• Risk Factors

Risk Factors Risk Factors

Our group has put in place necessary rules and systems, including the "Risk Management Rules," which are based on the "Crisis Management of Loss" principles outlined in our "Basic Policy for Internal Control System Establishment." These measures are designed to proactively identify and address risks, with the goal of minimizing their impact when they arise. The Risk Management Rules provide operational guidelines for effectively managing risks to ensure the continuity and smooth operation of our business. The responsibility for managing these rules lies with our Sustainability Department.

To assess business risks, each relevant department evaluates both the likelihood of anticipated risks occurring (frequency) and the potential impact they could have if realized (such as effects on sales, profits, etc.). Risks that are deemed to have high importance are given priority, and measures for risk avoidance, reduction (mitigation), and transfer are formulated and implemented. The effectiveness of these measures is reviewed annually through discussions between the Sustainability Department and the responsible departments. The status of implementation is continuously monitored, and the outcomes of the annual risk assessment are reported to the Board of Directors following management reviews. This information is also communicated to all employees. Additionally, risks are analyzed, and measures are integrated into our business plans.

Please note that the future considerations mentioned in this document are accurate as of June 26, 2023, as assessed by our group.

Our group classifies business risks into eight distinct categories: "Business Activity Risks," "Financial Risks," "Economic Risks," "Natural Disaster and Accident Risks," "Legal Risks," "Labor Risks," "Social Risks," and "Political Risks."

(1) Business Activity Risks

① Market Trends, Product Pricing, and Competitive Environment Fluctuations
Our group heavily relies on display sales, and our business and performance are influenced by the display market and the market for finished products that incorporate displays both domestically and internationally. The market for finished products is greatly affected by trends in personal consumption due to economic fluctuations, consumer preferences, seasonality, and other factors. If orders decrease due to these fluctuations, excess inventory of parts or finished products or losses due to decreased factory operating rates may occur, potentially affecting our group's business, performance, and financial status. Additionally, competition with other companies may result in lower sales prices, potentially affecting our group's performance.

Therefore, our group values our "Global No.1" proprietary technology as a source of value creation and aims to eliminate excessive competition and commoditization while maintaining and improving sales price levels. Our group also works to reduce costs through material and part reduction, yield improvement, and other initiatives to prepare for a potential decline in sales prices. However, if our group cannot eliminate excessive competition and commoditization, or if sales prices decline beyond the cost reduction achieved by our group, or if the ratio of low-profit products sold increases, our group's performance may be affected.

② Technology, and Research and Development
Our group manufactures and sells advanced displays, making the acquisition of technological superiority critical for our competitiveness. Our group acknowledges that our group has developed unique technologies such as backplane technology, which offers significant power savings and high definition compared to conventional methods, as well as next-generation OLED technology that leads the display market demands. Nevertheless, continuous research and development efforts are indispensable to swiftly deliver products using cutting-edge technology to our customers.

In our research and development endeavors, our group adheres to rigorous procedures, including the careful selection of research and development targets, regular progress reviews during the development phase, and assessments of whether to proceed. Nonetheless, if these efforts fail to translate into revenue or if our group's technological edge is compromised, it could impact our group's business, performance and financial standing.

③ Production Activities
Our group's display business relies on large-scale production facilities, their maintenance, a stable and substantial electricity supply, and a sizable workforce, resulting in a business with a relatively high fixed cost ratio. Consequently, a decline in our group's factory operating rate due to reduced customer demand, competition from other companies, or other factors may have an impact on our group's performance. Furthermore, an increase in electricity prices due to power supply constraints imposed by electricity companies, elevated import prices for petroleum and natural gas, or a weak yen could also affect our group's performance.

Additionally, our group procures raw materials and components from multiple suppliers and has established a production system under the assumption that raw materials will be obtained in a timely and appropriate manner. However, some raw materials and components are highly specialized, making it challenging to switch suppliers. If a supplier's business environment deteriorates, or if there are delays in the supply of essential raw materials and components due to unforeseen events such as disasters, there is a possibility of delayed deliveries of our group's products or increased costs associated with purchasing from alternative suppliers. Furthermore, if defects or flaws are found in procured raw materials and components or if they fail to meet our group's or our customers' specifications, it may affect the quality and evaluation of our group's products, potentially leading to claims or lawsuits against our group or our customers. This could result in increased costs due to lower evaluations or returns of procured raw materials and components.

