Harmonic Drive Systems Inc.

Since sales for industrial robots, semiconductor manufacturing equipment, and FPD manufacturing equipment account for the majority of sales, the Company is directly affected by capital expenditure trends and changes in market conditions. If an unexpected market contraction occurs due to supply-demand adjustments in the smartphone and semiconductor device markets, this may have a material adverse effect on order intake and net sales. Dependence on adoption in specific equipment (including capital goods and consumer goods) by specific customers also heightens the risk of lost business opportunities.

Although the Company has established a quality assurance system, including ISO9001 certification, it cannot completely eliminate the occurrence of unexpected product defects. If defects become apparent, this may have a material adverse effect on business performance through customer compensation, recall costs, and loss of social credibility. Because many products are customized and involve complex specifications tailored to individual requirements, quality control is highly challenging.

There is no guarantee that production capacity will be improved as planned, and securing skilled personnel at domestic plants is also subject to external factors. In addition to supply shortages from suppliers and rising prices of raw materials and components, escalating tensions in the Middle East since February 2026 could lead to higher energy prices and constraints on maritime shipping routes, resulting in increased procurement costs and longer procurement lead times. There is also a risk that if demand falls short of expectations, recovery of invested capital may become difficult.

The Company holds numerous tangible and intangible fixed assets used in its business as well as those arising from business combinations, and if there is a significant change in the business environment or a decline in the value of fixed assets, recognition of impairment losses may be required. In particular, goodwill and intangible fixed assets associated with the acquisition of the German subsidiary Harmonic Drive SE, among others, may be subject to this risk. Recognition of impairment losses would have a direct and material impact on business performance.

The advancement of business strategies, including production capacity expansion, is subject to various external factors such as economic and market conditions, competition, and demand levels. If intended effects are not achieved, or if actual results diverge from the assumptions underlying the business plan, the Company may fail to achieve its stated targets. Future changes to targets are also anticipated, which could affect investors' confidence in the reliability of business performance forecasts.

Although the Company holds a high market share in the reduction gear and mechatronics products markets, intensifying competition from new entrants could lead to deterioration in product profit margins and lost sales opportunities. In particular, the emergence of competitors in the strain wave gearing field could trigger price competition, posing a risk of adverse effects on profitability.

In the United States, additional tariff measures have repeatedly been implemented and suspended since 2025, and the outlook for trade policy remains extremely uncertain. If tariff rates are raised or the scope of covered items is expanded, this could result in a direct increase in tariff costs as well as an indirect impact on order intake and net sales through fluctuations in demand for customers' products. Compounded by geopolitical risks, including the situation in the Middle East, there are concerns about impacts on the global supply chain as a whole.

The Company holds customers' personal and confidential information as well as its own confidential information related to technology, sales, and human resources, and if unauthorized access, information leakage, or data destruction occurs due to cyberattacks or similar incidents, this could lead to a loss of credibility and disruption to business continuity. This may have an adverse effect on financial position, business performance, and cash flows.

If technological innovation emerges that substitutes for strain wave gearing, precision planetary reducers, servo actuators, or similar products, or if competitors achieve significant innovation in production technology, there is a risk that the competitiveness of the Company's products could decline significantly. Although the Company continues to allocate resources intensively to R&D and secure human resources, delays in keeping pace with technological innovation or in bringing new products to market may also adversely affect business performance.

The Company operates globally with consolidated subsidiaries comprising two companies in the United States, one in China, one in South Korea, and nine in Europe, and exchange rate fluctuations affect the yen-converted amounts of revenues, expenses, assets, and liabilities related to foreign currency-denominated transactions. During periods of yen appreciation, the yen-converted value of overseas subsidiaries' performance may decrease, which could have an adverse effect on consolidated business performance and financial position.