Tri Chemical Laboratories Inc.

In the fiscal year under review, sales to major semiconductor device manufacturers in Japan, China, Taiwan, and South Korea accounted for more than half of total sales, meaning that business performance is significantly affected by the market cycle of the semiconductor industry. In particular, the Company tends to be strongly influenced by trends in silicon wafer production, and if market conditions turn toward contraction, this could have a material impact on the Company's financial position and business results. As countermeasures, the Company is focusing on proactive responses to advanced development fields, maintaining a balance between domestic and overseas markets, and developing materials for new fields.

Among materials for semiconductors, sales in the fiscal year under review show a particularly high degree of dependence on the high-k dielectric insulating film materials field. If sales in this field decline, it could have a direct impact on the Company's financial position and business results. The Company is also working on the development and sales expansion of new materials other than high-k dielectric insulating film materials, but resolving this dependence will take time.

The Company uses many chemical agents and specialty metal materials as product raw materials that are subject to market fluctuations, and purchase prices could fluctuate sharply, and materials could become difficult to obtain, due to global economic conditions and political developments. There is a risk that profitability could deteriorate if the pass-through of price increases to selling prices is delayed, or if the Company holds a substantial amount of inventory when prices decline. The Company strives to secure appropriate inventory levels to ensure a stable supply, but there are limits to how effectively it can respond to sharp fluctuations.

The Company depends on Shimoyama Kogyo Co., Ltd. as its main supplier of specially specified containers, and if this business relationship with the supplier were terminated, it could temporarily impact the Company's financial position and business results. In addition, the Company procures approximately 80% of the organolithium compounds used in the synthesis of several major products, including high-k dielectric insulating film materials, from Asia Lithium Corporation, and there is a risk that a supply shortage, delivery delay, or sharp rise in purchase prices could lead to a suspension of production activities. The Company seeks to address this by securing multiple suppliers and maintaining appropriate inventory levels, but there are constraints on alternative procurement.

In the fiscal year under review, sales to overseas users accounted for approximately 80% of total sales, and a portion of these are settled in foreign currencies, meaning that sharp exchange rate fluctuations could affect the Company's financial position and business results. In addition, since the consolidated financial statements are prepared by translating the performance, assets, and liabilities of overseas affiliated companies in Taiwan, China, and South Korea, which are generated in local currencies, into yen, translation risk also exists. The Company addresses this through continuous monitoring by the finance department and appropriate use of forward foreign exchange contracts, but it cannot fully respond to sharp fluctuations.

The Company has subsidiaries in Taiwan and China, and joint ventures in South Korea and China, with the Taiwan subsidiary in particular now serving as an important production base in full-scale operation. If changes in laws or regulations, terrorism, war, or other factors cause social disruption in these regions, this could impede business activities and affect the Company's financial position and business results. The Company collects and monitors country risk information for each country and region, and works to maintain stable business operations while assessing geopolitical factors.

The Company is in a position to handle confidential information related to semiconductor manufacturers' most advanced manufacturing processes, and if an employee were to leak customer technical information externally, this could damage business relationships or lead to claims for damages, affecting the Company's financial position and business results. In addition, if know-how related to high-purity refinement and stable production accumulated since the Company's founding were to leak out, there is a risk of losing technical advantage. The Company strives to maintain and strengthen its information management system through the implementation of physical and system security measures, the development of internal regulations, and thorough employee training.

Because the Company's products and raw materials contain poisonous and deleterious substances, it is subject to numerous domestic and international laws and regulations, including the Poisonous and Deleterious Substances Control Act, the Fire Service Act, the High Pressure Gas Safety Act, and the Act on the Prohibition of Chemical Weapons and Regulation of Specific Substances. If the Company fails to comply with current or future laws and regulations, there are risks including revocation of licenses or permits, business suspension, official orders including business interruption, and loss of credibility. In addition, future tightening of legal regulations could increase production costs. The Company addresses this through the operation of an ISO14001 environmental management system and by collecting information on trends in regulatory revisions.

The Company's main production bases, the Head Office Plant and the Uenohara No. 2 Plant, are concentrated in an industrial park in Uenohara City, Yamanashi Prefecture, and if both plants were simultaneously damaged by a natural disaster such as an earthquake or an accident such as a fire, there is a risk of a decline in sales due to operational disruption and delays in production and shipment, as well as substantial repair costs. The Company is working to diversify its production bases through plant construction at the Minami Alps Business Office in Minami Alps City, Yamanashi Prefecture, and at its Taiwan subsidiary (San Fu Chemical Materials Co., Ltd.), but the risk of concentration in its main bases still remains.

The structure of research and development for the improvement of existing products and the development of new products involves research and development expenses and related capital investment occurring in advance, and if a large investment is made but product development fails to gain traction, this could affect the Company's financial position and business results. In addition, failure to keep pace with technological innovation in the industry could also lead to a decline in competitiveness. The Company addresses this through risk diversification by strengthening marketing at the research and development stage, thorough management of research and development projects, and promotion of alliances with other companies.