Moreover, the production of high-value-added displays such as high-definition and low-power consumption displays requires sophisticated production technology and a skilled workforce. Since most of our group's products are customized, the configuration of parts and manufacturing equipment varies for each product, which could lead to challenges in improving product yield or quality issues. Additionally, to fulfill contractual obligations with customers, it may be necessary to continue manufacturing products even if the yield is low. Our group diligently aligns development, design, processes, manufacturing, and quality assurance to minimize such issues and has established a system for promptly resolving problems when they arise. However, if yield deterioration or quality problems persist despite these measures, it may impact the evaluation and performance of our group's products.

④ Management Strategy
Our group actively engages in collaborations with external companies, including component manufacturers, equipment manufacturers, and finished product manufacturers, to bolster our corporate competitiveness, enhance profitability, establish a sustainable supply chain, and drive innovation in both technology and product development. In addition to forging new partnerships with external entities, our group may also explore strategic alliances and acquisitions to fortify our competitive position in areas such as research and development, manufacturing, and other key sectors. However, these collaborative efforts, strategic alliances, and acquisition endeavors may encounter challenges that could potentially hinder their execution or sustainability. These challenges could include constraints on funding, changes in strategic goals, business problems such as technology management or product development issues, regulatory issues such as permits and licenses, or market fluctuations. Moreover, there is a possibility that sufficient results may not be obtained after implementation, which may affect our group's performance and financial status.

⑤ Dependence on Specific Applications and Customers
Our group's sales revenue heavily relies on specific applications, products, or particular customers. If market demand for these applications or products declines, the brand influence of specific customers diminishes, our group's products fail to meet customer requirements, or the competitiveness of our group's products wanes due to the emergence of competing products, our group's performance could be impacted. This could manifest as reduced orders, narrower profit margins, or less favorable transaction terms.

⑥ Impairment of Fixed Assets
Our group possesses a substantial inventory of tangible fixed assets. While our group routinely assess the recoverability of residual values based on projected future cash flows from these assets, if business profitability associated with these assets is determined to be insufficient due to factors such as increased competition or other reasons, our group may be required to recognize impairments. Such impairments could potentially influence our group's performance and financial status.

⑦ Business Restructuring Expenses
To secure long-term competitiveness, our group may undertake business restructuring initiatives as necessary. This may involve actions like closing underperforming production facilities or discontinuing specific research and development efforts. In such instances, our group may incur expenses related to restructuring, including equipment write-offs and employee treatment costs. There is also the possibility of losing skilled employees during these transitions, which could impact our group's performance and financial condition.

⑧ Climate Change Risks
Starting from FY2022, our group conducts scenario analysis following the TCFD framework to assess risks and opportunities associated with climate change. Our group is committed to strengthening our efforts towards decarbonization (achieving carbon neutrality) in the future. Nevertheless, the financial burden tied to these initiatives or potential cost increases due to future carbon pricing mechanisms could influence our group's financial performance. Furthermore, if our pursuit of carbon neutrality falls short of customer expectations, there is a possibility of transaction restrictions with customers. Additionally, the increased occurrence and intensification of natural disasters resulting from prolonged temperature rises may lead to disruptions in our supply chain, reduced productivity, and higher expenses associated with business continuity planning responses. These factors have the potential to impact our group's financial performance and overall financial health.

(2) Financial Risks

① Fundraising and Cash Flow
The business environment surrounding our group is challenging due to a global decrease in consumer electronics shipments driven by factors such as global inflation and rising costs like materials and energy. Our group is expected to continue facing challenging financial performance and negative free cash flow in FY2023. However, in FY2022, our group's financial situation significantly improved thanks to support from Ichigo Trust (Ichigo) and INCJ, resulting in no outstanding borrowings at the end of FY2022 (except for the short-term loans of JPY 4 billion borrowed from Ichigo on May 30, 2023). Additionally, our company issued the 13th set of new share subscription rights to Ichigo through a third-party allocation on March 22, 2023. If Ichigo exercises all of these new share subscription rights, our group will be able to raise up to approximately 173.4 billion yen, providing a clear outlook for our near-future cash flow.

However, if Ichigo does not fully exercise the new share subscription rights or only partially exercises them, and our group cannot secure sufficient funds from financial institutions, our available funds may fall below the necessary level for our business operations.

The exercise period for half of the 13th new share subscription rights runs from June 1, 2023, to May 31, 2028, and the remaining half runs from December 1, 2023, to November 30, 2028.

