ESPEC CORP.

Because the Company's main customers are electronic component/equipment manufacturers and automotive-related manufacturers, sluggish capital expenditure by customers due to economic fluctuations directly affects business performance. While the domestic market is mature and growth depends heavily on overseas markets, competition continues to intensify with high-share manufacturers in Europe and the US as well as low-price manufacturers in China and Taiwan. As countermeasures, the Company is working to expand overseas markets and cultivate the thermal solution service and food machinery businesses.

With the overseas sales ratio at 50.9% in FY2025, natural disasters, infectious diseases, wars, terrorism, and political instability in countries where the Company operates may affect business performance. Since major manufacturing and R&D facilities are concentrated domestically, severe damage from earthquakes, typhoons, and similar events poses a risk of business continuity difficulties and enormous restoration costs. The Company has established a system for rapid information sharing and appropriate response based on crisis response regulations.

Subject to domestic and foreign export control laws such as the Foreign Exchange and Foreign Trade Act and the US Export Administration Regulations (EAR), there is a risk that products and technologies may be diverted to countries or end-users of concern. If a regulatory violation or unintended use is discovered, it could materially affect business performance and financial condition. The Export Control Division ensures thorough understanding of specifications, destinations, end-users, purposes, and transaction routes, and enforces strict compliance with the latest laws and regulations.

Bankruptcy or business withdrawal by suppliers or subcontracted processors could cause supply disruptions or the inclusion of defective parts, leading to production delays and significant costs. Key raw materials such as stainless steel, iron, copper, aluminum, and other metal and chemical materials are affected by international market conditions, and there is a risk that shortages of semiconductors and electronic components or price surges could pressure business performance. The Company strives to build a stable procurement system through thorough supplier management and supply chain evaluation and guidance.

In business and capital alliances or corporate acquisitions aimed at expanding business areas, the initially expected effects may not be achieved due to issues not identified in prior due diligence or changes in the business environment. If goodwill impairment or similar events occur, it could affect business performance and financial condition. When making decisions, the Company conducts detailed prior review of the target company's business content, financial condition, and business relationships, fully considering the risks involved.

If an information security incident occurs, such as leakage of personal information or confidential information handled in the course of business, it could affect business performance and financial condition through a decline in social credibility and brand image. As cyberattacks become more sophisticated and diverse, the importance of managing information assets is increasing. The Company has implemented an information security management system based on the international certification standard

The Company's mainstay products, Environmental Test Chambers, emit greenhouse gases during use and use fluorocarbons as refrigerants in refrigeration units. Therefore, stricter energy-saving regulations and refrigerant gas regulations associated with decarbonization may increase costs or hinder product sales. Delays in responding to regulations pose a risk of directly reducing competitiveness. The Company is working on developing and providing energy-saving products and products equipped with low-GWP refrigerants, as well as providing Contract Testing & Rental services using 100% renewable energy.

Competition for talent is intensifying due to labor market fluidity and the decline in Japan's working-age population. If the Company is unable to secure and develop capable personnel, or if personnel attrition occurs, there are concerns about impacts on business operations and the outflow of technology and know-how outside the Company. There is a risk that the human resource foundation essential for maintaining and strengthening corporate competitiveness could be damaged. The Company is strengthening diverse recruitment activities while working to improve employee engagement, support growth, and develop an environment that accommodates diverse work styles.

As the Company has multiple subsidiaries domestically and overseas and operates globally, if group governance becomes dysfunctional and compliance or ethical violations occur among officers or employees, it could lead to a decline in social credibility and brand image, as well as claims for damages. The complexity of governance is increasing as global operations expand. The Company continues to strengthen its systems through the development of group internal controls, thorough education on the