DyDo GROUP HOLDINGS

Based on the "Fundamental Policy Regarding the Building of Internal Control Systems", we have established basic matters concerning the risk management system of our group, and are working to ensure efficient and reliable risk management. As a standing committee, the Group Risk Management Committee (the Committee), chaired by the President and Representative Director, meets twice a year, or whenever necessary. The Committee is responsible for risk management policies, evaluation of major risks, approval of countermeasures, verification of the effectiveness of controls, and guidance on corrective measures.

The Committee organizes and evaluates risks by classifying them into "cross-group risks" and "business-specific risks." Furthermore, as a new risk management method adopted in FY2023, we conducted an assessment of medium- to long-term risks associated with demographic changes using the TCFD scenario analysis framework, and monitored the progress of countermeasures.

The Committee in the fiscal year under review identified significant risks with high impact and a high likelihood of occurrence, and discussed the risks related to the procurement of raw materials and supplies and to overseas situation, both of which have an increasing potential to affect current business performance. In addition, based on the results of a medium- to long-term risk analysis associated with demographic changes that was independently conducted by the Group, the Committee recognized that the Group should consider countermeasures on a medium- to long-term basis for risks related to the securing and development of human capital.

The significant risks evaluated by the Group Risk Management Committee during the fiscal year under review and the related countermeasures are as follows.

i. Development and Retention of Human Capital

The Group recognizes that the declining birthrate and aging population in Japan, along with the fluidity of the labor market, may hinder the recruitment of new talent, significantly impacting the stable continuation of our business. To achieve "Group Mission 2030," we believe it is essential to build an organization composed of individuals with diverse values and abilities, and to support the proactive growth and success of each employee.

To mitigate these risks, our Domestic Beverage Business is working on establishing "Smart Operations" that can function with fewer personnel, and improving the efficiency and productivity of vending machine operations through the use of artificial intelligence (AI). Additionally, we have introduced the "DyDo Career Create" system to systematically identify human capital management aligned with our business strategy and support the proactive career development of each employee. By implementing personnel systems, training programs, and evaluation systems focused on individual career development, we aim to enhance the growth and engagement of each employee with the qualities our group seeks, and to build a strong organization rich in diverse capabilities.

ii. Procurement of Raw Materials and Materials

The Group's products use a wide variety of raw materials and materials. Coffee beans, the main raw material for the Domestic Beverage Business, are commodities that are traded on the international market, and their prices are affected not only by commodity prices but also by fluctuations in foreign exchange rates. The same is true for other raw materials and materials, which are also affected by price fluctuations. In combination with the recent rise in energy costs, a sharp rise in the cost of procuring raw materials and materials may have a significant impact on the Group's business performance.

Reducing these risks, the Group has implemented price revisions in stages for some products in the Domestic Beverage Business and Food Business since October 2022. In its International Beverage Business (Turkish Beverage Business), the Group has continued to implement strategic price revisions in Turkey, which is under strong inflation, and is working to improve its profit structure by securing an appropriate marginal profit. Additionally, in each business, the Group regularly reviews raw materials, supplies, and procurement sources, and considers multiple procurement sources to ensure stable procurement of raw materials and supplies.

ⅲ. Overseas Situation

In recent years, changes in overseas conditions, including geopolitical risks such as soaring prices of materials and crude oil stemming from the situations in Russia and Ukraine and in Palestine and Israel, as well as sharp fluctuations in foreign exchange rates, have increasingly had the potential to affect the Group’s business activities in Japan.
In addition, overseas business development involves various risks, including differences in laws, regulations, and systems, political, economic, and social conditions, as well as cultural, religious, and business customs in each country, together with fluctuations in exchange rates.
In order to mitigate these risks, the Group has established a structure under which the International Business Management Department of the holding company manages and oversees overseas subsidiaries. Furthermore, information held by Group companies regarding overseas conditions is shared and discussed in a timely manner at management meetings and other forums, not only in relation to overseas businesses but also with respect to their potential impact on businesses in Japan, thereby strengthening management oversight and decision-making.
Through these initiatives, the Group is advancing the restructuring of its overseas beverage business strategy, with the aim of building a Group structure with a stable earnings base, while leveraging the foundations of its beverage businesses in Turkey, Poland, and China.