② Relationship with Major Shareholders
As of the submission date of this annual securities report, Ichigo is the controlling shareholder, directly holding shares equivalent to 78.2% of our total voting rights. Ichigo wields significant influence, including veto power, over matters requiring special resolutions at our general shareholders' meeting (such as organizational restructuring, mergers with other companies, asset or business sales, and changes to our articles of incorporation) and matters necessitating ordinary resolutions (such as director appointments or removals, disposition of surplus funds, and dividend determinations). Moreover, Scott Caron, the representative director and CEO of Ichigo Asset Management, Ltd., who advises on investment operations for Ichigo Asset Management International, Pte. Ltd., which has received investment operation authority from Ichigo under the investment delegation agreement, serves as our representative executive officer, chairman, and CEO.

To address this situation, our group has transitioned to a company with an established nominating committee since FY2020 and have formed audit committees, nominating committees, and compensation committees with a majority of outside directors to ensure independence. Our group does not have any prior approval requirements. Additionally, Scott Caron abstains from participating in board deliberations or resolutions concerning transactions with Ichigo or its affiliates to prevent conflicts of interest. Nevertheless, there is a possibility that Ichigo may influence matters requiring approval at our general shareholders' meeting.

Ichigo has expressed its intent to maintain a long-term shareholding position as a sponsor supporting the enhancement of our corporate value. However, as detailed in "④ Non-Compliance with Listing Requirement," our company are required to reduce Ichigo's shareholding to comply with the Tokyo Stock Exchange Prime Market's listing requirement. In such a scenario, if Ichigo sells some or all of our shares to meet these standards, the method, timing, and scale of the sale may impact the supply-demand relationship and market price of our shares.

Additionally, our company must also reduce INCJ's shareholding to adhere to the listing requirement. The Act on Strengthening Industrial Competitiveness mandates that INCJ disposes of all shares it holds by March 2025.

③ Dilution of Shares
As of the submission date of this annual securities report, the number of issued common shares is 3,880,388,022 shares, and the number of non-voting Class E preferred shares with conversion rights to common shares is 5,540 shares. Our company have also issued the 13th set of new share subscription rights to Ichigo for common shares.

If all Class E preferred shares are converted into common shares and all 13th new share subscription rights are exercised, the total number of shares to be issued, including those to be issued upon full exercise of the 13th new share subscription rights, will be 6,160,774,040 shares (61,607,740 voting rights), resulting in a dilution rate of 158.77% (dilution rate on a voting rights basis: 158.77%) with the total number of issued common shares standing at 3,880,388,022 (38,803,443 voting rights) as the denominator.

If Class E preferred shares are converted into common shares, and all 13th new share subscription rights are exercised, the per-share stock value and ownership ratio of our common shares may be diluted, potentially impacting the market price of our shares.

④ Non-compliance with Listing Requirement
As of the end of FY2022, our "free-float ratio" was 14.6%, which does not meet the Tokyo Stock Exchange Prime Market's listing maintenance standard of 35% or more for this ratio. Under the rules of the Tokyo Stock Exchange, our company must comply with this standard by the end of March 2025, within the transitional period. However, there is a special exception that allows for a grace period of five years (or a period recognized by the Tokyo Stock Exchange) for compliance with the above-mentioned listing requirement if a third party owns certain listed stocks to support business revitalization, and the Tokyo Stock Exchange recognizes that there is a prospect of compliance with the above-mentioned listing requirement within five years. As our company have entered into a capital alliance agreement with Ichigo for the purpose of supporting business revitalization, our company are allowed to apply for special treatment with a planned period until the end of March 2028, five years later.

The most significant challenge in achieving compliance with the free-float ratio on the Prime Market is reducing Ichigo's shareholding, which currently stands at 78.2% of our common stock as of the end of FY2022. Additionally, it is also necessary to reduce the shareholding percentage of the second-largest shareholder of our common stock, INCJ, which holds 5.5% of our common stock simultaneously.

Our company will engage in discussions with Ichigo and INCJ regarding the reduction of shareholding percentages to comply with the free-float ratio on the Prime Market. However, our company recognize that our company need to make further efforts to enhance our performance in alignment with the growth strategy "METAGROWTH 2026" and achieve early performance improvement. Nevertheless, even with these efforts, if the percentage of shares in circulation fails to comply with the listing requirement during the grace period until the end of March 2028, our company may face delisting.

