INNOTECH CORPORATION

Sales of proprietary test systems for semiconductor memory in the Test Solutions business are highly dependent on specific semiconductor memory manufacturers. If the supply-demand balance in the semiconductor market deteriorates, customers curtail capital expenditure, or customers withdraw from or sell their businesses due to industry restructuring, this could significantly affect the execution of business plans and operating results. There is also a risk of recording valuation losses on inventory due to excess holdings resulting from changes to or cancellation of customers' production plans. As countermeasures, the company is working to expand its product lineup, develop new customers, and strengthen close communication with customers.

In the Systems & Services business and the semiconductor design-related business, domestic automakers and their affiliated companies are major customers. If the competitiveness of domestic automakers declines or industry restructuring occurs due to the promotion of EVs or regulations on gasoline vehicle sales, the business environment could change significantly. In addition, stagnation in production and sales activities caused by changes in laws and regulations or political conditions in the countries and regions where these automakers operate could also affect operating results. As countermeasures, the company is promoting the enhancement of products, merchandise, and services for EVs, expanding sales channels to overseas automakers, and developing new markets.

EDA software, the core product of the semiconductor design-related business, and semiconductor memory test systems, the core product of the Test Solutions business, are dependent on specific suppliers and contract manufacturers. Unexpected corporate restructuring or termination of agency agreements involving these parties could affect business operations and operating results. As countermeasures, the company maintains good relationships and regular exchange of information with suppliers and contract manufacturers, in addition to expanding the range of vendors handled and promoting procurement from multiple companies.

In business areas undergoing rapid technological innovation, the recruitment and development of highly skilled personnel is essential. Competition to acquire engineers is intensifying, and if the company is unable to hire sufficient engineers or loses excellent engineers, this could affect the execution of business plans and future operating results. Securing R&D personnel is a particular challenge in achieving the medium-term management plan's strategy of expanding proprietary product sales and strengthening manufacturer functions. As countermeasures, the company is actively recruiting engineers, including those from overseas, improving compensation levels, enhancing benefits and training programs, and achieving efficient resource allocation through the use of external partner companies and temporary staff.

As the company operates not only in Japan but also mainly in Asia and North America, the materialization of geopolitical risks, natural disasters such as earthquakes, typhoons, and floods, or a global outbreak of serious infectious disease could cause disruptions in sales activities, difficulty procuring products and materials, tight supply and rising prices of key components, and challenges in ensuring employee safety, potentially affecting the execution of business plans and operating results. As countermeasures, the company is reviewing and strengthening its BCP management framework, reinforcing its supply chain, conducting parallel evaluation of alternative materials, placing early orders for long-lead-time materials, and complying with export control laws and regulations.

In proprietary products and services such as test systems and embedded-related offerings, product defects could disrupt customers' production lines or delay customers' development plans, and server failures in cloud services could cause service outages or loss of information, among other damages. Damages, particularly to semiconductor manufacturers and automotive-related companies, could be substantial. There is also a risk that delays in decarbonization initiatives could make it difficult to continue business relationships with customers. As countermeasures, the company has taken out product liability insurance, established a quality assurance committee, and is diversifying its contract manufacturers.

As the company handles confidential information including customer data, personal information of employees and others, and technical information, increasingly sophisticated and advanced cyber attacks could result in information leakage, loss, tampering, or system failures. This could lead to a halt in business activities, delays in service provision to customers, damage to reputation, and liability for damages, potentially affecting financial condition and operating results. As countermeasures, the company is strengthening measures against unauthorized access using firewalls, operating servers on closed networks, regularly addressing vulnerabilities, and implementing multi-layered defense.

Rapid business expansion accompanying M&A activity may outpace the development of adequate governance and internal controls. If employees or others commit violations of laws and regulations, whether intentionally or through negligence, this could damage the company's social credibility and affect its financial condition and operating results. As countermeasures, the company is actively involved in establishing regulations and unifying accounting policies at newly acquired subsidiaries, has formulated the "Basic Policy on Internal Control" and the "Innotech Group Code of Ethical Conduct," established an external whistleblowing contact point, and involves officers and employees in management through secondment to or concurrent posts at subsidiaries' boards.