i. Risks associated with hyperinflation in Turkey

The Turkish Beverage Business, which accounts for a large portion of our International Beverage Business, has steadily improved its performance against the backdrop of rapid inflation since FY2022 by implementing strategic price revisions and agile sales promotion activities. While improving unit sales prices and increasing sales volume, the business has delivered solid results and is expected to continue to grow over the medium- to long-term.
Meanwhile, as the cumulative three-year inflation rate in Turkey exceeded 100%, the Group determined that its Turkish subsidiary, whose functional currency is the Turkish lira, is operating in a hyperinflationary economy. Accordingly, starting from the second quarter of FY2022 on a consolidated basis, the Group has applied accounting adjustments to the financial statements of the subsidiary in accordance with IAS 29, “Financial Reporting in Hyperinflationary Economies”, as well as the applicable local accounting standards in Turkey. If inflation in Turkey worsens further, the resulting accounting adjustments could become significant and have a material impact on the Group’s results.
In addition, the restated amount of non-current assets, including trademark rights, may have a material impact on the Group’s results. As with ordinary non-current assets, the Company is required to assess whether impairment is necessary, and if the restated amount exceeds the recoverable amount, the asset must be written down to its recoverable amount.
To address these risks, the Group is strengthening and expanding the management framework of the Finance Department of the holding company with respect to earnings management and the cash conversion cycle. In addition, the local subsidiary in Turkey is working to mitigate risks by securing appropriate profit margins through continuous price revisions and by expanding export transactions from Turkey.

ii. Concentration and Dependence on the Existing Vending Machine Business

The vending machine channel of the Domestic Beverage Business, which is the Group’s core business, has traditionally been able to secure stable cash flow by offering canned coffee as its main product, which has relatively high price stability, sales stability, and profitability. However, in recent years, rising prices of various raw materials, including coffee beans, as well as an increasing consumer tendency toward saving, have made improving profitability in the vending machine channel a key challenge. As this severe business environment is expected to continue into and beyond the next fiscal year, the Group recorded impairment losses in the fourth quarter of FY2025 by reducing the carrying amount of business-related assets, including vending machines, to their recoverable amount.
Recognizing that a transition to a sustainable earnings structure over the medium- to long-term is essential, the Group is implementing projects aimed at strengthening its profitability. Specifically, the Group will work to rebuild a lean and profit-generating vending machine network by optimizing its product portfolio to improve per-machine performance (PM) and control cost ratios, as well as by strategically withdrawing vending machines at unprofitable locations.
In addition, in response to the anticipated labor shortages in the future, the Group is further advancing smart operations through the use of the latest technologies. At the same time, the Group is promoting the deployment of “LOVE the EARTH Vendors,” carbon-neutral vending machines designed to “create a sustainable future together with our customers,” and aims to establish a sustainable vending machine business model.

iii. Entry into Orphan Drug Business

In January 2019, the Group established DyDo Pharma, Inc. to focus on healthcare-related markets, including the high-growth life science field, as its next growth area, with a particular focus on orphan diseases, or intractable diseases with fewer than 50,000 patients in Japan. In September 2024, DyDo Pharma, Inc. obtained the approval of new drug application of "Firdapse® Tablet 10mg," a treatment for Lambert-Eaton Myasthenic Syndrome, and began sales in January 2025, making steady progress.

However, since the development of orphan disease drugs is subject to uncertainties, there is a possibility, development will be extended or discontinued, regulatory approval will not be granted according to expectations, regulatory approval will take longer than expected, or the drug price may be lower than expected. In addition, during the period of upfront investment until the business foundation is stabilized, the Group may incur continuous operating losses and have negative cash flow, which may affect the Group's results.

Reducing these risks, the Group has appointed an independent outside director with extensive knowledge and experience in the pharmaceutical industry to strengthen monitoring of DyDo Pharma's business plans based on individual development projects. In addition to this, the Group promotes its business operations with expert personnel with long experience in the pharmaceutical industry, including business development, new drug development, regulatory affairs, medical affairs, and post-approval systems, as well as with the cooperation and support of external experts, institutions, and companies.

The Group believes that demographic changes will have an increasingly significant impact on business, particularly in the domestic market, where the population continues to decline amid a declining birthrate and an aging society. Beginning in FY2023, the Group applied a scenario analysis framework to assess medium- to long-term risks that should be closely monitored across the entire supply chain, and to review the progress of related countermeasures.

Although the impact of population decline may affect sales and profits in some areas, we believe that the possibility of business contraction is limited and can be adequately addressed through business strategies. However, we recognize that securing human capital may have significant medium- to long-term impacts.

Addressing these risks, the Group is stepping up its investment in human capital and improve productivity. We will continue to monitor risks on an ongoing basis and consider countermeasures to reduce risks from a medium- to long-term perspective.