Management Policy

Business Risks

The following summarizes the risks that could affect the operating results, stock price, financial status and other factors of the Group. Please note that items of risks stated below are not a comprehensive list of risks concerning our business and that items regarding future matters stated below are determined by the Group as of the submission date of our annual securities report.

Overseas Sales and Fluctuation of Exchange Rate

The ratio of overseas sales of the Group in the immediate two consolidated fiscal years is 89.5% both in the previous and current consolidated fiscal years, which we consider as a high ratio. Therefore, performance of the Group may be affected by the trend of overseas markets.

We plan to mitigate the risks caused by the fluctuation of exchange rates through hedge transactions utilizing derivatives, but it is difficult to avoid such risks entirely. In addition, if sales price is revised, or orders increase or decrease, performance of the Group may be affected.

High Dependency on Specific Suppliers

The Group may depend upon specific suppliers for the supply of raw materials such as basic fabrics and resins. The Group has kept close relationships with such specific suppliers in order to procure raw materials stably. Performance of the Group may be affected if the price of materials rises sharply or if the procurement of raw materials meets a significant obstacle such as a shortage of raw materials because of steep increase in demand, natural disasters, quality problems, or a policy change, bankruptcy, business failure or merger of the specific suppliers.

Product Development and Cost Competition

The synthetic leather industry is under severe competition so that we are always required to develop new products by research and development as well as to satisfy needs of our customers. To achieve this end, we need to continuously invest in our product development regardless of the fluctuation of profit of the Group. Meanwhile, even if we successfully develop high-quality and high-value-added products, there are possibilities where the performance of the Group may be affected by competitors in the Asian area in the event that they succeed in stably supplying products with the same quality as those of the Group at cheaper price.

Defects in Products

The Group manufactures high-function and high-quality synthetic leather products through our established quality control system, and supplies them to the market. If, however, we incur a significant amount of cost due to defects in products, including damage compensation for our customers, performance of the Group may be affected.

Production Facilities and Logistics Bases
a. Legal Restrictions
Although there are no legal restrictions over the products of the Company, the Group has been under various legal restrictions and administrative guidance relating to the ground subsidence monitoring, VOC emissions regulations, fuel consumption control by the Act on Rationalizing Energy Use and handling of hazardous materials in connection with our facilities and production activities. If these legal restrictions are tightened in the future, performance of the Group may be affected due to increase of capital investment and related expenses.
b. Influence by Disasters or Power Failure
The products of the Group are manufactured at the Saitama Office located in Gyoda, Saitama Prefecture and at the Gunma Plant located in the town of Ora, Ora County, Gunma Prefecture. If manufacturing equipment is damaged due to disasters, power failure or other events occurring in relation to these production facilities, or material suppliers suffer from catastrophic damage, the operations, production and shipping may be suspended. If restrictions on use such as total volume control over the supply of energy including electricity and gas due to disasters or other factors occurring in the future apply to the production facilities, our production activities may be significantly affected.
In addition, our major logistics bases are located in the state of New York and Texas in the U.S. If a disaster or other event occurs in these areas, shipping may be suspended.
c. Securing Human Resources and Technology Inheritance
The products of the Group have been manufactured and developed by our employees with high level of knowledge and experience in technology and design. If we lost such human resources due to increasing mobility of employment, we would not be able to educate and train new employees for a sufficient period of time in order to pass on such technology, knowledge and experience, resulting in performance of the Group being affected.
Major Shareholders of the Company

The total number of issued shares of the Company is 8,650,000 as of the submission date of our annual securities report. Tokyo Small and Medium Business Investment & Consultation Co., Ltd. ("SBIC East Japan"), the largest shareholder of the Company, owns 1,102,000 shares of the Company, equivalent to 12.74% of the total number of issued shares.

SBIC East Japan was established as a policy-implementation organization in order to enhance the equity capital of small and medium sized enterprises and promote their sound growth and development in accordance with the Small and Medium-sized Enterprise Investment Business Corporation Act (Act No. 101 of June 10, 1963). SBIC East Japan has been the largest shareholder of the Company since it undertook a capital increase of the Company in 1972. Although the investment policy of SBIC East Japan is to hold shares for the long term, the purpose of investing in unlisted shares is to sell them after being listed. If SBIC East Japan changes its policy for holding shares and decides to sell the Company's shares in the future, the balance of supply and demand may be affected adversely in the short term, resulting in a decrease in the market price of the Company's shares.

The founders of Ultrafabrics, LLC, Clay Andrew Rosenberg and Barbara Danielle Boecker-Primack own 1,179,300 and 670,700 of class A preference shares respectively, including those held through trust. The Company and the founders executed an agreement in which they are not permitted to sell or dispose of the class A preference shares for three years after their acquisition of the shares without prior consent of the Company. If they sell the shares after the lapse of three years from their acquisition, the balance of supply and demand may be affected adversely in the short term.

Group Management System

The Group changed its corporate structure to a holding company as of October 2017. Ultrafabrics Inc. located in the U.S. and wholly owned by the holding company sells products and conducts brand management, and Daiichi Kasei Co., Ltd. located in Japan manufactures the products and conducts fundamental research. The product development and quality assurance shall be jointly conducted by both the companies. Given these circumstances, we need to organize the internal control system and management system of the Group including the holding company and to continuously enhance these systems.

However, if these management systems do not function sufficiently, performance of the Group may be affected.