OSAKA YUKA INDUSTRY LTD.

In the fiscal year under review, the top three customers—Dow Toray Co., Ltd. (sales of ¥356,930 thousand, 30.3% of total), Sumisho Chemical Co., Ltd. (¥186,006 thousand, 15.8%), and ENEOS Corporation (¥140,697 thousand, 11.9%)—accounted for approximately 58% of net sales, indicating a high degree of customer concentration risk. Should there be a change in policy or a reduction or termination of business by a major customer, a direct and significant impact on business performance is expected. Although the Company strives to maintain business relationships through quality improvement, the structurally high dependence is difficult to resolve in the short term.

The Company's only production site is the Hirakata Plant, and in the event of a large-scale disaster such as an earthquake or fire, there would be no alternative production means, creating a risk that business continuity could become difficult. Although the Company has obtained ISO45001 certification, formulated a BCP, and implemented disaster drills and seismic countermeasures, the structural vulnerability of concentration at a single site remains. In addition, an unforeseen industrial accident could also affect business performance and financial condition.

The Group operates with a small workforce, and given the business characteristic of requiring specialized precision distillation technology, difficulties in recruiting personnel or failures in technology succession pose a risk directly linked to business continuity. If existing personnel leave the Company, this could also lead to the loss of technology and know-how, potentially affecting business performance and financial condition. While the Company intends to actively recruit and train personnel in line with its business expansion policy, securing specialized personnel is not easy.

The Group has a policy of nurturing and growing the Plant Business as a new business, but market analysis and service development require time, and the cost of acquiring necessary resources could exceed expectations. Although the business has already been launched, there is no guarantee that it will continue to develop smoothly, and risks such as policy changes, service revisions, or withdrawal are also anticipated. If profitability is not achieved and losses occur, this could adversely affect business performance and financial condition.

The Group has established certain barriers to entry in the precision distillation field through years of accumulated trust, technology, and niche market positioning, but there is a risk that its competitive advantage could be undermined by new entrants, intensified competition, or the emergence of alternative technologies. Because the market is niche, the spread of alternative technologies could have a significant impact on the market as a whole, raising concerns about a direct impact on business performance. While the Company currently expresses confidence in maintaining its barriers to entry, continuous response to changes in the technological environment is necessary.

The Group is subject to various permits, licenses, and regulations, including the Fire Service Act and the Poisonous and Deleterious Substances Control Act, and given the nature of its business handling precision distillation of chemicals, it is particularly susceptible to the effects of regulatory tightening. Future regulatory tightening is expected to expand constraints on business activities and generate additional costs, which could affect business performance and financial condition. Although compliance with laws and regulations is a basic policy, the cost of responding to regulatory changes is difficult to foresee in advance.

The Group's customers belong to diverse industries such as electronic materials, pharmaceuticals, and agrochemicals, and if changes in laws and regulations or economic conditions in each industry affect customers' business activities and R&D activities, this could also change order volumes and transaction terms with the Group. If regulatory tightening or an economic downturn in a specific industry simultaneously affects multiple customers, the impact on business performance could be significant. While the diversity of customer industries provides a certain degree of risk diversification, there are concerns that, combined with the risk of concentration on major customers, the impact could be amplified.

The Company has obtained ISO9001 certification and established a quality inspection system, shipping only products that meet customer specifications, but if unforeseen quality issues or product liability incidents occur, there is a risk of loss of customer trust and damage compensation liability. Although the Company has taken out liability insurance to prepare for unforeseen events, the decline in credibility could lead to reduced business or reputational damage that extends beyond the scope covered by insurance. Given the business characteristic of precision distillation requiring high quality standards, maintaining quality control is fundamental to business continuity.

The Group has obtained ISO27001 certification and established an information security management system, but through its business activities it holds a large amount of important and confidential customer information, and there is a risk of information leakage due to unforeseen circumstances. If an information leak occurs, it could lead to a loss of customer trust and a decline in social credibility, potentially hindering the continuation of business relationships. Operating with a small workforce also poses certain constraints on maintaining internal controls.

The Company has obtained ISO14001 certification and possesses equipment compliant with environmental laws and regulations, implementing appropriate treatment, but if environmental pollution occurs due to human error or other causes, there is a risk of significant impact such as administrative sanctions, suspension of operations, or damage compensation. In addition, if changes in environmental laws and regulations result in additional capital investment or cost burdens, this could affect business performance and financial condition. Given the business characteristic of handling chemicals, environmental risk is also an important issue directly linked to the social license to operate.