AXXZIA Inc.

If purchase prices of raw materials rise due to shifts in international conditions or an imbalance in supply and demand caused by inflows of speculative capital, this could have a material adverse effect on the Group's profitability. The likelihood is assessed as "medium" and the severity as "high," recognized as a serious financial risk. The Group aims to secure timely procurement at appropriate prices by promoting global sourcing and maintaining good relationships with suppliers.

If actual sales diverge from projections due to changes in domestic and overseas laws and regulations, shifts in consumer needs, intensified competition, and similar factors, resulting in stagnant inventory, this could have a material adverse effect on business results and financial condition through the recording of inventory valuation losses and similar measures. The likelihood is assessed as "medium" and the severity as "high." The Group seeks to mitigate this risk through monthly inventory reviews, revisions to production plans, and the timely implementation of sales promotion measures for products at risk of stagnation.

If a natural disaster such as an earthquake, or an accident, occurs in the regions where raw material suppliers or contract manufacturers are based, or where the Group's own facilities are located, this could halt the supply of raw materials and products or delay production and delivery, resulting in a material adverse effect on business results and financial condition. The likelihood is assessed as "low," but the severity is positioned at the highest level of "high." The Group works to minimize the impact on its production and supply framework by securing multiple suppliers and diversifying contract manufacturers.

The Group's sales to China accounted for 72.2% of total sales in the fiscal year under review, creating a high risk that social disruptions in China—such as policy changes, changes in the legal system, anti-Japanese protests, and infectious disease outbreaks—could directly impact business operations. The business is also significantly affected by changes in the platform operation policies of Alibaba Group and Douyin, the Group's primary sales channels. As countermeasures, the Group is working to identify local conditions at an early stage and build its own branding and marketing framework within mainland China; however, the high degree of dependency remains a structural risk.

Amid the structural labor shortage and rising costs in the logistics industry, if logistics providers significantly raise shipping rates or scale back business relationships, the cost of supplying products domestically and overseas could increase, adversely affecting business results. The likelihood is assessed as "medium" and the severity as "medium." The Group aims to build a stable logistics framework by distributing delivery contracts among multiple providers and maintaining good business relationships.

In the fiscal year under review, the AGTHEORY Cosmetics Series and AXXZIA brands accounted for the majority of sales. If these core brands were to experience a sales downturn for any reason, this would have a direct and material impact on the Group's overall performance. The likelihood is assessed as "medium" and the severity as "medium." While the Group seeks to diversify brand dependency risk through the continuous creation of new brands and products, the current level of concentration remains high.

The Group is subject to a wide range of domestic and overseas laws and regulations, including the Pharmaceuticals and Medical Devices Act, the Food Sanitation Act, the Act against Unjustifiable Premiums and Misleading Representations, the Act on the Protection of Personal Information, and China's e-commerce law. Changes to or the establishment of new regulations could restrict business activities or generate compliance costs. The likelihood is assessed as "medium" and the severity as "medium." The Group strives to ensure thorough legal compliance through the establishment and operation of compliance management regulations, confirmation with relevant government authorities, and training for officers and employees.

In the fiscal year under review, the proportion of outsourcing expenses paid to Api Co., Ltd., the Group's primary contract manufacturer, reached a high level of 64.6% of total outsourcing expenses. If a natural disaster, fire, accident, or sudden change in the company's business condition were to occur, this could seriously disrupt the production and supply of products. The likelihood is assessed as "low" and the severity as "medium." The Group is working to mitigate this dependency risk through distributed manufacturing across multiple lines at the company's four plants and by identifying candidate alternative contract manufacturers.

The Group is significantly affected by inbound demand from Chinese visitors to Japan, and there is a risk that such demand could decline sharply due to deteriorating Japan-China relations, the spread of infectious diseases, changes in local economic conditions, or policy changes. The likelihood is assessed as "high" and the severity as "low," positioning this as a risk that could materialize in the short term. Although a framework for responding through flexible convening of board meetings has been established, dependency on external conditions remains high.

The ratio of overseas sales in the fiscal year under review reached 74.6%, and unforeseen fluctuations in exchange rates could have a material impact on the yen-equivalent amounts of sales and profit. The likelihood is assessed as "medium" and the severity as "low," but given the high proportion of overseas sales, the Group faces structural foreign exchange exposure. The Group centralizes foreign exchange risk from intra-group transactions at the head office and seeks to mitigate risk through forward exchange contracts and similar measures.