KAGA ELECTRONICS CO.,LTD.

The following section details potential risk factors that could potentially affect the consolidated business performance, share price, financial standing and otherwise largely with respect to the business of the Group.
Furthermore, forward-looking statements contained in this document are based on conclusions that have been made by the Group as of the end of the fiscal year under review (the fiscal year ended March 31, 2020).
The Group sells semiconductors and other electronics products that are primarily installed in consumer devices and constitute an important part of its operating revenues. Those sales are affected by economic conditions in nations and geographic regions where the Group engages in sales of such products. Accordingly, the Group’s operating results and financial standing could be adversely affected by economic volatility in our major markets such as Japan, North America, Europe, Asia, and also by expanding and contracting demand due to such volatility. The Group’s operations involve product sales and manufacturing overseas. Sales, expenses, assets and other amounts denominated in local currencies in respective geographic regions as presented in the consolidated financial statements are converted to Japanese yen. Depending on the exchange rate at the time of conversion, such amounts could be adversely affected upon their conversion by volatility in exchange rates, despite the amounts remaining unchanged in the local currency.
We conduct currency hedging transactions particularly by means of forward exchange contracts in order to reduce risk of exchange rate volatility, and otherwise endeavor to minimize any effects of exchange rate volatility between major currencies such as the USD, EUR, GBP, CNY and JPY. However, the Group’s operating results and financial standing could be adversely affected by the timing of such forward exchange contracts and any sudden fluctuations in exchange rates. We engage in numerous overseas business transactions such as those involving sales of components encompassing electronics manufacturing services (EMS) for developing and producing products under contract. We also have sales and manufacturing sites in respective countries. Accordingly, our operating results and financial standing could be adversely affected by our exposure to country risk, which derives from external factors such as those marked by deteriorating political and economic factors on a local basis, and by changes in laws and regulations.
Meanwhile, the Group outsources some of its productions to external manufacturers in order to achieve greater manufacturing efficiency. Accordingly, our facilities management and manufacturing could be adversely affected by environmental changes, labor shortages, strikes and other unforeseen events occurring at such production sites. Moreover, we could also incur adverse effects with respect to our operating results and financial standing due to the potential emergence of a situation where it would become difficult for us to procure components and manufacture products due to a shortage of labor. Such a situation could materialize should an infectious disease proliferate or an earthquake or other such disaster strike.
The market for electronics products handled by the Group (general electronic components, EMS, semiconductors, products related to information devices, etc.) is epitomized by stiff competition, and also marked by technological innovation, changing customer needs and frequent entry of new products. Amidst that market scenario, we compete with many manufacturers and trading companies both in Japan and abroad. Accordingly, the Group’s operating results and financial standing could be adversely affected should it find itself unable to mount opposition by means of competitive pricing, products, technologies or otherwise, against intensifying competition involving low prices or an increase in new market entrants.
Short product life-cycles are prevalent in some markets particularly in our other businesses, due to changing consumer preferences. As such, our operating results and financial standing could be adversely affected should we find ourselves unable to keep pace with intense waves of market expansion or contraction in such markets.
The Group maintains ties with over 2,000 manufacturers spread throughout Japan and overseas, and is able to make purchases for a wide variety of products encompassing everything from electronic components, semiconductors and other electronic devices, to products that include personal computers and related equipment, consumer electronics, communications equipment and toys. However, our operating results and financial standing could be adversely affected should we find ourselves unable to make purchases at optimal times or prices due to changing market trends or consumer needs. Moreover, the following risks could materialize as a consequence of the Group’s distinctive approach to making purchases.

• i.The Group makes purchases both domestically and abroad of electronics products that include commodity memory chips and other semiconductor products and electronic components, and it supplies such products to its customers both in Japan and overseas. However, our operating results and financial standing could be adversely affected under certain situations. For instance, a domestic or overseas manufacturer who acts as one of our suppliers could encounter financial or other business-related problems, or otherwise we could face diminishing competitiveness of products or decreasing demand with respect to products.

• ii.The Group sells products it has purchased from personal computer manufacturers both domestically and abroad. However, our operating results and financial standing could be adversely affected by factors such as changes in the terms and conditions of a manufacturer who acts as a supplier, or by changes in purchase pricing and profit margins.

