NIHON KAGAKU SANGYO CO.,LTD.

Non-ferrous metal and petroleum-related raw materials used in the Chemicals Business, and iron, stainless steel, aluminum, etc. used in the Building Materials Business, may spike or plummet sharply due to geopolitical risks centered on the Middle East, global supply-demand conditions, and speculative capital movements. There is a risk that cost increases cannot be passed on to selling prices, and a risk that selling prices are affected in advance of a decline in market prices. In addition, since production of non-ferrous metals and petroleum-related raw materials is concentrated in specific countries, there is also a risk of supply disruption due to political, economic, or natural disaster-related troubles.

The industrial chemicals manufactured and sold by the Group are mainly supplied as intermediate materials to manufacturers, and if a customer manufacturer changes its business strategy, there is a risk that delivery of the relevant products may be discontinued at the customer's discretion. In product categories with a high degree of dependence on specific customers, the impact on business performance could be significant. The Group seeks to diversify through multi-directional, multi-product, small-lot supply, but risk remains at the individual product level.

In order for the Group to maintain product competitiveness in its business fields, continuous development of new products and technologies is required. However, there is a risk that R&D investments may not necessarily yield the targeted results, which could make it difficult to recover the investment. Amid intensifying technological competition with competitors, delays or failures in development could lead to a decline in market competitiveness.

While the Group is systematically and gradually expanding its production and sales sites overseas, there is a risk that unforeseen events such as natural disasters, changes in laws and regulations, terrorism, or the outbreak of war in the host country could disrupt local production and sales. The Group has actual experience of being affected by large-scale flooding in Thailand in the past, demonstrating the reality of overseas risk. Adverse effects on business performance and financial condition are a concern.

Some of the industrial chemicals manufactured and sold by the Group, as well as some raw materials used, include toxic substances and hazardous materials designated by law. If an unforeseen incident occurs during use, storage, or transport, resulting in fire, theft, or leakage, this could cause fire, environmental contamination, or harm to human health, and the Group could be held liable for damages. While the Group makes every effort to manage such risks from the standpoint of legal compliance and internal control, the risk cannot be completely eliminated.

While the Group strives to comply with quality standards such as ISO9001 as well as related laws and regulations and contractual standards with users, if an unforeseen quality issue occurs, there is a risk that the reputation of the Group's products as a whole could decline. Quality problems can not only lead to customer attrition and suspension of business relationships, but could also have a material impact on business results. Although every effort is made at each stage of management, development, production, and sales, risk remains.

While the Group acquires intellectual property rights related to its products and strives to respond appropriately, there is a risk of infringement by third parties. On the other hand, if a newly developed product infringes on a third party's intellectual property rights, there is a risk that the Group could face claims for damages, and it is explicitly stated that there is no guarantee that the Group's investigations are sufficiently thorough and comprehensive. Intellectual property disputes could lead to litigation costs and business constraints.

Having experienced the Great East Japan Earthquake, the Fukushima nuclear accident, and large-scale flooding in Thailand, the Group has formulated and implemented a Business Continuity Plan (BCP). However, if a disaster exceeding the assumptions of the BCP occurs, there is a risk of a material impact on business performance. Although measures have been taken based on past disaster experience, complete preparedness for unforeseen events is difficult. If domestic or overseas production or sales sites are affected by a disaster, there are concerns about impacts on the entire supply chain.

If infection with COVID-19 or other infectious diseases spreads among the Group's employees, there is a risk of a temporary suspension of operations, which could have a material impact on business performance. Given the nature of manufacturing operations, there are processes for which a shift to remote work is difficult, which could constrain the continuation of production during an outbreak. Infectious disease risk could also simultaneously affect multiple sites both in Japan and overseas.

The decline in the domestic working population and the progression of the low birthrate and aging society have become major issues, creating a risk that labor shortages and rising labor costs could make it difficult to secure and develop the excellent human resources essential for business expansion. It is explicitly stated that if the Group is unable to secure and develop human resources, or if labor costs continue to rise, this could adversely affect business performance and financial condition. A shortage of manufacturing and technical personnel could also directly lead to a decline in production capacity and product development capability.