Lacto Japan Co., Ltd.

Political and economic trends in Japan, Asia, North America, Europe, Oceania and other regions may cause fluctuations in the supply-demand balance of handled products (dairy raw materials, cheese, meat, etc.), potentially affecting business performance through purchase and selling prices. If geopolitical risks such as the Russia-Ukraine conflict, the Israel-Palestine conflict, or contingencies involving Taiwan or North Korea materialize, there is a risk of disruption across the entire supply chain, spanning procurement, transportation, and sales. As countermeasures, the Company is working to diversify supply sources, promote the development and procurement of alternative raw materials, and diversify its business with food as its core.

Since raw materials such as dairy ingredients, cheese, and meat are of animal origin, they are highly susceptible to the effects of climate change, such as rising temperatures and deterioration of feed crop conditions due to drought or excessive rainfall, which can lead to decreased raw milk production. If abnormal weather reduces production and tightens supply-demand balance, price surges and declines in sales volume could occur simultaneously. If extreme warming progresses, there is a risk that procurement of dairy raw materials and cheese itself could be hindered. The Company addresses this through diversification of supply sources and initiatives toward building a sustainable dairy and livestock industry.

The dairy and livestock industry has a significant environmental burden, including methane gas emissions from cattle and water/soil pollution and deforestation from manure treatment, and environmental regulations such as greenhouse gas emission controls may be further strengthened amid the transition to a low-carbon society. This could increase compliance costs, and if dairy and livestock producers in the supply chain are slow to respond, there is a risk of impact on smooth business operations. The Company seeks to mitigate this risk through initiatives to build a sustainable dairy and livestock industry.

While trade liberalization progresses through agreements such as the CPTPP (effective December 2018), the Japan-EU EPA (effective February 2019), and the Japan-US Trade Agreement (effective January 2020), changes in tariff policy could make it difficult to leverage the overseas network and expertise the Company has built. In phases where liberalization stalls, import prices and various costs may rise, whereas tariff reductions or eliminations could present opportunities to increase sales volume, meaning revisions to trade agreements can affect performance in both directions. The Group is adjusting its business strategy while closely monitoring trends in trade agreements.

The Company is subject to laws such as the Food Sanitation Act and the Consumer Safety Act in Japan, and to the legal regulations of each country overseas, and revisions, abolitions, or the introduction of new regulations may result in additional compliance costs. If licenses are revoked due to legal violations, business activities could be restricted, posing a risk of material impact on performance. The Company has established a Quality Assessment Department to handle regulatory compliance and information gathering, building a framework to respond appropriately and swiftly to new regulations.

If livestock diseases such as classical swine fever, African swine fever, BSE, avian influenza, or foot-and-mouth disease occur, safeguard measures may restrict the import and movement of meat and processed meat products, potentially reducing procurement volumes and causing significant fluctuations in meat prices. This is expected to lead to decreased sales volume and deteriorated profitability. The Company works to reduce this risk by diversifying procurement sources across regions and suppliers.

Since the products handled are food raw materials and food products, if foreign object contamination, mislabeling of raw materials, or compositional changes/flavor deterioration due to transport and storage methods occur, the Company may face product recalls or claims for damages in its capacity as a trading company and as a manufacturer of its own branded cheese. In particular, the manufacture of proprietary brand food-service cheese in Asia also entails manufacturer liability. The Company thoroughly implements safety management measures such as food defense and makes every effort to ensure quality.

If major general trading companies or major food manufacturers take capital stakes in the Company's suppliers or customers and bring them under their corporate umbrella, the Group's business foundation could be undermined, potentially affecting performance. In the procurement and sales markets for dairy ingredients, meat, and processed meat products, competition with major companies poses a risk to the Company's unique market position. The securities report provides only limited disclosure of specific countermeasures.

Given a business structure centered on import and export transactions, a weaker yen increases purchase amounts and selling prices, while a stronger yen reduces sales revenue; sharp exchange rate fluctuations near the fiscal year-end also affect the cost of sales in the following period. As of the end of November 2025, the balance of interest-bearing debt stood at a high level of ¥37,156 million (interest-bearing debt dependency ratio of 41.19%), and cash flow from operating activities for the consolidated fiscal year turned negative at ¥-268 million. The syndicated loan agreement with a commitment line entered into with major financial institutions includes financial covenants, and if these are breached, there is a risk that immediate repayment of borrowings could be demanded.

If unforeseen system failures or unauthorized access result in the leakage, alteration, or loss of information, this could damage the Company's social credibility and impose broad constraints on business activities, potentially having a material impact on financial position, business performance, and cash flows. The DX Planning and Promotion Department is advancing infrastructure development utilizing cloud services and implementing the latest security measures, while also addressing this risk through the formulation of an information security policy, regular security training, and thorough dissemination of social media guidelines.