HEPHAIST Co., Ltd.

In FY2026 (ending March 2026), the Company recognizes that a material event exists that raises significant doubt about its ability to continue as a going concern, as a result of a significant decline in net sales and the recording of an operating loss and negative operating cash flow. The main causes are the delayed demand recovery in the industrial machinery sector for Linear Motion Equipment (Linear Ball Bushings, etc.), the continued sluggishness of orders in the Chinese market, and the impact of regulation changes on Precision Parts Processing (Racing Parts, Prototype Parts). As countermeasures, the Company is expanding its Unit business, thoroughly pursuing price pass-through, and fundamentally reviewing its cost structure, and it has determined that no material uncertainty exists by securing funding capacity such as the unused balance under its overdraft agreement.

Linear Motion Equipment (Linear Ball Bushings, etc.) accounts for approximately 64.7% of net sales, and there is a risk that demand may fluctuate sharply due to changes in capital expenditure demand in the industrial machinery equipment sector. In addition, price competition from the inflow of inexpensive products and substitutes from other countries may also affect business performance. As countermeasures, the Company is implementing scrap-and-build of low-profitability model numbers and diversifying its business by focusing on Precision Parts Processing and the Unit Products business.

THK Co., Ltd. and Honda Motor Co., Ltd. (Honda Group) are major customers, and changes in their order trends and management strategies directly affect business performance. In particular, sales of racing parts for the Honda Group fluctuate depending on racing participation trends, and were affected this period by regulation changes. As countermeasures, in addition to maintaining good relationships with both companies, the Company is working to diversify risk by developing new markets and new customers.

The majority of overseas sales are exported in foreign currencies, and since the sales, expenses, and assets of overseas affiliated companies, including the Chinese subsidiary, are also translated into yen, foreign exchange fluctuations beyond expectations could have a material impact on the Company's financial position and business results. As countermeasures, the Company conducts forward exchange contracts and settlements through foreign currency deposit accounts, but the risk remains that it may not be able to fully respond to sharp fluctuations.

The Company holds substantial tangible fixed assets due to ongoing capital investment in manufacturing equipment, etc., for quality and productivity improvement and business development. If the market value of fixed assets declines significantly or business profitability deteriorates, an impairment loss may occur, which could have a material impact on the Company's financial position and business results. The Company has established a system to check for signs of impairment through periodic surveys and to apply appropriate accounting treatment.

In business activities in China, political and social turmoil, changes in laws, regulations and tax systems, and sharp exchange rate fluctuations, among other factors, may affect business performance, and in fact, the slowdown in orders in the Chinese market was one of the causes of the deterioration in performance for the current period. As countermeasures, the Company promptly grasps overseas conditions through close information sharing with its Chinese subsidiary and information gathering from financial institutions and business partners, while also implementing risk avoidance through forward exchange contracts.

The purchase prices of steel and resin products, the main raw materials for the Company's products, are affected by market price fluctuations, and business performance may deteriorate if price increases cannot be passed on to selling prices. As countermeasures, the Company controls orders based on market price trends, in-houses production of some resin components, and reduces outsourced processing costs and labor costs, but thorough implementation of price pass-through remains an ongoing challenge.

Securing, developing, and retaining specialized engineers is an important challenge, but declining birthrates, an aging population, and a shrinking labor force, along with fewer job seekers entering the manufacturing industry, are making it difficult to secure human resources. If recruitment does not proceed as planned or if employees leave during the course of their growth, this may hinder the transfer of technology and skills and constrain business execution. As countermeasures, the Company is pursuing community-based and overseas recruitment, as well as improving employee satisfaction through the Fister commendation system and incentive compensation system.

The Company depends on specific suppliers and subcontractors for raw materials, certain components, and manufacturing processes, and excess demand or a supply stoppage due to disasters or accidents could cause production delays, potentially leading to lost opportunities and a decline in credibility with business partners. As countermeasures, the Company is working to reduce the risk of supply disruption by developing alternative suppliers and promoting in-house production.

Soaring raw material and energy prices due to abnormal weather and the introduction of new regulations regarding CO2 emissions may increase production costs, which could have a material impact on the Company's financial position and business results. As countermeasures, the Company is working to reduce CO2 emissions through effective use of waste and the promotion of sales of environmentally friendly products, but the risk of additional costs remains depending on the direction of stricter regulations.