KOBAYASHI PHARMACEUTICAL CO.,LTD.

Health hazards arising from unexpected contamination of ingredients in Beni-koji (red yeast rice)-related products caused damage to a large number of consumers and business partners. Going forward, compensation costs and quality improvement investment costs may increase beyond expectations, and this could continue to adversely affect business results and financial position. In response, the Quality and Safety Assurance Division is leading continuous PDCA activities, and recurrence prevention measures were formulated in September 2024 and are being promoted.

There is a risk that brand image and social credibility may decline due to delays in the progress of compensation and recurrence prevention measures related to this incident (the Beni-koji issue), as well as due to legal violations or inappropriate expressions in product packaging and advertising spreading via social media. It is also explicitly noted that a decline in consumer trust and purchasing intent toward health foods, pharmaceuticals, and other products may become prolonged. The Company has established a system for prior checks by domestic and overseas advertising/labeling quality control departments and is working company-wide to restore trust.

The Company continues to make large-scale capital investments, such as the expansion of the Sendai Kobayashi Pharmaceutical plant and the relocation and construction of a new Central Research Institute. There is a risk that a large impairment loss may occur if expected cash flows cannot be generated due to divergence from market demand forecasts, changes in the competitive environment, decline in brand image, and other factors. In fact, it has been disclosed that an impairment loss on fixed assets related to a new plant under construction was recognized during the consolidated fiscal year under review. Going forward, the Company plans to thoroughly implement rigorous scrutiny by the "Investment Committee" chaired by the head of the Finance Division, and to expedite risk detection through continuous review of investment plans.

As the Group handles pharmaceuticals, quasi-drugs, cosmetics, and other products, changes to laws and regulations such as the Pharmaceuticals and Medical Devices Act may force the Company to discontinue product development or sales. There is also a risk that overseas sales may fluctuate due to changes in import/export regulations. In response to this incident, the Company established a new department in 2025 specializing in laws and regulations related to product development and manufacturing, thereby strengthening its response to legal and regulatory matters.

If, in the wake of this incident, there is stagnation in thoroughly instilling a "quality and safety first" mindset, a sharp increase in employee turnover, delays in acquiring and developing the personnel necessary to strengthen the quality control system, or stagnation in organizational culture reform, it may become difficult to fulfill social responsibilities, potentially adversely affecting business results and financial position. The Company is responding through monthly "quality and safety education" for all officers and employees, workshops and engagement surveys led by the President, a new personnel system introduced in January 2026, and the launch of an organizational culture reform project.

The Company is subject to a wide range of laws and regulations concerning product quality and safety assurance, sound business activities, and proper application of accounting and tax laws. If a serious problem arises due to a lack of compliance awareness among officers and employees, it could adversely affect credibility, business results, and financial position. The Company addresses this through compliance promotion based on the "Kobayashi Pharmaceutical Group Charter of Corporate Behavior," an annual employee awareness survey and compliance questionnaire, and the operation of an "Employee Consultation Office" and an overseas internal whistleblowing hotline.

Amid a rising trend in the proportion of overseas sales, there is a risk that overseas business performance may fluctuate and investment recovery efficiency may decline due to slowing economic growth, regulatory changes, capital outflow restrictions, and other factors in the countries where the Company operates. In addition, if exchange rates fluctuate significantly when translating the financial figures of overseas consolidated subsidiaries into yen, consolidated business results may be significantly affected. The Company addresses this through the application of phased and rational investment budget principles, a monthly reporting system from the presidents of local subsidiaries, and monitoring of fluctuations in major currencies.

Under the growth strategy of launching numerous new products every spring and autumn, there is a risk that new product sales may fall short of expectations due to difficulty in idea generation, discontinuation of development, or preemptive launch of similar competing products. In particular, it is explicitly noted that, in the wake of this incident, new health food products may continue to struggle to reach expected sales levels. The Company addresses this through monthly "idea meetings," management of development progress via a "new product portfolio," and semi-annual reviews of existing brand strategies.

As the Company holds customer personal information, information on new products under development, and various types of know-how, there is a risk that a leak of information could lead to compensation costs and loss of credibility that worsen business performance, that a cyberattack causing system downtime could interrupt business activities, and that leakage of trade secrets could reduce competitive advantage. The Company addresses this through an internal management system based on its personal information protection regulations, remote redundancy of critical systems, and daily backup and remote server storage of important digital data.

In connection with this incident, lawsuits have already been filed by consumers, and there is a possibility that the Company may face further lawsuits from purchasers of Beni-koji products and companies that purchased Beni-koji raw materials. In addition, given the Company's wide-ranging product offerings both domestically and internationally, there is a risk of compensation burdens and loss of credibility arising from infringement of intellectual property rights by third parties or infringement of third-party rights by the Company. The Company addresses this through establishing a litigation response system in cooperation with law firms in relevant countries, improving the efficiency of intellectual property infringement checks using digital technology, and continuing sincere compensation to affected parties.