CellSource Co., Ltd.

As climate change progresses, risks are anticipated including disaster risk in regions where manufacturing facilities are located, supply chain disruption risk, cost increases due to carbon pricing, and increased costs for system development and equipment upgrades associated with the tightening of environment-related laws and regulations. The Group conducts risk assessments and formulates and monitors risk mitigation measures through a monthly Compliance and Risk Council, and the impact is evaluated as high, with the frequency of occurrence assessed as "already occurring, with impact expected to increase going forward." If these risks materialize, they could affect business results and financial position.

Of the fiscal year's net sales of ¥3,711,455 million, total sales to Ikaju-kai Medical Corporation and its affiliated clinics amounted to ¥1,355,036 million, representing 36.5% of total net sales, indicating a high level of dependence. If the relationship with Ikaju-kai deteriorates or Ikaju-kai's business environment worsens, this could have a direct impact on the Group's business results and financial position. The Group's policy is to concurrently pursue the development of new business partners and deepen relationships with partners other than Ikaju-kai.

Contract Processing Services and Medical Device Sales are subject to regulations such as the Act on the Safety of Regenerative Medicine, the Act on Pharmaceuticals and Medical Devices, and the Product Liability Act, while the cosmetics sales business is also subject to a wide range of laws and regulations, including the Consumer Contract Act and the Act against Unjustifiable Premiums and Misleading Representations. If permits or registrations are revoked, administrative dispositions such as business suspension or surcharges are imposed, or unexpected enactment or amendment of laws and regulations results in additional costs, this could have a material impact on business results and financial position. The Group works to address legal and regulatory requirements and maintain and strengthen its internal control system through a monthly Compliance and Risk Council.

The regenerative medicine market using autologous blood- and fat-derived stem cells is still in its early stages and involves high uncertainty; depending on trends in legal amendments and treatment efficacy, there is a risk that the growth in the number of treatments performed by medical institutions could slow. In addition, if these treatments become covered by insurance in the future, revisions to medical service fees, along with intensified competition from an increasing number of new entrants, could create downward pressure on prices for Contract Processing Services. If these risks materialize, they could affect the Group's business promotion as well as its business results and financial position.

Contract Processing Services for fat-derived stem cells are conducted at a regenerative medicine center that has obtained a Specific Cell Processing Product Manufacturing License from the Minister of Health, Labour and Welfare; however, if demand for outsourcing grows at a pace exceeding capacity expansion, there is a risk of lost business opportunities and ballooning expansion costs. Manufacturing of the cosmetics product "Signalift" is fully outsourced to Shalom Co., Ltd., and if that company's production is halted, sales opportunities will be lost until an alternative supplier is secured. In addition, if health damage caused by cell-processed products or cosmetics occurs, this could lead to compensation and recall costs as well as loss of credibility.

The manufacture and sale of cell-processed products, medical devices, and cosmetics inherently carry product liability risk. Although the Group has partial product liability insurance coverage, this may not fully cover the ultimate amount of damages. If health damage to patients or defect-related accidents involving medical devices or cosmetics occur, the Group may bear product liability, which could impede business promotion. Even if liability is denied, the resulting damage to trust could affect business results and financial position.

The Act on the Safety of Regenerative Medicine and the Act on Pharmaceuticals and Medical Devices are relatively new laws that took effect in November 2014, and there is a risk that legal violations, medical malpractice, or unexpected treatment outcomes by medical institutions or business operators entering the market in the future could cause reputational damage across the entire industry. Even if such incidents involve other companies or institutions, if confidence in regenerative medicine as a whole is undermined, this could impede the Group's business promotion and affect its business results and financial position. While the Group itself responds through thorough legal compliance and quality control, risks arising from external factors cannot be completely controlled.

If a cyberattack or similar event causes a system failure in the manufacturing, production flow, or sales channels, this could have a material impact on business continuity. In addition, if unauthorized access, tampering, or leakage occurs with respect to patients' personal information obtained from medical institutions or confidential information of business partners, this could result in significant reputational damage and adversely affect business performance. The Group strives to build a sufficient system security framework and thoroughly manage personal information, but unforeseen incidents cannot be entirely eliminated.

The Group is primarily advancing joint research with universities and other academic institutions to develop new manufacturing and contract processing fields utilizing exosomes, and to evaluate the efficacy of PFC-FD and fat-derived stem cells across various treatment areas. Research and development expenses for the fiscal year totaled ¥19,073 million (0.5% of net sales). Depending on future research methods and commercialization plans, substantial R&D expenditure may be required, and if commercialization results commensurate with R&D expenses are not achieved, this could impede business expansion and affect business results. The success or failure of R&D also depends on external collaboration with academia, resulting in high uncertainty.

Due to expanding global demand in the regenerative medicine and biopharmaceutical fields and changes in geopolitical risk, the supply and transportation of related equipment and materials may become unstable. If material shortages occur, this could cause delays or suspensions in Contract Processing Services, potentially having a material impact on business results and financial position. The Group addresses this through reviewing suppliers, strengthening communication systems, establishing rigorous inventory management systems, and consistently securing multiple alternative sources, but risks remain in the event of rapid business expansion or occurrences similar to infectious disease outbreaks.