⑤ Material Events Related to the Going Concern Assumption
Our group has incurred operating losses and significant impairment losses for six consecutive reporting periods and net losses attributable to parent company shareholders for nine consecutive reporting periods in FY2022. This has raised significant doubts about the group's ability to continue as a going concern. In response to this situation, our group is actively pursuing further cost reductions through comprehensive company-wide business restructuring efforts. These efforts include enhancing equipment utilization efficiency, optimizing asset size to boost productivity, and reevaluating our supply chain. As part of this strategic initiative, our group made the decision to sell all the shares of our manufacturing subsidiary, SE, to Suzhou Dongshan Precision Manufacturing Co., Ltd., at a board of directors meeting held on October 28, 2022. Our group subsequently completed all necessary procedures, including share transfers, by January 2023.

Additionally, regarding Higashiura Fab, which had been slated for production discontinuation by March 2023, our company reached a final agreement with Sony Semiconductor Manufacturing Corporation, a tenant of some facilities within Higashiura, to transfer ownership of Higashiura. The property delivery date for this transfer is set for April 1, 2024, based on a board of directors' resolution passed on March 10, 2023. Our group remains committed to selecting and focusing on existing businesses and optimizing management resources to further enhance profitability.

In addition to these measures, our group announced the "METAGROWTH 2026" growth strategy on May 13, 2022, with the aim of significantly improving profitability through differentiation and de-commoditization based on technology platforms. As part of this growth strategy, our group have restructured our product and business portfolio, with a focus on next-generation OLEDs, known as "eLEAP," announced on May 13, 2022, high-mobility oxide semiconductor backplane technology "HMO," announced on March 30, 2022, as well as automotive and VR products. Our group actively leverage intellectual property rights related to these areas. Our overarching goal is to establish a stable financial structure and promote business growth.

On the financial front, recognizing the importance of securing funds to address global inflation and supply chain risks, our company reached an agreement with INCJ to extend the repayment deadline for our borrowings from September 2, 2019 (with a total principal amount of 20 billion yen), until February 28, 2023. Subsequently, our company fully repaid the short-term borrowings (with a total principal amount of 20 billion yen) owed to Ichigo based on a board of directors' decision on February 10, 2023. This repayment was made using new borrowings from Ichigo (with a total principal amount of 20 billion yen) obtained on February 10, 2023. Furthermore, under this extended capital alliance agreement, Ichigo waived approximately 15 billion yen of our total debt, which amounted to approximately 101.7 billion yen (including total borrowings of 28 billion yen based on the Short-Term Loan Agreement dated December 22, 2022, new borrowings from us as of February 10, 2023, and debts transferred from INCJ on February 27, 2023).

Our company have also completed the payment and issuance procedures for our company's ordinary shares, raising a total of approximately 86.7 billion yen through physical investment after partially relinquishing the remaining debt. Additionally, our company issued the 13th set of new share subscription rights to Ichigo on March 22, 2023, with a maximum total procurement amount of approximately 173.4 billion yen.

These actions have transformed all of our borrowings into self-capital, resulting in a substantial reduction in debt, the establishment of a long-term stable capital structure, and increased flexibility in our financial policies to address future funding requirements. Our group will continue to adopt timely and appropriate funding measures, including flexible borrowing (with a total principal amount of 4 billion yen from Ichigo as of May 30, 2023), as necessitated by future funding needs. This may also include the exercise of the 13th new share subscription rights and the sale or liquidation of underperforming assets, among other strategies.

However, given the recent surge in global raw material costs, rising energy costs, increased power and transportation expenses, and global consumption declines, there is significant uncertainty concerning the assumption of a going concern for our group's cash flow.

(3) Economic Risks

① Fluctuations in the Economic Situation
As our group operates globally, fluctuations in demand for finished products resulting from shifts in the global economy could potentially impact our group's business, performance, and financial situation. In particular, the demand for high-priced consumer goods such as VR equipment and durable consumer goods like automobiles is highly sensitive to economic conditions. Therefore, if the domestic and international economy deteriorates, there is a risk that demand for our products used in these finished goods could decline, which may affect our group's business, performance, and financial situation.

② Fluctuations in Exchange Rates
Since our group conducts business with partners and in regions across the world, the costs and selling prices of products and services traded in foreign currencies are influenced by exchange rates. These fluctuations in exchange rates may negatively impact our group's business, performance, and financial situation. Additionally, assets and liabilities denominated in local currencies of overseas subsidiaries are converted to yen when preparing consolidated financial statements, thereby exposing our group's financial situation to fluctuations in exchange rates.

