Risks Relating to the Operations

The subsidiaries in the Group operate in different markets with different customer segments and different underlying driving forces, and are therefore subject to different market-specific risks. The following are, as far as the Board of Morphic is able to judge, the most significant risk factors for each area of operation for the subsidiaries.

Wind Power

Raw Material Prices

One of the single largest production-related risks concerns the development of the price of steel. The towers for the wind turbines are made from steel, which means that steel market developments could affect the results.

Electricity Prices

The development of the Wind and Hydroelectric Power seg­ment is to a large degree dependent on the development of the price of electricity and on laws and regulations govern­ing the energy market. For example, the high electricity prices of recent years have benefited wind power-generated electricity. A significantly lower electricity price would make wind power-generated electricity less profitable. In the longer term this could lead to lower demand. A tempo­rarily lower electricity price could prompt wind power cus­tomers to delay new investments in wind turbines.

Access to Components and Delivery Delays

The Company aims to grow by selling high-quality wind turbines with relatively short delivery times. Quality, delivery security and the ability to generate revenues are crucial parameters. To achieve its goal, the Company has invested in a tower factory that has raised production capacity by a factor of ten. In this segment the limitation is not on the demand side, but depends on delivery capacity. The component that has until now constituted the main limitation on delivery capacity is blades for the rotor. As the market opportunities greatly exceed the Company’s delivery capacity, the Company has taken measures to increase capacity together with its subcontractors. There is a risk that the supply of blades will limit the Company’s ability to deliver as planned.

Product Liability

The manufacture and installation of wind turbines are subject to a series of certifications and controls that are designed to prevent, as far as possible, any errors in the construction, in materials or in the manufacturing process and thereby ensure the reliability of the products. There is still a risk that errors will pass the controls or that controls are inadequately performed or designed. There is also a risk that external conditions that are beyond anyone’s con­trol or ability to predict may cause reliability problems or failures. Responsibility in case of such disruptions will depend on the circumstances of each individual case, but may fall on the Company, subcontractors, the customer or another party.

Competition

As regards the wind power business, competition in the Swedish market is limited to a small number of players. There is a risk that more players will seek to establish themselves in Sweden and thereby affect the Company’s ability to retain a high market share. Moreover, DynaWind is a new player and WinWinD’s wind turbines are rela­tively new on the market. There is a risk that customers will prefer to choose an established supplier with a long history.

Flow Plates

Delays at Morphic’s Customers

The Company’s sales are dependent on the Company’s cus­tomers commence the development of their introduction onto the market of fuel cell products. Delays at the Company’s customer sites relating to market introductions of fuel cell products therefore constitutes one of the principal operating risks. Delays at customer sites may be market-based and technology-based. The timing and choice of the geographical area for market introductions constitute a significant part of the Company’s customers’ strategies. As always when new technology is being introduced, there may be teething problems or delays which are difficult to predict at present.

Competition

In the fuel cell business the main competition comes from other methods of production, including etching and mill­ing. The Company’s competitors are mainly established, large component manufacturers which are able to com­pete, despite using a markedly inferior production process, thanks to their size and lengthy experience of volume pro­duction of components.

The Company estimates that its patents and the continu­ous development of its own production process constitute a significant competitive advantage in relation to estab­lished component manufacturers.

Ship Propulsion

Customer Dependence

Aerodyn AB is dependent on the development of the inter­national shipping and shipbuilding market. A decrease in shipbuilding could have a negative impact on the develop­ment of the business. The ship propulsion business is global, and Morphic is competing with a large number of players.

Raw Material Prices

Rising prices for stainless steel and bronze, primarily, are increasing the Company’s raw materials purchasing costs, but since the Company’s products are priced individually on a per-order basis, this will not affect the Company’s margins. On the other hand, rising commodity prices increase the cost of building new ships, creating a risk of falling demand for the Company’s products.

Components

New Manufacturing Process

Cell Impact’s manufacturing process is relatively new on the market. Its advantages for the manufacture of flow plates are evident, but it may prove more difficult to estab­lish the process for other components. There is also a risk that customers will prefer to stick to an existing process, despite the benefits provided by the Company’s offer. There is also a risk that the work of demonstrating the benefits of the process to potential customers will take longer than expected.

Electricity Prices

The business operation linked to hydro power is depen­dent on the market’s continued desire to improve the per­formance of existing hydroelectric power plants. A lower electricity price could postpone such investments.

Competition

Contract production of heavy components and hydro power components for the Scandinavian market has a lim­ited number of competitors, since local production is pre­ferred. For contract production of small components, the competition consists of established manufacturing pro­cesses in a global market.

Energy Technology

New Product

Morphic’s energy systems are sold in a new and changing market. There is a risk that selling and establishing the systems in the market will take longer than expected due to difficulties in choosing the right types of customers in the initial phases. As always when introducing new tech­nology, teething problems or delays may also occur that are difficult to predict at present.