business results.

[13] Product storage

Because many of the products handled by the Group are highly priced and easily portable, the Group pays sufficient care and consideration to crime-prevention measures. However, it can still be said that crimes such as theft and robbery are a high risk. The Group endeavors to minimize the risk of such incidents by the introduction of security devices such as surveillance cameras, and by cooperating with security companies.

2. Full-Body Beauty Business

(1) Legal Restrictions

[1] Relation to the Act on Specified Commercial Transactions

Beauty treatment services and products sold by the Group are subject to the Act on Specified Commercial Transactions and other regulations, and the Group regards compliance as one of its major business management issues. Moving forward, in the event of amendments to relevant legislation or establishment of new legislation, there is a possibility that such changes may have an impact on the Group’s business operations.

[2] Relation to the Consumer Contract Act

The Group prepared manuals and other materials concerning the Consumer Contract Act prior to the enforcement of the Act itself, and is working to promote understanding of the Act amongst employees through employee education. However, in the event of employees engaging in acts that constitute a violation of the Act, the Company may be subject to guidance or suspension of business operations by administrative agencies, and there is a possibility that this could impact business management due to a decline in society’s confidence in the Group.

[3] Relation to the Act against Unjustifiable Premiums and Misleading Representations

Advertising is an effective means of attracting customers, and creates major response. The Group takes sufficient care to eliminate false content and exaggerated expressions in advertisements in order to avoid violating the Act against Unjustifiable Premiums and Misleading Representations. In the hypothetical event of the Group’s advertisements being judged to display inappropriate or misleading representations, there is a risk of the Group being ordered by the Fair Trade Commission to remove such representations, or being subject to orders for suspension of advertisements or business operations. In such cases, there is a possibility that such actions could impact the Group’s business results.

[4] Relation to the Act on the Protection of Personal Information

The Group’s counselors create customer “medical charts” in order to manage customers and to carry out continuous treatments that are appropriate for individual customers. In order to do so, the Group handles necessary personal information, and undertakes certain obligations as a business operator handling such personal information. The Group carries out appropriate management of personal information by formulating basic policies and establishing regulations with regard to the protection of personal information, enhancing its information system security, and providing education for its employees. However, in the event of leakage or unauthorized/wrongful use of information, depending on the content of information affected, the Group may be subject to claims for massive compensation. Business activities may be hindered by society’s loss of confidence in the Group, and there is a possibility that this may impact the Group’s business results.

(2) Securing Human Resources

The Group endeavors to secure human resources by engaging in the active recruitment of new graduates and mid-career personnel using a variety of recruitment media and methods nationwide. However, since the workforce consists primarily of female employees in their early 20s, there are risks due to the limited number of veteran personnel, and the industry’s high rate of personnel turnover. In the event that the Group is unable to secure necessary personnel going forward, a situation may arise in which we are unable to handle customer reservations, and there is a possibility that this may impact the Group’s business results.

(3) Agreements with Credit Companies

In addition to cash payments, the Group has also introduced shopping credit and credit card options as payment methods for customers at the time of signing beauty treatment service contracts. In the event that the number of payment options available to customers decreases moving forward as the result of cancellation of agreements with credit companies and credit card companies, the lack of payment options may hinder the signing of contracts with customers, and there is a possibility that this may impact the Group’s financial standing.

(4) Advances Received

As a characteristic feature of beauty treatment services, it is common in the beauty treatment industry for customers to undergo treatments several times, or for multiple sessions. Many of the Group’s customers pay the full contract amount for a course of treatments to be performed over several sessions in a single payment. Such payments are processed using the “advances received” account title. Later, when customers visit salons and actually undergo their treatments, these advances are then posted as sales revenue according to the content of services rendered. The Group utilizes advances received as deposits, operating funds and funds for expanding its network of stores and salons. In the event that the utilization of such funds is restricted in the future, for example, as a result of changes in legislation or other regulations stipulating that they must be managed separately as customer assets, then there is a possibility that this may impact the Group’s financial standing and financing plans.

3. Art Business

[1] Theft of works of art

Because the works of art handled by the Group include highly priced items, the Group pays sufficient care and consideration to crime-prevention measures. However, there is still a risk of crimes such as theft and robbery. The Group endeavors to minimize the risk of such incidents by seeking to enhance security, such as through the introduction of surveillance cameras and mechanical security systems in storage warehouses and exhibition spaces.

[2] Damage or destruction, etc., of works of art

Since the Group handles works of art not only in Japan but also overseas, there is a risk of damage or destruction during transportation. In order to avoid such risks, the Group always insures artwork both during transportation and storage, and entrusts transportation management to dedicated specialist business operators with an intimate understanding of how to handle works of art.

[3] Currency exchange market rate fluctuations

Since many of the works of art handled by the Group are bought and sold on overseas markets, there is a risk from currency exchange rate fluctuations. There is a possibility of this risk impacting the Group’s business results and financial standing.

4. Overseas Business Operations

The Group is working proactively to expand the global presence of its existing businesses with a view to expanding the scale of its business operations in the medium to long term. Given that there are numerous emerging economies in Asia, the region in which the Group particularly plans to expand its existing businesses, there are many unknown risks that may even exceed those anticipated by the Group; including international political risks, economic risks such as currency exchange rate fluctuations and trade risks, and social and labor-related risks caused by cultural and customary differences. In the event that these risks become apparent and substantially exceed those anticipated by the Group, there is a possibility that they may impact the Group’s business results and financial standing.

5. New Business Operations

The Group is working proactively to develop new businesses with a view to expanding the scale of its business operations in the medium to long term. However, new businesses carry many uncertain factors. In the event that (excessive) time is required to launch business operations, in the event that the Group is forced to withdraw partway through when a new business does not progress as envisaged, or in the event that amendments to legislation or revisions to regulations are carried out, there is a possibility that this may impact the Group’s business results and financial standing.