SHOFU INC.

There is a risk that personnel information or confidential information may be leaked due to external cyberattacks, unauthorized internal access, or information security incidents. This could impede business continuity and the maintenance of trust, potentially adversely affecting the Group's financial position and business results. Although security measures are implemented for networks, complete protection remains difficult to achieve.

There is a risk that the manufacturing and marketing license or manufacturing business registration could be revoked due to deficiencies in the manufacturing control and quality control systems required under the Pharmaceuticals and Medical Devices Act, or due to legal violations. As a dental equipment and materials manufacturer, license revocation would have a serious impact directly affecting business continuity. Although the Company responds through GMP/QMS compliance and internal audits, the risk remains.

If defective products, mislabeling, performance deficiencies, or design/formulation errors result in market circulation or health hazards, this could adversely affect the Group's financial position and business results. The use of raw materials that do not comply with cosmetic or pharmaceutical standards poses a similar risk. The Company has implemented measures such as establishing a quality control system and strengthening inspections in the manufacturing process, but the risk cannot be eliminated entirely.

As markets become more globalized, there is a risk that competition with companies in other industries and new market entrants will intensify, reducing the Company's market share and profitability. If price competition progresses in the dental equipment and materials market, this could lead to decreased sales volume and deteriorating profit margins. The Company is working to reduce competitive risk by promoting differentiation strategies and enhancing brand strength and service quality.

There is a risk that healthcare cost containment policies in various countries could strengthen demands from customer medical institutions for price reductions, or reduce demand. Dental equipment and materials are directly susceptible to the effects of healthcare cost policies, which could lead to reduced profitability. The Company addresses this through enhancing the value-added nature of its product portfolio, cost optimization, and development of new markets.

There is a risk that business activities and sales strategies could be affected by changes in the political and economic conditions, exchange rates, healthcare insurance systems, and laws and regulations of various overseas countries. Exchange rate fluctuations directly affect the yen-denominated amounts of overseas sales, potentially adversely affecting the Group's financial position and business results. The Company responds through monitoring local regulatory developments, measures to mitigate foreign exchange risk, and strengthening governance systems.

There is a risk that growth investments in facilities and R&D, or M&A activities, may fail to achieve the expected results, making it difficult to recover the funds invested. Deterioration in investment profitability could directly and adversely affect the Group's financial position. The Company addresses this through thorough prior due diligence, careful examination of investment profitability, and continuous monitoring of progress.

There is a risk that impairment losses could arise due to declines in the value of marketable securities, equity-method affiliates, and subsidiary shares, or deterioration in their business performance. The recognition of impairment losses would directly and adversely affect the Group's financial position and business results. The Company addresses this through regular monitoring of the business and financial conditions of investees and market trends, as well as reviewing its holding policies.

There is a risk that the Company may be unable to recruit or secure the necessary personnel due to a shrinking labor population, or that business expansion and efficiency improvements could be delayed due to a shortage of specialized personnel and lengthy training periods. The dental equipment and materials field requires a high degree of specialization, and personnel shortages could directly lead to a decline in product development capabilities and competitiveness. The Company is working to diversify recruitment channels and improve compensation and working conditions.

There is a risk that delays in adopting new technologies such as generative AI, or insufficient utilization of digital transformation (DX), could lead to reduced operational efficiency, diminished competitiveness, and slower management decision-making. If the Company falls behind while competitors actively promote DX, this could result in a disadvantageous competitive position in the market. The Company is advancing the formulation of a DX strategy, research and adoption of AI utilization, and improvement of digital literacy along with human resource development.