IVY COSMETICS CORPORATION

If infectious diseases such as COVID-19 spread widely again, the Company's counseling-based sales, training sessions, meetings, and study sessions—which are premised on door-to-door and face-to-face sales—may be forced to be cancelled or postponed, restricting activities to acquire new sales representatives and customers. In addition, an increase in excess mortality could damage the sales organization. Although the social environment is on an improving trend, structural vulnerability to infectious disease risk remains due to the business model's dependence on face-to-face sales.

Raw materials and supplies used in the manufacture of cosmetics and quasi-drugs are procured from around the world, and if supply disruptions, price spikes, or prohibitions on use due to revisions to the Pharmaceuticals and Medical Devices Act occur, this could hinder the manufacture and sale of major products and adversely affect management indicators and financial condition. In particular, the closure of the Strait of Hormuz due to the Middle East conflict that began in February 2026 has affected transport routes for crude oil, naphtha, and other materials, posing a significant risk to the downstream cosmetics industry. The Company pays close attention to this risk factor and responds carefully with regard to supplies, raw materials, semi-finished products, and merchandise purchasing.

The Company adopts a wholesale format, recognizing revenue at the time of delivery to 238 sales companies (as of the end of March 2026), meaning that the purchasing policies of these sales companies directly affect the Company's revenue. If a sales company misjudges the expected pace of inventory consumption in connection with strengthened products, resulting in excess inventory, there is a risk that subsequent inventory adjustments will depress the Company's sales. The Company strives to grasp the financial and inventory status of sales companies through regular interviews.

If the financial condition of a sales company deteriorates sharply, this could affect the Company's performance through recording of allowances for doubtful accounts, among other effects. Repayment of zero-interest, zero-collateral loans extended during the COVID-19 pandemic is putting pressure on the cash flow of small and medium-sized enterprises, raising concerns that some sales companies may face cash flow difficulties. The Company addresses this through regular interviews and strengthened credit management.

Door-to-door sales, the Company's main sales format, is subject to regulation under the Act on Specified Commercial Transactions, and if this law is revised, it could affect the maintenance of the Company's sales system. Changes in legal regulations represent a risk that touches the very core of the business model and could lead to increased response costs or restrictions on sales activities. The Company addresses this through information gathering by its legal department and timely responses.

The proportion of sales from new products and strengthened products has remained at high levels, at 49.8% in FY2024 (ended March 2024), 47.3% in FY2025 (ended March 2025), and 37.4% in FY2026 (ending March 2026), with sales concentrated notably around campaign periods. Quarterly sales in FY2026 (ending March 2026) fluctuated significantly, from ¥1,156 million in the second quarter to ¥312 million in the third quarter, and performance is greatly affected by the sales trends of new products and strengthened products. The Company strives to control and smooth the sales ratio of new products and strengthened products.

The Company has a revenue structure in which changes in sales have a leveraged effect on profit, creating a risk that performance will deteriorate if sales decline sharply and cost and expense controls cannot keep pace. In FY2026 (ending March 2026), quarterly net loss reached ¥171 million in the third quarter, and combined with seasonal fluctuations, the volatility in profit and loss is significant. The Company responds through advance forecasting of conditions and thorough control of costs and expenses.

There is a risk that difficulty in raising new funds from financial institutions will continue. During the fiscal year under review, the Company raised ¥193 million through the exercise of stock acquisition rights and ¥190 million through new borrowings, but maintaining a favorable fundraising environment remains a challenge going forward. The Company strives to maintain close cooperation with its banks and improve its creditworthiness in order to secure a range of options.

If earnings deteriorate, there is a risk that the Company will be unable to pay preferred dividends on Class A preferred shares or dividends on common shares. Accumulation of retained earnings is a precondition for resuming dividend payments, but securing stable profits remains a challenge due to seasonal sales fluctuations and the high fixed-cost structure. The Company is working to improve earnings in order to increase retained earnings.

As of March 2026, the Company met all listing maintenance criteria, with 3,812 shareholders, tradable share market capitalization of ¥1.82 billion, and a tradable share ratio of 74.23%. However, if these criteria are not met in the future, it could affect the Company's creditworthiness. Although the tradable share market capitalization has a certain margin above the criterion (¥1.0 billion or more), the risk of falling below the criterion due to a decline in share price or a decrease in the number of shareholders cannot be ruled out. The Company strives to improve its creditworthiness and maintain its shareholder base.