ZAOH COMPANY, LTD.

Approximately 71.8% of products handled are imports from Europe/US and China, with foreign-currency-denominated purchases comprising 62.1% US dollar and 27.8% euro by currency. A stronger euro or dollar pushes up procurement costs and lowers profit margins. The Company hedges this risk through forward foreign exchange contracts and by shifting to new products that incorporate exchange rate assumptions, but complete avoidance is difficult.

Among overseas procurement, dependence on specific manufacturers is high, with China's Yili Corporation accounting for 17.8%, US-based Minuteman International 15.5%, and the Italian IPC Group 9.4%. Should procurement from these manufacturers be halted for any reason, business performance could be temporarily and adversely affected. The Company mitigates this risk by sourcing the same product categories from multiple manufacturers.

Demand from the manufacturing sector is affected by domestic economic conditions and capital expenditure appetite; when business performance deteriorates, customers may postpone equipment introduction or extend replacement cycles. In the building maintenance industry, customer price sensitivity increases during economic downturns, which can intensify price competition for products lacking distinctive features and erode profit margins. There is also a risk of price competition in the consumer market as competitors catch up with similar products.

Continuously discovering new products that meet market needs and developing price-competitive suppliers are key to business expansion; failure to achieve this could reduce future growth and profitability. There is also a risk that competitors catch up with similar products, drawing the Company into price competition. The ability to continuously supply products that are attractive in terms of features and price is directly linked to maintaining competitive advantage.

All pre-shipment products are centrally managed at the Funabashi logistics center; if it were to be damaged by a disaster, it would take approximately one to two months to receive the next shipment of imported products. During this period, the Company aims to minimize impact by shifting to domestically procured products and conducting advance order-taking activities, but a prolonged procurement period could adversely affect business performance. Although insurance is maintained for the building and stored products, the import-dependent procurement structure creates vulnerability.

For imported products, the Company bears product liability as the seller, and could be held liable for damages arising from accidents caused by product defects or deficiencies in warning labels or instructions. Although the Company carries product liability insurance, if the amount of damages exceeds the insurance coverage, the Company would need to bear the difference itself, potentially adversely affecting business performance and financial condition. While safety tests are conducted prior to sale, defect-free status cannot be guaranteed for all products.

On-site, hands-on demonstration sales are the core differentiator from competitors, and securing and developing capable personnel is essential for business expansion. If sufficient personnel cannot be secured to match business growth, opportunities for demonstration sales may decrease, adversely affecting business performance. The Company continues active recruitment of both new graduates and experienced hires, but intensifying competition in the labor market could pose a challenge.

Purchasing transactions with major overseas manufacturers are based on gentlemen's agreements rather than formal master agreements, and stable procurement has currently been secured under this arrangement. However, if changes in a supplier's management policy force the Company to conclude a formal master agreement, the Company could be compelled to accept unfavorable terms, posing a risk of adverse effects on business performance and financial condition.

Changes in the international situation could trigger surges in raw material and energy prices, affecting the Company's energy costs and the procurement costs of imported products. Delays in the arrival of product materials due to resource supply shortages also pose a risk of adversely affecting business performance. Because major sourcing countries are concentrated in the US, Italy, China and others, the Company's structure makes it susceptible to deteriorating conditions in specific regions.

If a global infectious disease outbreak causes lockdowns in major sourcing countries (the US, Italy, China, etc.), securing products could become difficult. Domestically, if states of emergency lead to prolonged business closures or telework at client companies, demand for cleaning and opportunities for product demonstrations could decrease, resulting in sluggish sales. The Company aims to reduce the impact by maintaining several months' worth of inventory, but there are limits to its ability to respond if such conditions become prolonged.