COSEL CO.,LTD.

U.S.-China relations, the Russia-Ukraine situation, and tensions in the Middle East region may lead to the advancement of economic security policies, trade restrictions, and tariff introductions by various countries. These may cause disruption and cost increases in import/export transactions and in the procurement of parts and materials and the supply chain, posing a risk of adverse effects on business results and financial position. As countermeasures, the Group is promoting the diversification and review of its supply chain, while also aiming to stabilize profitability through continuous cost reductions and the early market introduction of value-added products.

Prolonged global inflation, rising policy interest rates in Europe and the U.S., exchange rate fluctuations, and slowing economic growth in China may destabilize the global economy and regional economies. Since the Group conducts business globally, primarily in Japan, Asia, North America, and Europe, such changes carry the risk of having a significant impact on business results and financial position. The Group is engaged in continuous monitoring of external environment, regional, and industry trends, cross-functional reform activities, and strengthening competitiveness through the creation of new products and services.

In the power supply market, in addition to technological advances and lower prices for procured components, price-reduction requests associated with concentrated purchasing by major users are increasing, intensifying price competition with competing power supply manufacturers and causing a persistent downward trend in product prices. Such price trends may affect the Group's business results and financial position. The Group is working to improve profitability through continuous cost reductions, market introduction of high-value-added new products, optimization of product pricing, and cost and profit management.

The Group conducts transactions with overseas subsidiaries and external customers in foreign currencies, and overseas sales account for approximately 35-40% of consolidated net sales, so exchange rate fluctuations directly affect export profitability and overseas competitiveness. In a yen appreciation phase, this may affect business results and financial position through a decline in the competitiveness of products in overseas markets and deterioration of export profitability. The Group is working to mitigate foreign exchange risk by increasing foreign-currency-denominated raw material purchases, localizing material procurement, and expanding overseas production.

Although the Group has established an ISO9001-certified quality system, there is no guarantee that defects will not occur in any of its products or services, and if an accident, market recall, or production stoppage caused by quality issues occurs, the Group may be held liable for damages to customers. If a large-scale recall or similar event occurs, this poses a risk of significant impact on business results and financial position due to substantial recall costs, compensation expenses, or decreased sales. The Group strives to ensure reliability and safety through continuous improvement and reform of its quality assurance system, including design reviews, internal quality audits, and supplier audits.

Raw material inventory balances remain at high levels due to responses to procurement difficulties and securing stock of parts discontinued by component manufacturers, with storage spread across multiple locations including outsourced external warehouses. Although the book value of raw materials on the balance sheet is calculated based on declines in profitability, future usage projections involve company estimates and may be affected by changes in economic conditions such as customer and market trends. Under daily management of physical parts, materials, and inventory levels, the Group is addressing the risk of profitability decline through order management and optimization of the production system.

The Group holds important business information, confidential information of business partners, personal information, and the like, and if information leakage due to theft or loss, or loss, falsification, or theft resulting from cyberattacks such as unauthorized access occurs, this may hinder business activities and affect business results and financial position. The Group is strengthening its IT governance system by establishing basic information security policies and regulations, developing management systems and rules, providing employee training, conducting risk assessments and countermeasures, and responding to the strengthening of various laws and regulations.

In June 2018, the Group made Powerbox International AB a subsidiary with the aim of strengthening sales capabilities and technological competitiveness in the European market, but in FY2020 (fiscal year ended March 2021), due to the COVID-19 pandemic, business could not be developed as planned, and an impairment loss on goodwill (¥1,097 million) was recorded. At present, there remains a risk of impairment of intangible assets other than goodwill, which could have a material impact on business results and financial position. The Group recognizes maximizing the synergy effects of sales capabilities and technological competitiveness as an important issue, and is working to strengthen its European business.

Laws and regulations concerning climate change response and decarbonization are being strengthened worldwide, and delays in responding to these carry the risk of affecting business results and financial position through the loss of business opportunities and additional investment in product development and production. The Group has established an ISO14001-certified environmental management system and is working to reduce environmental impact across the entire product lifecycle.

If the Group is accused of infringing on the intellectual property rights of a third party, this may lead to litigation, resulting in restrictions on the production and sale of products and expenditures such as damages, which could have a material impact on business results and financial position. Protection of intellectual property rights and avoidance of disputes are positioned as important management issues, and the Group has established a specialized committee to conduct investigations of third-party intellectual property rights during the research and development and design stages.