TOCALO Co.,Ltd.

Sales in the semiconductor/FPD manufacturing equipment field account for 42.4% of consolidated total sales in FY2026 (ending March 2026), making it a core business area. A deterioration in market conditions in this industry or intensified price competition with competitors could lead to reduced orders or requests for price reductions. In particular, the impact on performance would be especially significant if manufacturing equipment is redesigned with structures that no longer require thermal spray coating. As countermeasures, the Company is promoting the development of maintenance demand and the development of coatings for next-generation equipment.

Sales dependency on the Tokyo Electron Limited group remains high, accounting for 26.6% of total sales in FY2026 (ending March 2026). The production and order trends of this group directly affect the performance of the Company's group. The high dependence on a specific customer creates a structure that is susceptible to the effects of that company's capital expenditure cycle and performance fluctuations.

If major machinery manufacturers and others fully internalize thermal spray coating processing or increase their in-house production ratio, demand for outsourcing to the Company's group may decline, potentially affecting performance. In addition, since the Company conducts customer-focused business operations, there is a risk of losing order opportunities if major customers relocate their production bases overseas or to other distant locations.

Raw materials, including rare earth elements, are procured from a limited number of suppliers. If constraints arise in procurement from specific suppliers, it could not only adversely affect production activities but also create problems in fulfilling supply obligations to technology licensees. The Company strives to build and maintain strong business relationships with major suppliers, but there are limits to securing alternative sources of supply.

The Company conducts overseas business in China, Taiwan, the United States, and other countries, and deterioration in the economic and political conditions of each country or sharp exchange rate fluctuations could affect the Company's financial position and business performance. In addition, punitive tariff measures or import/export restrictions resulting from changes in international political conditions could restrict the business activities of major customers, indirectly affecting the performance of the Company's group. Furthermore, differences in interpretation with tax authorities regarding transfer pricing taxation and other tax matters could result in additional tax burdens.

The Company holds a large amount of important technical information, such as parts drawings entrusted by customers, primarily related to semiconductors and FPDs. If a major system failure or information leak occurs due to unauthorized access, it could result in substantial cost burdens and loss of customer trust. The Company strives to strengthen its management system through the development of information security regulations, capital investment in technical countermeasures, and employee training.

Natural disasters such as typhoons, earthquakes, and tsunamis, as well as fires and terrorism, could cause production activities to halt or equipment to be damaged, and similar effects could occur at business partners. The spread of new infectious diseases could affect the financial position and business performance through order postponements or cancellations, long-term production stoppages due to mass infection among employees, and supply chain disruptions. The Company is proceeding with the development of crisis management manuals and the establishment of a business continuity system.

The Company provides thermal spray coating processing for a diverse range of industries. If a product liability claim arises due to a quality defect, it could result in not only cost burdens but also a decline in the Company's reputation as a manufacturer. In addition to enhancing its quality assurance system and introducing new quality control methods, the Company has taken out product liability insurance and other measures to prepare for such contingencies.

The Company seeks to protect the technology and know-how generated through the development of new coatings by filing for patents, but there is a risk of imitation in certain regions where sufficient protection cannot be obtained. In addition, if third-party patents of which the Company's group is unaware already exist, and a damages lawsuit is filed alleging infringement of intellectual property rights, this could affect the Company's financial position and business performance.

A delayed response to sustainability issues, including reduction of greenhouse gas emissions, could affect business performance. The Company positions its response to climate change as an important management issue and is promoting information disclosure and strategic initiatives based on frameworks such as the TCFD, but there is a risk that costs to respond to stricter regulations and worsening environmental issues will increase.