EBRAINS,INC.

The Group's sales are highly dependent on semiconductor manufacturing equipment-related demand. If a sharp decline in demand in the semiconductor market or an industry-wide restraint on capital expenditure occurs, this could adversely affect business performance through decreased orders, increased inventory, and other factors. In the past, demand fluctuations could be offset across multiple industries, but in recent years concentration in specific markets has been progressing. As a countermeasure, the Group continues to pursue sales to a variety of industries; however, the structural risk of concentration remains.

In the current consolidated fiscal year, the sales ratio to Avalue Data Corporation reached 18.6%, indicating a high degree of dependence on a single customer. A deterioration in the situation of the semiconductor-related end customers of this company could lead to decreased orders and increased inventory. Although the likelihood of termination of the transaction is judged to be low, the structure remains indirectly influenced by trends in the downstream semiconductor market.

Regarding the electronic components and other materials required for product manufacturing, if industry-wide supply-demand imbalances lead to chronic difficulty in procurement, delivery delays, or soaring prices, this could compress profits and lead to decreased orders. The Group strives for stable procurement by building good relationships with suppliers, but there are limits to what an individual company can do in response to industry-wide supply-demand fluctuations.

The Group holds a large amount of raw materials to accommodate high-mix, low-volume production and short delivery times, but demand forecasting is difficult due to technological innovation and supply-demand changes in the semiconductor industry, creating a risk of large-scale disposal due to specification changes and other factors. Although the Group monitors the aging of inventory assets at monthly management meetings and implements appropriate inventory management, if disposal exceeds expectations, inventory valuation losses exceeding those recorded in the past could be recognized.

In an extreme yen appreciation phase, customers' export competitiveness declines, leading to decreased orders to the Company, while in an extreme yen depreciation phase, profits are compressed by rising prices of parts procured from China and elsewhere. The Group is structurally exposed to bidirectional foreign exchange risk, and sharp fluctuations in either direction—yen appreciation or depreciation—could adversely affect business performance.

The Group has a production subsidiary in China. Although the ratio of this subsidiary to consolidated net sales is low, at approximately 2.6%, it plays an important role in domestic cost reduction and in transactions with local subsidiaries of customers. If changes in Chinese government policy, soaring labor wages, or other factors make it difficult to maintain the current operating structure, this could adversely affect the Group's financial position and business performance.

There is a possibility that, over the long term, new electronic equipment structures could emerge to replace the backplane method and motherboard method in industrial electronic equipment. If the Company is unable to respond to such technological innovation, there is a risk that the competitiveness of its main products could be lost. Advances in the miniaturization and higher density of CPUs, memory, communications, and other components could promote the emergence of alternative technologies, requiring continuous technological response.

Representative Director and President Masato Uemura plays a central role in driving the Group's business, including management strategy, planning and development, capital policy, and sales activities, resulting in a high degree of dependence on him. Although the Group is proceeding with the development of its organizational structure and human resources, if he were to step away from management before a successor is sufficiently developed, this could adversely affect business performance.

Securing excellent engineers needed to respond to technological innovation, as well as talented personnel in sales and administrative departments, is a prerequisite for continuing and expanding business. The Group works to recruit and retain personnel through the use of job placement services, Hello Work, and improvement of the working environment; however, if recruitment does not proceed as planned, if capable personnel leave, or if recruitment and labor costs rise sharply, this could adversely affect business performance.

The Group holds confidential information and personal information of business partners. If an information leak occurs due to human or technical error, unauthorized access, or other causes, the Group could be held liable and subject to regulatory action, and trust from business partners and the market could be damaged. Although the Group is working to strengthen security, it is difficult to completely defend against external threats such as cyberattacks, and the risk of an adverse impact on business performance remains.