Business and Other Risks

(1) Risks related to business environment

1. Mail order cosmetics market
   According to the “Fiscal 2022 Digital Transaction Environment Enhancement Project (Market Survey on Electronic Commerce)” released by the Ministry of Economy, Trade and Industry in August 2023, the electronic commerce market size in the cosmetics and pharmaceuticals industries from January to December 2022 increased 7.48% year on year to 919.1 billion yen, with the rate of electronic commerce transactions rising from 7.52% to 8.24%. Under these circumstances, the Company is actively promoting the development of new products and promotional measures utilizing SNS and applications. At the same time, we are striving to maintain the competitiveness of our products by viewing communications with customers at our call centers as an opportunity to constantly explore potential needs and apply those needs to product development.
   However, if the Group is unable to take effective countermeasures against changes in the business environment surrounding the Group including cases where the Group is unable to maintain the competitiveness of its products due to insufficient response to changes in consumer values, needs, and purchasing behavior, or the introduction of new products by competitors, then the Group’s business and earnings may be affected.
    
2. Market conditions for raw materials
   The Company seeks to decentralize risks by outsourcing the manufacture of cosmetics products to different business partners for each product and avoiding depending on specific business partners for products other than “The Cleansing Balm” series that constitutes our mainstay. However, if the overall cost of raw material rapidly increases due to exchange rate fluctuations, crude oil price hikes and raw material supply shortages, etc., then the cost of outsourcing is expected to increase. In such cases, the Group’s business and earnings may be affected.
    
3. Overseas markets
   As part of its business expansion strategy, the Group is developing its business overseas mainly in Asia. Although we make careful decisions when entering a new market by conducting research on local market trends and the existence and content of relevant laws and regulations, the Group’s business and earnings may be affected if unexpected changes in legal regulations, social turmoil due to political instability, or other risks materialize in the future and business development does not proceed as initially planned.
    
4. Impact of the spread of COVID-19
   With the reduction of COVID-19 to a Category 5 infectious disease from May 2023, the flow of people in the city has increased, and the domestic cosmetics market continues to recover for both Japanese and inbound tourists.
   However, the timing and scope of impact of COVID-19 may change significantly in the future. If economic activity remains sluggish and consumer behavior regarding household finances becomes more cautious, then the business and earnings of the Group may be affected.
    
5. Impact of soaring prices
   Electricity and gas prices as well as food and other prices are rising, caused by the situation in Ukraine and depreciation of the yen, and there are concerns about the impact on household finances. If consumer behavior abruptly changes due to price hikes, the Group’s business and earnings may be affected.
    

(2) Risks related to legal regulations

The Group is subject to legal regulations including the Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices, the Act on Specified Commercial Transactions, and the Act against Unjustifiable Premiums and Misleading Representations. In addition, under the Act on Prevention of Unjustifiable Premiums and Misleading Representations, new stealth marketing regulations were introduced from October 1, 2023, based on the designation by Cabinet Office Notification No. 19 (March 28, 2023). In order to keep up to date with revisions to relevant laws and regulations and changes in the external environment, the Group strives to strengthen and maintain its legal compliance system by collaborating with lawyers and specialized consultants and providing employee education. However, in the unlikely event of a violation of these laws and regulations, then the Group’s business and earnings may be affected.
Unforeseeable changes in these related laws and regulations or the establishment of new ones in the future may also affect the Group’s business and earnings.

 

(3) Risks related to business

1. Competition with other companies
   In the cleansing market, to which “The Cleansing Balm”, the Group’s mainstay product, belongs, oil, gel, and cream have conventionally been the mainstream cleansing formulations. However, the Group launched a new form of cleansing or namely, the balm-type called “The Cleansing Balm”, and aggressively promoted its sales in order to develop a new market. To take advantage of this, competing companies have recently launched balm-type products one after another.
   In addition to its new standard product, “The Cleansing Balm”, the Group is seeking to further attract customers by offering various types of “The Cleansing Balm” to meet customers’ skin concerns, such as “The Cleansing Balm Black Repair” which is specialized for the treatment of dirt in pores. However, if the Group is unable to maintain its superiority due to intensifying competition in the market, then the Group’s business and earnings may be affected.
    
2. Outsourcing the manufacture of our products
   Although the Group outsources the manufacturing of its products, the Group is ultimately responsible for the manufacture of its products. Therefore, each time a production lot is changed, we conduct a sample check of the manufactured products to ensure product quality. However, if product quality defects occur, resulting in damage to the brand image, and those damages exceed the coverage of product liability insurance, then the Group’s business and earnings may be affected.
    