(4) Natural Disaster and Accident Risks

① Impact of Disaster and Other Factors
Our group operates manufacturing facilities in Japan and the Philippines, and our group has a global network of sales offices. Additionally, our group outsource module assembly to EMS (electronic manufacturing services) companies in China and Taiwan. In the event of natural disasters such as earthquakes, tsunamis, heavy rains, floods, lightning strikes, or other calamities, or if disruptions occur in our supply chain due to damage to sources of parts, computer virus infections, data breaches, epidemics, wars, terrorist attacks, civil unrest, or labor disputes, our group's production, shipping, and sales operations may be halted. Furthermore, if there is instability in social infrastructure due to factors such as decreased power supply or disrupted logistics routes resulting from disasters, it could lead to reduced production capacity, difficulties in sourcing raw materials, and delays in product delivery, potentially impacting our group’s business, financial performance, and overall financial condition.

Our group has taken various insurance policies to cover potential losses arising from such disasters, including policies for buildings, structures, equipment, inventory, and goods in transit. These policies also include coverage for business interruption and product liability. However, some of these insurance policies have deductibles, and not all damage amounts are covered.

② Environmental Regulations and Other Legal Regulations
Our group's operations are subject to a wide range of domestic and international laws and regulations. Additionally, our group must comply with various environmental regulations related to air quality, soil contamination, water pollution, hazardous materials handling, waste disposal, product recycling, climate change mitigation, energy management, and other environmental aspects in various regions worldwide. While our group diligently adheres to these regulations, there is a potential risk of business disruptions, such as restrictions on manufacturing and sales activities or investments in facilities, due to changes in regulations. Furthermore, if new regulations are enacted or existing ones are amended, compliance costs may increase. Non-compliance with these regulations could adversely affect our group's performance and reputation in society.

(5) Legal Risks

① Occurrence of Significant Lawsuits
On July 16, 2020, a lawsuit was filed by two domestic corporate shareholders, and one individual shareholder who serve as a representative for those corporations.

The lawsuit named our group and a total of 10 former and current directors of our company as defendants. The plaintiffs sought joint and several damages amounting to approximately JPY 3,858 million due to alleged inappropriate accounting treatment in our past financial statements. Our group is committed to addressing this legal challenge and will respond appropriately based on the plaintiff's claims.

② Intellectual Property Rights
Our group actively pursues the acquisition of intellectual property rights in relevant countries and regions to safeguard our proprietary technologies. However, in certain countries and regions, protection provided by intellectual property rights may be insufficient due to unique circumstances. Additionally, while our group may utilize third-party intellectual property rights with permission from the respective third parties, there is a possibility that obtaining or renewing such permission may become more challenging or may come with unfavorable conditions for our group in the future. Furthermore, competing companies may secure permission to use third-party intellectual property rights under more advantageous term than our group, potentially impacting our group's competitive position.

③ Lawsuits and Other Legal Procedures
Our group specializes in manufacturing and sale of displays that incorporate advanced technology. However, detecting defects or flaws in products utilizing advanced technology before shipment can be challenging. If quality issues arise after shipment, addressing them may entail substantial expenses related to product recalls, repairs, design modifications, and the allocation of human resources, including technicians. Such issues may also affect our relationship with customers and our group’s reputation. Moreover, our global business operations expose us to the risk of becoming involved in lawsuits and other legal proceedings in various countries. In the event our group becomes party to such legal actions, the differences in legal systems and court processes across jurisdictions could lead to substantial compensation payments or fines depending on the circumstances.

Additionally, our global presence means that investigations or lawsuits related to potential violations of competition laws may be initiated in Japan and other countries or regions concerning our display business. These regulatory investigations or legal actions could result in substantial fines or damages being assessed against our group in multiple jurisdictions. Predicting the outcomes of such regulatory sanctions and lawsuits is challenging, and they may require significant time and resources to resolve. The results of these legal challenges could have an impact on our group's business operations, financial performance, financial condition, and social reputation.

(6) Labor Risks

① Talent Acquisition
Our group recognizes that securing and developing highly skilled professionals in the technical department is crucial for maintaining a competitive advantage. However, the pool of highly skilled professionals is limited, leading to intensifying competition for talent acquisition and retention. Failure to secure or develop excellent human resources may have adverse effects on our performance and financial situation.

