HPC SYSTEMS Inc.

The HPC Business sells scientific and technical computing computers to universities, government agencies, and corporations, while the CTO Business sells industrial computers, both being directly affected by customers' R&D and capital investment demand. If financial and economic turmoil stemming from uncertainty over US tariff policy worsens the performance of customer companies, there is a risk that sales in both businesses will decline. No specific countermeasures against demand fluctuation are disclosed by the Group.

The main supplier for the HPC Business is Super Micro Computer, Inc. of the United States, from which the Group receives stable supply under a distributor agreement. If the technological level of this company declines or it becomes difficult to continue the transaction, there is a risk of incurring time and monetary costs such as securing alternative suppliers, adjusting delivery schedules, and increased procurement costs. Although alternative candidates exist, securing the necessary quantities and the associated response costs may affect business performance.

As the majority of products are purchased from overseas, with Taiwan being a main supplier, the Group is exposed to geopolitical risk, market risk, and credit risk related to Taiwan. In addition, significant fluctuations in exchange rates directly affect procurement costs and may worsen business performance. No specific hedging measures are disclosed by the Group.

If there is a sharp increase in the price of components such as memory or a supply shortage occurs, there is a risk of rising costs and delays in product shipments. Securing sufficient quality parts in a timely manner and in the necessary quantities is a prerequisite for business continuity, and procurement disruptions may affect both sales and profit. No specific measures such as increasing inventory stockpiles are disclosed by the Group.

Since major customers are universities, government agencies, and large corporations, sales and operating profit tend to be concentrated in the January–March period (third quarter) at the fiscal year-end. In the third quarter of FY2025 (ending June 2025), sales were ¥2,552,010 thousand and operating profit was ¥403,070 thousand, standing out compared to other quarters (sales of ¥1,445,411 thousand to ¥1,612,929 thousand, operating profit of ¥43,565 thousand to ¥109,865 thousand), resulting in large quarterly performance fluctuations. This concentration means that order trends in a specific quarter have an extremely large impact on full-year performance.

In the computing-related market, R&D is advancing globally, and the pace of technological innovation is extremely fast. If the Group is unable to respond in a timely manner to the speed of technological innovation, it may lead to a decline in product competitiveness and affect the business and performance. The Group states that it is working to build a responsive framework, but specific R&D investment amounts and details of the framework are not disclosed.

Representative Director Tetsupei Ono plays an extremely important role in driving the business, and if he becomes unable to carry out his duties, there is a risk of a significant impact on business continuity. The Group states that it is focusing on human resource development and strengthening to reduce this dependence, but specific details of succession planning are not disclosed. Given the small organizational scale, the impact of key person risk is relatively high.

There is a risk of system outages caused by computer viruses, unauthorized access by hackers, system failures, or power supply interruptions to data centers due to natural disasters, among other causes. Although appropriate security measures are in place, system outages caused by unpredictable factors directly affect business continuity. Given the nature of the HPC Business, the impact on customers could be significant, potentially leading to a loss of trust.

The Group holds business-use assets such as domestic factories and server equipment, as well as investment securities (listed and unlisted), and impairment processing may become necessary due to changes in the business environment or declines in market prices. For unlisted stocks, valuation is highly uncertain as it is assessed comprehensively based on net assets, future business plans, and other factors. If impairment losses occur, they will affect net income for the period and financial soundness.

The Group is subject to various legal regulations, including the Companies Act, the Financial Instruments and Exchange Act, tax laws, trade-related laws including the Foreign Exchange and Foreign Trade Act, and the Subcontract Act, and there is a risk that business activities may be restricted by new enactments or amendments. In particular, trade-related regulations such as the Foreign Exchange and Foreign Trade Act directly affect the procurement of parts from overseas and the export of products, and the risk is heightened in conjunction with uncertainty over US tariff policy. Increased compliance costs may also affect business performance.