3. Development of new products
   Although the Group has drawn up detailed development plans for new product development, the time required for the planning, development, and commercialization of these products can range from several months to more than a year for some products. Therefore, if the period from planning to development and commercialization of a new product is longer than initially planned, then the Group’s business and earnings may be affected.
    
4. Sales composition ratio
   Our “CANADEL” brand in the all-in-one market is enjoying strong sales growth, and “clayence,” launched in March 2022, has also been very well received.
   However, the sales composition of “DUO,” the Group’s mainstay brand, remained high at 65% of consolidated net sales in the current fiscal year, and the Company recognizes the need to increase sales of other brands in order to stabilize its operations. To address this issue, the Group is aggressively planning new products of “CANADEL” and “clayence” brands and developing new brands by increasing the number of personnel in the Product Planning and Development Department within the Brand Management Division.
   However, if projects for brands other than “DUO” do not progress as planned, and if we are unable to maintain sales of the “DUO” brand due to intensifying competition in the balm market, then the Group’s business and earnings may be affected.
    
5. Risks associated with dependence on specific suppliers
   Since contract manufacturers have different areas of expertise, the Group aims to manufacture high quality products at low cost by selecting contract manufacturers with the best quality, delivery time, and cost for each product and then outsourcing the manufacturing to them. In addition, the Group is working to reduce its dependence on specific suppliers for general purchasing, including the Group's main product "The Cleansing Balm" series.
   However, if the Group is unable to diversify its suppliers as expected in the future, and if the Group is unable to continue purchasing from a supplier on which the Group is dependent to a certain degree as planned due to changes in its business policy or other factors, then the Group’ s business and earnings may be affected.
    
6. Wholesale sales channel
   The Group has approached domestic customers mainly through digital marketing and offered them products through subscription mail order service transactions. The Group has also endeavored wholesale sales to variety stores and drug stores, etc., steadily expanding the number of outlets distributing our products. The size of those markets is large, and the Group will strive to expand sales opportunities. However, if these business activities do not expand as expected due to rapid changes in the surrounding environment or other factors, then the Group’s business and earnings may be affected. 
    
7. Inventory control
   The Group is endeavoring to enhance the accuracy of supply and demand forecasts by analyzing market trends and POS data and working to optimize inventory quantities by appropriately controlling order quantities.
   However, if sales forecasts for new products or limited items deviate significantly from the actual situation, some products may be out of stock or there may be excess inventories, and the Group’s business and earnings may be affected.
    
8. Stable operation of the system
   The Group’s mainstay mail order business is operated on the Web, and we recognize that in order to provide services to customers under convenient conditions, it is necessary to have a structure that allows stable operation of the system and quick resolution of any problems that may occur. Due to this reason, we therefore conduct ample verification when introducing a new system or function, and after the system is in operation, we take measures such as obtaining sufficient staff to ensure stable operation of the system.
   However, if our online shopping site goes down due to a server shutdown caused by a sudden increase in the number of accesses or disasters, or if a system failure occurs due to factors including a computer virus or intrusion by a cracker, then the Group’ s business and earnings may be affected.
    
9. Copyright, trademark, intellectual property rights, etc.In dealing with intellectual property rights such as patents and trademarks related to our products, the Company takes the utmost care not to infringe on intellectual property rights held by other companies. At this point, the Company is free of any lawsuits that would have a material impact on its business and earnings. However, the Group’s business and earnings may be affected in cases such as the suspension of sales of the Group’s products due to a lawsuit filed by a third party for infringement of intellectual property rights.
   In addition, if there are significant changes in laws and regulations on intellectual property rights or such, or if new significant laws and regulations relating to the Group’s business are established, then the Group’s business and earnings may be affected.
    
10. Personal information, etc.
    In the mail order business, which is the Group’s mainstay, we hold personal information regarding many customers. To protect these customers’ personal information, we minimize information that should be held by the Group to as small an amount as possible. For example, credit card numbers and other payment information are linked directly from our online shopping site to the settlement agent, without involving the Group. Personal information held by the Company other than payment information is also managed by strictly regulated access so that only related parties can access it. In addition, we have obtained the P Mark for the management of personal information and also promote the meticulous management of personal information among all employees, as well as provide training for employees in response to the enforcement of the Act on the Protection of Personal Information.
    However, if, for some reason, payment information related to the Group’s customers is leaked from the settlement agent, or if personal information other than payment information is leaked from the Group, then the Group’s credibility will be severely damaged, which may affect the Group’s business and earnings.