OPTORUN CO.,LTD.

A large portion of consolidated net sales is attributable to China, and Optorun Technology (Shanghai) Co., Ltd. and Optorun Semiconductor Technology (Shanghai) Co., Ltd. serve as the Group's main production bases. Changes in China's economic, political, legal, and social conditions could directly impact the Group's business development in both sales and production. Because both sales and production are concentrated in China, the scope of impact if geopolitical risk materializes is wide.

Demand for optical thin-film equipment has diversified from smartphones to automobiles, AR/VR, semiconductors, and other fields, but customer capital expenditure tends to fluctuate along with changes in the product life cycle of final products in each field. A sudden increase in demand may result in missed order opportunities, while a sudden decrease in demand may make it difficult to secure orders or lead to order cancellations. The greater the magnitude of demand fluctuation, the greater the impact on net sales and profit.

The Group has overseas locations and sales agents in China, Taiwan, South Korea, and Vietnam, and overseas business forms the foundation of business growth. Amid the current international situation in which each country's political background affects its economy, changes to related laws and regulations or the occurrence of conflicts could hinder business continuity. In particular, tensions such as those surrounding the Taiwan Strait situation could simultaneously affect both production and sales locations.

Transactions with major smartphone manufacturers and optical component manufacturers are mostly denominated in US dollars, while payments for procurement and wages are mainly denominated in Chinese yuan, so fluctuations in multiple currencies affect earnings. The Group works to reduce risk through adjustment of foreign currency positions and forward exchange contracts, but if exchange rate movements exceed expectations, the impact on business performance will be significant. As the ratio of overseas sales rises, sensitivity to exchange rates may increase further going forward.

Some components used in the Group's products may be subject to security trade control regulations. The Group strives to comply with regulations through supplier due diligence and cooperation with authorities, but if regulatory content changes or unintended violations occur, there is a risk of incurring response costs or facing business restrictions such as export suspension. The trend toward stricter export controls against the backdrop of US-China tensions could directly affect transactions with China, one of the Group's key markets.

The Group's mainstay products are film deposition equipment using ion beam-assisted deposition and sputtering methods, with ALD and etching technologies also incorporated, but there is a risk that the Group's technology could become obsolete due to changes in the shape and materials of optical components or significant technological advances. Other companies may be able to offer superior film deposition methods, which could lead to a loss of competitive advantage. The Group is advancing accelerated improvement development of existing products alongside research and development of new technologies, but the possibility that the speed of technological change will outpace such efforts cannot be ruled out.

Production activities are concentrated primarily at two locations in Shanghai, China, and one location in Taiwan. If external factors such as changes in the employment environment, revisions to labor regulations, labor disputes, natural disasters, infectious diseases, or political constraints occur, there is a risk that production could be halted or restricted. The Group seeks to optimize cost and quality through production at multiple locations, but due to the high degree of geographic concentration, the materialization of risk in a specific region directly affects company-wide supply capacity.

Optical thin-film equipment involves extremely complex design and manufacturing processes, and there is a possibility that products may be manufactured that do not conform to customer specifications or that contain defects. If problems are discovered after shipment, in addition to costs for product replacement, customer compensation, and litigation, this could damage relationships with customers and reputation within the industry. The Group has strengthened its quality control department and established quality check systems at each process, but response costs could become substantial in some cases.

Business expansion requires securing personnel with advanced specialized skills in physics, electrical engineering, and other fields, but competition to acquire such talent is intense, and the Group may not be able to secure personnel with the necessary knowledge and experience. The Group has implemented measures such as employee training, enhanced fringe benefits including stock-based compensation, and recruitment activities at universities, but there is also a risk of losing capable personnel. A shortage of personnel could affect business performance through declines in product development, production capacity, and customer response capability.

Zhejiang Crystal-Optech Co., Ltd. is a related company holding 16.3% of the Company's voting rights and has appointed one outside director. While there are currently no constraints on business strategy, personnel matters, or capital policy, if that company changes its management policy or its policy regarding holding of the Company's shares, this could affect the Group's business development, business results, and financial condition. In addition, there is an inherent risk of conflicts of interest in the film deposition business conducted through the joint venture (Zhejiang Jingchi Optoelectronics Technology Co., Ltd.).