SANWAYUKA INDUSTRY CORPORATION

Given the nature of the business handling a wide variety of chemical substances and hazardous materials, there is a risk that serious occupational accidents may occur. In March 2017, a fatal accident caused by an explosion and fire occurred at the Ibaraki Business Office, and if such an incident were to recur, in addition to victim compensation and restoration costs, it could adversely affect the business due to reputational damage. The Group continuously implements measures such as establishing an Occupational Health and Safety Committee, instituting "Sanwa Safety Day," and holding joint safety conferences with local fire departments.

The industrial waste treatment business requires permits from prefectural governors and others based on the Waste Management Act, and these permits must be renewed upon expiration (typically every 5 years, or 7 years for excellent certified operators). If illegal dumping, false manifest entries, violations of treatment facility standards, or similar issues occur, the company could be subject to administrative dispositions such as business suspension orders or permit revocation, which could have a significant impact on business activities. Although no violations have occurred to date, continuous compliance with numerous laws and regulations, including the Waste Management Act, the Fire Service Act, and the Poisonous and Deleterious Substances Control Act, is required.

Compliance with environment-related laws and regulations such as the Air Pollution Control Act, the Water Pollution Control Act, and the Soil Contamination Countermeasures Act is required, and if environmental pollution occurs due to unforeseen circumstances, liability for damages and restoration costs may arise. If environmental regulations are further tightened in the future, significant expenditures may be required for equipment renovation, replacement, or expansion. The company strives to prevent environmental pollution through appropriate equipment installation at each plant and continuous monitoring and training.

Since recycled fuel and recycled organic solvents are linked to crude oil and naphtha prices, and recycled metals are linked to precious metal and rare metal market prices, a sharp fluctuation in these market conditions could lead to a decrease in sales volume or a decline in selling prices. Since commodity market conditions are influenced by external factors, this is an area that is difficult for the Group to control. The sales structure of recycled products, in which market fluctuations directly affect earnings, represents a business vulnerability.

With increasing attention on the environmental business, there is a possibility of an increase in new entrants from other industries and industry consolidation (such as mergers). If price competition intensifies in areas where the Group's trading area overlaps with competitors, it could lead to a decline in profitability and adversely affect operating results. While permits and licenses serve as a barrier to entry in the waste treatment business, an increase in new entrants that supplement financial strength and technological capabilities is anticipated.

At the end of the current consolidated fiscal year, interest-bearing debt stood at ¥7,984 million, with an interest-bearing debt ratio to total assets of 30.7%, as capital expenditures and working capital are funded through bank borrowings and bond issuance. With increases in capital expenditures and working capital expected to continue alongside business expansion, if the trend of rising interest rates continues, an increase in financial expenses could affect operating results. The company strives to strengthen its financial condition by reducing its borrowing ratio, but the risk of changes in the external interest rate environment remains.

Natural disasters such as major earthquakes, torrential downpours, and lightning strikes could cause extensive damage to plant buildings, machinery and equipment, storage facilities, and transport vehicles, potentially rendering them inoperable for extended periods. The spread or prolongation of infectious diseases that could cause a pandemic may disrupt business continuity through economic stagnation or infection among employees. Although regular natural disaster preparedness drills are conducted, the risk of business interruption in the event of severe damage cannot be eliminated.

Resource recycling of waste through chemical methods is a business requiring advanced technology, and securing and developing excellent talent is key to business continuity and expansion. Competition for recruitment is intensifying due to the decline in the young working-age population caused by the falling birthrate, and there is also a risk of turnover among hired personnel. If problems arise in securing and developing talent, or if excellent personnel leave the company, this could affect operating results through a decline in technological capabilities.

The company handles confidential information of business partners, proprietary sales, manufacturing, and technical know-how, and personal information of employees, and there is a risk of external leakage due to intentional acts or negligence. If information leakage occurs, it could affect operating results through a loss of sales due to damage to social credibility, compensation for damages, and additional security measure costs. The company strives to ensure thorough awareness among all employees through the establishment of information management regulations and the implementation of security measures.

The company holds numerous tangible fixed assets such as plants, machinery and equipment, storage facilities, and transport vehicles, and if estimated future cash flows decline, it may become necessary to record an impairment loss. If the utilization rate of specific equipment declines due to deterioration of the business environment or changes in market needs, there is a risk that a decline in recoverability could affect the financial position. Although the company conducts regular assessments of recoverability, impairment risk may materialize in the event of a sudden change in the external environment.