Moreover, if highly skilled professionals with specialized knowledge leave our group for competing companies, there is a risk that our competitiveness may decrease due to the outflow of valuable knowledge and know-how. Furthermore, the management team plays a significant role in our group's operations. If, for any reason, the management team resigns and suitable replacements cannot be found or if the management team's health or ability to respond to unforeseen events, such as legal issues, is inadequate, it may impact our group's business, performance, and financial situation.

(7) Social Risks

① Information Security
Our group holds and manages confidential information related to our group's technology, research and development, manufacturing, sales, and business activities, as well as personal information of stakeholders, customers, and business partners. While our group has implemented appropriate management practices to safeguard this confidential information, there is no guarantee that such measures will always be effective. In the event of an unexpected cyber-attack or other incident resulting in the unauthorized disclosure of our group's information, leading to third parties unlawfully obtaining or using such information, lawsuits may be filed against our group for damages. This could potentially impact our group's business, performance, financial situation, and public perception.

② Spread of Infectious Diseases
During the global spread of the novel coronavirus infection, our group implemented measures to reduce physical contact, such as recommending remote work or staggered commuting for employees, isolating workspaces, prohibiting non-essential business travel, and utilizing web conferencing systems. These measures prioritized the safety of our employees and their families while maintaining production operations.

Although COVID-19 is categorized as a Class 5 infectious disease under the Infectious Diseases Control Law, the potential resurgence of this infection or the emergence of other infectious diseases could disrupt various aspects of our group's activities, including procurement, production, logistics, and other transactions. Such disruptions could lead to delays in raw material procurement, product production, or decreased orders from customers, potentially affecting our group's business, performance, and financial situation.

③ Risks Related to Human Rights in the Supply Chain
In 2020, an Australian think tank released a report alleging that several companies, including our group, were procuring components manufactured through forced labor involving Uighur people. In response, our group conducted investigations into the facts related to two subcontractors of our supplier who were accused of engaging in forced labor. However, no evidence was found to confirm the existence of forced labor. Our group has received reports that the supplier suspended transactions with these two subcontractors and successfully transitioned to other suppliers, which our group has verified. Our group distributes the "Supplier CSR Promotion Guidebook" to all suppliers, requesting that they refrain from engaging in any human rights violations, including forced labor and child labor.

Our group also conducts self-audits using the "Supplier CSR Self-Audit Sheet" and engage in regular monitoring. However, there is no guarantee that these measures will always be effective in the future. If human rights violations occur at our suppliers, it may become difficult to procure necessary materials for our group's business activities, and transactions with customers and other business partners may be suspended. This could potentially affect our group's business, financial situation, and public perception.

④ Internal Control
Our group has established and maintained an internal control system to ensure compliance and accurate financial reporting. However, during FY2019, it was revealed that inappropriate accounting practices persisted through fictitious inventory entries and deferred expenses in past financial statements. Significant deficiencies were identified in internal controls related to financial reporting. Recognizing the importance of internal controls in financial reporting, our group took corrective action by establishing a Governance Improvement Committee in April 2020 and implementing specific measures to prevent recurrence, including strengthening the internal control function as recommended by the committee.

Consequently, as of the end of FY2022, important deficiencies that required disclosure were resolved, and it was disclosed in the "Internal Control Report" dated June 28, 2021, that our internal control system is effective. Our group will continue to implement measures to prevent the recurrence of such deficiencies, emphasize compliance in management, and enhance internal communication. Our group considers the establishment and operation of internal controls related to financial reporting as one of our top management priorities and are committed to inspecting and improving the management structures of related companies throughout the group. However, there is no guarantee that an effective internal control system can be established and maintained in the future, and inherent limitations in internal controls exist. If the measures mentioned above do not function effectively in the future or if significant deficiencies or errors in internal controls related to financial reporting are disclosed, it could impact the reliability of our group's financial reporting.

(8) Political Risks

① Geopolitical Risk
Our group operates manufacturing facilities in Japan and Philippines, and outsources manufacturing processes to China and Taiwan. Our group also has global sales presences, with a significant portion of our group's total sales coming from overseas. As our group expands our overseas operations, our group faces geopolitical risk factors, such as transferring global subsidiaries, economic and political instability in foreign countries, wage increases tied to inflation in emerging countries, deterioration of relationships with local employees, strengthened foreign exchange management, unexpected new or revised regulations, differences in tax systems, legal systems, and business environments, administrative measures such as taxation, military influences such as war and terrorism, and geopolitical risk factors such as anti-Japanese movements. These factors may affect our group's business, performance, and financial condition.