The FANCL Group operates its business in the fields of beauty and health. In recent years, there has been an upward trend of newcomers into the markets of cosmetics for sensitive skin and nutritional supplements due increasing numbers of women with skin sensitivities and a growing health consciousness. If our response to changes in consumer values, needs, and purchasing behaviors related to beauty and health is not sufficient, and our competitive edge begins to wane due to the emergence of new competitor products, the FANCL Group's growth potential and profitability could decline.

Since its establishment, the FANCL Group has developed Mutenka cosmetics, nutritional supplements, germinated brown rice, kale juice and other businesses based on the corporate philosophy of eliminating "negatives". In regard to product development, the department that oversees product planning and development follows this corporate philosophy and operates based on customer needs and market research. By maintaining the philosophy of eliminating "negatives" faced by those around us and by our customers, and further developing our businesses, we are able to swiftly respond to changes in consumer behavior and maintain our competitive edge.

The frequency of natural disasters, such as major earthquakes and storm and flood damage caused by climate change, has been increasing in recent years. In the event that the FANCL Group's head office, plants, or distribution centers are affected by a natural disaster and operational difficulties ensue, there could be a significant impact on the FANCL Group's business results. In addition, yields of rice and kale, which are the raw materials in our germinated brown rice and kale juice products businesses, are determined by the weather, and in the case of a shortage of raw materials or sharp price increases due to unseasonable weather, the FANCL Group's business performance could be affected.

The FANCL Group has established an all-hazard type Business Continuity Plan, not only for natural disasters such as major earthquakes, and is taking measures based on this plan. With regard to the functions of the head office, we are advancing disaster countermeasures such as using seismic base isolation to protect core system servers necessary for business continuity against earthquakes, as well as providing a system that allows employees to work from home. In terms of procurement, we have identified manufacturing and inventory locations of raw materials and materials for our main products and are aiming to reduce risk by diversifying our suppliers and storing rare raw materials in inventory. Regarding rice and kale, which can be affected by weather conditions, we are working to diversify production areas and stockpile raw materials. On the production side, the FANCL Group manufactures cosmetics, nutritional supplements, and germinated brown rice at six directly managed plants in Japan, and we outsource the production of kale juice to affiliated companies and other firms. Our goal is to reduce risk by building a production system with multiple locations, including outsourced production. With regard to logistics, we have established distribution centers in eastern and western Japan to diversify risk.

The FANCL Group is developing its business in China and other markets across Asia, treating it is an important region for its overseas business. In particular, If geopolitical issues such as trade friction between the U.S. and China and between Japan and China arise, it could have a significant impact on our overseas business, which in turn could have a significant impact on the Group’s overall performance.

The FANCL Group aims to maintain brand value that ensures its products are selected even in the event of geopolitical issues. Additionally, China is still the Group's main overseas market, but as we continue down the path of globalization going forward, we will strengthen our expansion into Asia, Europe, and the U.S. This will balance our sales regionally, and through this optimization, we will reduce our exposure to geopolitical risk.

In the event of the spread of an infectious disease, there may be a closure of the FANCL Group's business establishments and direct stores, which may have a significant impact on the Group's business performance.

In accordance with the FANCL Group's business continuity plan, we maintain multiple manufacturing, distribution, and call centers, and have constructed a system that allows for business continuity even in the event of an infectious disease spreading at one of our business sites.
In addition, the head office has established an environment that allows employees to work from home, enabling them to carry out their duties without needing to travel to the head office in the event of an infectious disease outbreak. In response to the closure of direct stores, the FANCL Group has developed a structure that aims to mitigate the overall impact by leveraging its multi-channel strengths, directing customers to online and catalogue sales.

The FANCL Group operates overseas via three consolidated subsidiary companies and is subject to the influence of fluctuating exchange rates on transactions denominated in foreign currencies, as well as the conversion of foreign subsidiaries' financial statements into yen as part of the Group's consolidated financial statements. If exchange rate fluctuations are unexpectedly severe, there may be a significant impact on the FANCL Group's business performance and financial situation.

The FANCL Group has established a system for quickly responding to currency fluctuations by monitoring the fluctuations of major currencies used for the Group's transactions and preparing appropriate exchange contracts, among other measures.

For its cosmetics, dietary supplements, germinated brown rice and kale juice businesses, the FANCL Group procures raw materials from external corporations and manufacturers its products at directly managed factories as well as factories to which work has been outsourced. If unforeseen situations arise due to external factors, FANCL Group's business performace may be affected due to the inability to procure the planned quantities or a sharp rise in raw material prices.

For the procurement of raw materials, the department in charge of purchasing the materials conducts comprehensive management of the transactions, working with the sales department to disperse risk by purchasing from a range of suppliers.

There is a risk that a customer could experience an adverse reaction in their skin or body due to use of the Group's cosmetics, nutritional supplements, or other products. The Group's business performance could be negatively impacted in the event that there are issues with quality of the Group's products.

