AXELL CORPORATION

Sales to the pachinko/pachislot machine market account for approximately 95% of consolidated net sales, and a contraction in this market would have a material impact on business performance. In particular, dependence on specific products is high, with Graphics LSI and Memory Modules alone accounting for approximately 84% of consolidated net sales (FY2026, ending March 2026). Although efforts are underway to expand the market, if the market size shrinks significantly or price competition intensifies due to the entry of competitors, the impact on business performance would be severe.

The pachinko/pachislot machines in which the Company's products are installed are subject to legal regulations such as the "Act on Control and Improvement of Amusement Business, etc.", and industry associations also maintain voluntary self-regulations aimed at curbing excessive gambling elements. If new regulations are introduced or existing self-regulations are strengthened, causing significant changes in pachinko/pachislot machine sales trends, this could have a material impact on the Group's business performance. The Group itself is not directly subject to legal regulation, but must continuously monitor regulatory developments in the downstream market.

As the Group adopts a fabless model and outsources product manufacturing, securing production capacity from and maintaining relationships with contract manufacturers is key to business continuity. A shortage of production capacity, unexpected problems at contract manufacturers, or termination of contracts would have a material impact on business performance. In addition, the Group has entered into long-term procurement contracts with some contract manufacturers to ensure stable supply, and if actual demand diverges significantly from agreed procurement volumes due to changes in market conditions, this could also adversely affect business performance.

In addition to soaring raw material prices due to the situation in Russia and Ukraine, manufacturing costs for some products are trending upward due to a global rise in memory prices driven by expanding demand for generative AI. Although efforts are underway to pass these costs on to sales prices, if the pass-through is insufficient relative to the rise in manufacturing costs, or if opportunity losses arise from prolonged product manufacturing periods, this could have a material impact on business performance.

The Group primarily conducts business activities through sales agent trading companies, and sales to Midoriya Denki Co., Ltd. account for more than 45% of consolidated net sales. While the relationship is currently favorable, any problems arising in the relationship with this company or other sales agents could have a material impact on the Group's business performance.

As pachinko/pachislot machine manufacturers become more cost-conscious, the reuse of component parts, including the Company's products, is becoming increasingly widespread. The Company is working to mitigate the impact through promoting migration to next-generation products and diversifying its product lineup; however, if the reuse ratio rises significantly or product diversification efforts fail to yield results, this could have a material impact on the Group's business performance.

Recognizing the risk of dependence on a single market, the Group is working to quickly commercialize new business areas such as the AI domain, embedded device markets including medical equipment and industrial equipment, and blockchain. However, if the scale of the markets entered falls short of expectations, or if commercialization progresses slowly, the Group may be unable to recover its invested capital, which could have a material impact on business performance. It should also be noted that risks specific to new markets will be newly added.

LSI development costs are increasing along with the miniaturization of advanced process technology, and consolidated R&D expenses have remained at high levels: ¥1,579 million in FY2024 (ended March 2024), ¥1,547 million in FY2025 (ended March 2025), and ¥1,641 million in FY2026 (ending March 2026). There is a risk that business performance could deteriorate if developed products fail to generate expected revenue, or if prototype development expenses for multiple projects are concentrated in the same period. In addition, if technological innovation in the semiconductor, AI, or blockchain domains exceeds expectations and significantly reduces product competitiveness, this could also have a material impact on business performance.

Although the Group conducts clearance investigations during product development, the possibility of litigation being brought based on claims of infringement of third-party intellectual property rights cannot be completely ruled out. If litigation is brought, it would require the expenditure of significant management resources, including time and costs, to respond, and if the Group were to lose such litigation, it could result in the discontinuation of sales of the relevant products and the assumption of substantial damages liabilities, which could have a material impact on business performance.

As the Group's globalization progresses, the amount of foreign-currency-denominated settlements is increasing, and since pricing for yen-denominated transactions is also set based on exchange rates, the Group is affected by exchange rate fluctuations. Although the Group works to reduce this risk through forward exchange contracts and other measures, sudden exchange rate fluctuations could have a material impact on business performance.