• iii.The Group sells products such as those involving sports which it has purchased. However, our operating results and financial standing could be adversely affected by factors such as changes in the terms and conditions of a manufacturer who acts as a supplier, or by changes in purchase pricing and profit margins.

The Group develops, manufactures and sells power supplies, optical equipment and other such products of the Company’s own brand. Although going forward we aim to expand our business by developing new products and technologies, such efforts entail risk as follows.

i.Risk pertaining to inventories
ii.Risk involving warranties with respect to defective products
iii.Risk incurred in securing funds and resources needed to invest in new products and technologies
iv.Investment risk incurred with respect to funds and resources for new products and technologies
v.Risk of lacking an adequate ability to address the rapid pace of technological innovation

The Group’s operating results and financial standing could be adversely affected under a situation where it faces the future prospect of diminishing growth and profitability should we find ourselves unable to develop appealing products due to the aforementioned risks, or as a result of the Group failing to sufficiently predict industry and market changes. The Group is subject to the legal restrictions of respective nations, given that it develops business both domestically and abroad. In addition, we face the possibility that in the future a nation might establish legal restrictions or other such measures currently unforeseen. Accordingly, the Group’s business activities could be curtailed should we fail to comply with such legal restrictions or other such measures. Under such a scenario, our operating results and financial standing could be adversely affected. The Group incurs stock market price volatility risk because it maintains shareholdings that include shares of financial institutions and shareholdings of companies involved in its purchases and sales. Moreover, we do not employ any special hedging instruments that would otherwise address such risk of share price volatility. The Group is subject to risk in connection with operations both domestically and abroad, with respect to the potential for litigation, disputes and other legal proceedings. The legal affairs operations (Business Administration Department) of the Group handle all aspects of such legal risk. Also, our control framework calls for the reporting of matters as necessary to both the Board of Directors and the Supervisory Board. During the fiscal year under review (the fiscal year ended March 31, 2017), the Group did not become subject to any lawsuits that would have a material impact on its business operations. However, the Group’s operating results and financial standing, for instance, could be adversely affected should the Group become subject to a major lawsuit or other such proceedings in the future. The Group’s retirement benefit costs and liabilities are calculated on the basis of assumptions made with respect to factors such as the discount rate and other actuarial calculations, and on the basis of the expected rate of return on plan assets. Our future projected costs and reported liabilities are generally affected in cases where actual results vary with respect to our assumptions, or where the assumptions have changed. Accordingly, the Group’s operating results and financial standing could be adversely affected under such scenarios. The Group maintains frameworks for managing personal information in order to prevent a situation where personal information becomes compromised as prescribed by Japan’s Act on the Protection of Personal Information. Nevertheless, given the increasingly diverse nature of the environment surrounding personal information in the prevailing information-based society, a situation could emerge where personal information becomes compromised due to unforeseen circumstances. Accordingly, the Group’s operating results could be adversely affected under such circumstances, particularly due to potential loss of the Group’s public credibility accompanied by expenses incurred to address such issues.
Furthermore, we are responding to the GDPR (EU General Data Protection Regulation), which came into force in May 2018, as necessary. The Group considers M&A to be a means of expanding operations. When conducting M&A, although we conduct detailed due diligence, etc., with regard to the finances and contractual relationships of the target company in order to avoid purchasing risks to the extent possible, the Group's results and financial status may be impacted if the target company is unable to generate the profits expected when calculating value or if contingent liabilities that could not be detected at the time of the M&A or unforeseen liabilities, etc., manifest. The outlook is unclear for the environment in which the Group conducts its business due to the effect of the spread of the novel coronavirus disease (COVID-19). The Group places the utmost priority on the safety of all employees and stakeholders, and is promoting measures such as thorough hygiene management, staggered working hours, and working from home, and it is implementing measures to prevent the spread of the disease. However, stay at home orders and stop work orders impact not only the Group, but also our trading partners. At present the impact on the Group's results is limited; however, if the situation continues for a long period and there is increased spread of infection or if changes to people's lifestyles become entrenched, there may be further impact on the Group's results and finances.