The Group has established individual quality control standards for cosmetics, nutritional supplements, germinated brown rice, and kale juice that are more rigorous than the general quality control standards. In manufacturing, we comply with ISO and GMP (Good Manufacturing Practice) systems, enforce strict quality control and production management in aims to 1) prevent human error, 2) prevent bacterial and foreign material contamination, and 3) establish a stable production process for uniform quality, and ensure the quality and safety of our products by building and maintaining appropriate manufacturing facilities. To improve the quality of our products, the department that oversees quality assurance holds meetings to confirm quality control status with relevant departments and conducts on-site plant inspections.

With a growing global trend in cyberattacks and internal cybercrimes causing in information leaks in recent years, there is a need for data security to be strengthened within the FANCL Group. We safekeep large amounts of personal data as online and catalogue sales and directly magaged store sales are our main sales channels. In the event that personal data is leaked, a loss of customer trust could lead to a decrease in sales, and losses may be incurred to compensate for damages.

In the FANCL Group, the IT Security Working Group was established with the Information Systems Division at its core to strengthen IT security measures. In measures against cyberattacks, the Company undergoes regular examinations by third party organizations, takes systematic measures such as strengthening anti-virus functions, content filtering, and firewalls, and carries out associated employee education. To mitigate cybersecurity risks internally, measures include restricted access to unnecessary websites and data encryption. In regard to management of personal data, we adhere to the guidelines for personal data protection set by the Japan Direct Marketing Association as well as our own internal regulations, and under the IT Security Working Group, we are working to strengthen data management structures and thoroughly educate our employees.

Our Cosmetics business is subject to regulations under the Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices (Pharmaceutical Affairs Law), and our Nutritional Supplements business is subject to regulations under the Food Sanitation Act and the Nutrition Improvement Act. In addition, we are subject to regulations such as the Specified Commercial Transactions Act and the Act Against Unjustifiable Premiums and Misleading Representations (Unjustifiable Premiums and Misleading Representations Act) for online and catalogue sales. Furthermore, we are subject to various other laws and regulations in the course of our business activities, including labor, accounting, and transaction management. In the unlikely event that any of these laws and regulations are violated, it could have an impact on the performance of the FANCL Group.

We have established the "FANCL Group Compliance Standards" to clarify the rules that FANCL Group employees should observe as members of the Group and to ensure that employees work with a common understanding. In addition, the Company provides employees with education on general compliance on a regular basis after they join the Company. For the purpose of building a cross-organizational compliance system within the FANCL Group, we have established and are operating the Compliance Committee, which consists of the departments in charge of legal affairs, quality assurance and others. With regard to the Pharmaceutical Affairs Law and the Act against Unjustifiable Premiums and Misleading Representations, which have a particularly large impact on our business operations, we have established the Quality Control Subcommittee under the Group Risk Compliance Committee to regularly review and confirm the compliance.

In addition to the high level of social interest in environmental issues such as greenhouse gas and marine plastic waste issues, ethical consumption and sustainability are becoming important factors in corporate activity and product selection. If FANCL Group's products and services are unable to adequately respond to such changes in awareness and needs regarding social issues, there is a possibility that its competitiveness will decline and its business performance will be affected.

In the FANCL Group “Sustainable Declaration” the FANCL Group has identified the environment as one of the priority themes to be addressed.We aim to enhance our corporate value through the use of non-plastic containers, switching to certified raw materials, and Fancl's unique plastic container collection model.

In Japan, the working population is expected to decrease further due to the declining birthrate and aging population. At the same time, the employment environment is changing drastically due to the development of information technology, globalization, and the reform of work styles. In order to realize VISION 2030, the FANCL Group will need to secure diverse and talented human resources who can play an active role in various fields. If the Group is unable to secure human resources in a planned manner due to changes in the hiring environment, or if the secured human resources are insufficiently trained, there is a possibility that business activities will stagnate, which may affect the business results of the FANCL Group.

The FANCL Group is actively working to make the company a better place to work for its employees, by expanding its personnel system to accommodate diverse work styles and improving the working environment. We have set up a department specialized in employee education and are working to secure human resources in line with future expansion of business development, through systematic human resource development. In April 2017, the FANCL Group established a new employment category called the "Active Senior Employee System" which has no fixed retirement age. The purpose of this new employment category is to help retain excellent human resources within the company, and also to contribute to the enhancement of human resources by passing on the corporate philosophy and skills and training to future generations.

The FANCL Group conducts business in a range of differing business areas, such as cosmetics and nutritional supplements, and in multiple countries, including Japan, other Asian countries, and the United States. There is a possibility that lawsuits will be filed in any of these business areas. In the current consolidated fiscal year, no lawsuits that would have a significant impact on the FANCL Group have been filed, but in the unlikely event that a lawsuit is filed and a decision is made that is unfavorable to the FANCL Group, the financial position and business performance of the FANCL Group could be affected.

The FANCL Group, led by its legal department, strives to prevent the occurrence of disputes by complying with various laws and regulations, concluding appropriate contracts, and appropriately acquiring and managing intellectual property rights. A system has been established so that in the unlikely event that a lawsuit is filed, all information relevant to the lawsuit is promptly consolidated with the Legal Department and an appropriate response is carried out in cooperation with law firms and other parties.