BASE FOOD, Inc.

The top three suppliers accounted for 87.7% of total purchases in FY2025 (ended February 2025), indicating an extremely high degree of dependence on specific manufacturing outsourcing partners. If manufacturing capacity is disrupted due to natural disasters, fires, accidents, sudden changes in management, or other events, there is a risk that production and supply of products could be halted. While the Company is diversifying its manufacturing bases and expanding the number of outsourcing partners, its ability to respond to unforeseen circumstances such as sudden contract terminations remains limited.

If quality issues occur in products manufactured by outsourcing partners, or if physical damage occurs during shipping center operations or distribution processes, the Company may be held liable as the seller, potentially damaging brand value and reducing sales. If a voluntary recall of affected products becomes necessary, a temporary increase in product disposal losses is also expected. Although the Company has established a monitoring and inspection framework in collaboration with its outsourcing partners, it is difficult to eliminate this risk entirely.

The Company's main raw materials include whole wheat flour, soybeans, oils and fats, and eggs. Due to global conditions causing surges in fuel and raw material prices or sharp exchange rate fluctuations, securing the necessary quantities at appropriate prices may become difficult. While the Company is addressing this through building and optimizing its procurement network and developing new products that use raw materials with lower price volatility risk, the risk of rising costs squeezing profitability remains ongoing. Increases in manufacturing outsourcing fees due to wage increases at outsourcing partners may also affect business performance.

In the Company's own e-commerce channel for FY2025 (ended February 2025), "BASE BREAD" accounted for 90.7% of sales within the BASE FOOD series, indicating an extremely high degree of dependence on a single product. If sales of "BASE BREAD" decline due to increased new entrants into the health-promoting food market or changes in consumer preferences, this would have a direct negative impact on the entire business. While the Company is developing new products to expand its product portfolio, commercialization can take a long time.

"Complete nutrition" is a core differentiating element of the Company's products. However, if competitors launch products that meet the same standard, or if other companies' products that do not meet the standard use similar expressions, differentiation may become difficult and competitive advantage may be lost. In addition, if troubles or negative rumors spread regarding other companies' "complete nutrition"-related products, there is a risk that the Company's product image could be indirectly damaged. Since the legal definition of "complete nutrition" is not clearly established in Japan, there is also a risk that the Company could be cited by regulatory authorities for misleading representation of superiority under the Act against Unjustifiable Premiums and Misleading Representations.

The Company spends significant amounts on advertising, including TV commercials and online advertising, which serves as a key driver of sales growth. If sales growth slows due to increased advertising rates or declining advertising efficiency, or if advertising expenses increase, profitability could deteriorate significantly. While the Company is working to improve efficiency by selecting advertising placements and reviewing media and messaging based on performance measurement, dependence on customer acquisition costs is structurally high given the nature of the e-commerce business.

In FY2025 (ended February 2025), 69.4% of net sales came through the e-commerce channel, and much of the sales from the Company's own e-commerce depend on a subscription (regular purchase) model. If customer retention rates fall significantly below expectations due to declining appeal of products and services or reduced competitiveness relative to competitors, the assumptions underlying the business plan would be undermined, materially affecting business performance. While the Company aims to improve retention rates through measures such as improving product quality, expanding the lineup, and enhancing convenience, fluctuations in the cancellation rate are directly linked to earnings stability.

The Company is subject to numerous laws and regulations, including the Food Labeling Act, the Food Sanitation Act, the Product Liability Act, the Health Promotion Act, the Act on Specified Commercial Transactions, and the Act against Unjustifiable Premiums and Misleading Representations. If a violation occurs, administrative sanctions such as business suspension orders or surcharge payment orders, as well as product recall costs, could result. In particular, surcharges under the Act against Unjustifiable Premiums and Misleading Representations are set at 3% of sales attributable to the violation, which could have a significant financial impact. Since regulatory authorities have a certain degree of discretion regarding "complete nutrition" labeling, there remains a risk that changes in the interpretation of the definition could require improvements to labeling.

As a company primarily engaged in e-commerce, the Company holds a large amount of customer personal information. If information leakage occurs due to cyberattacks, unauthorized access, computer viruses, or similar causes, this could result in loss of social credibility, claims for damages, and response costs. If confidential business or technical information is leaked, this could also lead to the suspension of new product development or loss of competitive advantage. While the Company has established personal information protection regulations and conducts security training, risks associated with the increasing sophistication of cyber threats continue to exist.

As of the end of FY2025 (ended February 2025), the Company holds tax loss carryforwards. If business performance progresses smoothly and these loss carryforwards are resolved, a new tax burden based on the prescribed tax rate would arise, potentially affecting net income and cash flow. In addition, the Company has not paid dividends since its founding and, for the time being, prioritizes strengthening internal reserves, with the timing of shareholder returns undetermined. The Company also raises funds through borrowings from financial institutions, and in a rising interest rate environment, increased borrowing costs could worsen its financial condition.