WAVELOCK HOLDINGS CO., LTD.

Some raw materials are dependent on supply from specific manufacturers, and there is a risk of cost increases due to the use of substitute raw materials when procurement of the required delivery timing or quantity becomes impossible. If immediate alternative procurement is difficult, this could lead to a suspension of product sales for an extended period. Although measures such as securing multiple procurement sources are being pursued, the risk has not been completely eliminated.

The main raw materials are petrochemical-based, and raw material costs fluctuate in line with naphtha prices, crude oil market conditions, and foreign exchange fluctuations. If price transfer to products does not proceed in the event of a sharp short-term price surge, gross profit may decline significantly. The rise in crude oil prices due to the conflict in Eastern Europe is also recognized as an additional factor affecting raw material prices.

For economic reasons, dedicated production equipment for some products has not been duplicated, and there is a risk that supply of the relevant product could be temporarily suspended in the event of a long-term shutdown due to some circumstance. Plans for new capital investment and equipment installation may also be delayed due to changes in the external environment. Risk reduction is being pursued through appropriate and necessary maintenance.

The production plants and outsourced processing plants of the Material Solutions business are concentrated in western Shizuoka Prefecture, an area assumed to be the epicenter of the Tokai and Tonankai earthquakes, creating a risk that production capacity could decline significantly in the event of an earthquake. In addition, these plants are located within approximately 20km of the Hamaoka Nuclear Power Plant, and if the area is designated an evacuation zone in the event of a disaster, this could lead to a prolonged suspension of manufacturing. Although the main equipment buildings have earthquake-resistant structures, damage cannot be completely prevented.

Knitted and woven products in the Material Solutions business are produced on a planned basis, and if actual sales deviate from the plan, product and merchandise inventory may temporarily increase. Even for made-to-order products, if excess production occurs due to production lot sizes or yield issues, the company may be forced to record sales losses under conditions different from standard terms, or inventory disposal losses. These are recognized as risks that could affect business performance.

While a large portion of sales are collected via promissory notes, purchase settlements are mostly made in cash, meaning that if sales grow rapidly, the necessary working capital increases, which could impede cash flow. This characteristic of the financial structure is recognized as a risk that could affect business performance and financial condition.

With business expansion in South Korea, China, North America, Europe, and elsewhere, foreign currency-denominated assets and transactions have increased, and significant fluctuations in exchange rates could affect business performance and financial condition. Although forward foreign exchange contracts are used to hedge exchange rate fluctuation risk, since these are subject to mark-to-market valuation as derivatives, there is also a risk that valuation losses could be recorded depending on exchange rate movements.

In the current consolidated fiscal year, the top 10 customers accounted for 34.4% of consolidated net sales, and if the business relationship with these customers is lost for any reason, it could have a material impact on business performance. While relationships are currently favorable, the high degree of dependence itself is recognized as a risk factor.

Due to the nature of the business, which uses petrochemical raw materials as its main material, the company is subject to the "Act on the Promotion of Understanding and Control of the Release and Transfer of Specific Chemical Substances into the Environment," and some products are also subject to regulations such as the Building Standards Act and the Food Sanitation Act. Failure to comply with these regulations could result in restrictions on business activities or increased costs due to changes in manufacturing methods.

Since 100% inspection of products is difficult, sampling inspections are conducted; however, if a claim arises due to a serious defect in shipped products and damages exceeding the insurance coverage amount are demanded, this could affect business performance. In the event a defect occurs, changes in materials or manufacturing methods and capital investment may become necessary, and if implementing improvement measures takes time, there is also a risk of lost sales for the relevant product.