Sakata Seed Corporation and its affiliated companies (hereinafter, "SAKATA Group"), seeds and seedlings are our main commodity. As seeds and seedlings are living things, nature plays a big part in our business and we are subject to various risks including weather and natural disaster risks, breed development risks, and the risk of intellectual property right infringement. These risks are impossible to predict and involve a degree of uncertainty. They may significantly impact our future financial position, business performance, and cash flows.
We have covered the matters that may have a major influence on investors’ decisions according to their importance, meaning we have not covered all the risks. The currently unpredictable risks and non-critical risks may have an impact in the future. The future risks stated in these matters are determined by us based on the information currently available.
(1) Weather-related Risks and Natural Disaster Risks
Growing seeds and seedlings, our main commodity, is highly dependent on the weather. Therefore, weather conditions affect sales and production. First, from a sales point of view, natural disasters and bad weather, such as storms, may result in crop failure, affecting farmers’ activities and consequently creating the risk of decreasing the sales of our products. We put effort into reducing this risk by expanding our sales regions to over 170 countries across the globe and developing breeds that adapt to harsh environments. However, we recognize that abnormal weather events are increasing, and bad weather in various places may reduce our profit. In terms of producing commercial seeds, we may also run the risk of poor quality, insufficient yield, or increased production cost due to bad weather. Therefore, we diversify these risks by spreading our production across 19 countries, and further delegating the production to multiple seed producers in each region. In addition, we always keep a certain amount of safety stock. However, major weather changes or natural disasters that happen between the planting season and the seed gathering season, especially in our main production sites, may negatively impact business performance, causing a decline in profit or a significant rise in production cost due to shortage.
(2) Development Risks,including those related to human resources and the Risk of Intellectual Property Right Infringement
Taking into consideration the nature of breed development, where it requires over 10 years from setting the breeding goal, breed development risks include the risk of bearing investment costs, development feasibility risk, the risk of change in product demand, the risk of development competition with other companies, and the risk of new breeding techniques lowering the entry barrier, and thus creating more competition in development. Moreover, if the breeders who develop the breeds leave the company, there is a risk of the breeds they were in charge of getting damaged, making it difficult to finalize a high-quality product. There is also a risk of intellectual property infringement if the genetic resources are leaked, resulting in the circulation of imitation products. SAKATA Group, we establish a research and development structure that includes expanding the use of biotechnology and collaborating with external research institutes. In addition, we also implement an incentive system for developers and encourage a team system in the breeding process. We also register our varieties according to the Plant Variety Protection and Seed Act and patent them to protect our intellectual property rights. However, if there is a sudden change in demand or a superior variety is released by another company, it may negatively affect our business performance.
(3) Risk of Asset Holdings Value Volatility
SAKATA Group owns various assets and establishes management systems, such as the regular check of the current status of real estate and the development of its internal regulations regarding cross-shareholding, in an effort to perform appropriate evaluation and management. However, if there is a sudden decline in the value of land, securities, or other assets, it may negatively affect our business performance. Moreover, as mentioned in “(1) Weather and Natural Disaster Risks,” due to the nature of our business where the production of commercial seeds is heavily impacted by the weather conditions, we keep a certain amount of seeds, which are our inventory assets, as a safety measure to fulfill our responsibility of providing supply reliability to our clients and to stably continue our business. As a result, the quality of the seeds may deteriorate, and the demand for them may change, causing the risk of increased loss due to disposal or valuation of the inventory assets. We regularly review our valuation based on quality and sales trends. However, if our production and sales performance differ significantly from the plan, it may negatively affect our business performance.
(4) Quality and Security Risks
At SAKATA Group, we follow the founder, Takeo Sakata’s, motto of “Quality, reliability, and service.” Gaining trust in quality and security is one of our top priorities. We have established a quality management department and we check our products against our quality standards. Simultaneously, we take measures to handle consumer complaints appropriately, such as establishing a Customer Relations Office. However, due to the nature of our products as living things, unexpected difficulties may occur in regard to quality standards and consistency. Risks may also occur due to factors unrelated to the seeds themselves, such as environmental factors and technical issues in production. This may negatively impact our business performance.
(5) Country Risk
SAKATA Group operates production, R&D, and sales bases in 22 countries around the world, including Japan. We have 5 farms and R&D facilities in Japan and 14 in 11 countries overseas. Some of these regions that we operate in have the following risks.
a. Unforeseen establishment or abolishment of laws or regulations
b. Political or economic turmoil
c. Social turmoil due to terrorism or conflict
d. Occurrence of earthquakes or other natural disasters
e. Occurrence of information-related problems, such as computer viruses and leakage of various types of information
Operating business globally has the advantage of diversifying sales and production risks. On the other hand, it increases the likelihood of risk events occurring in specific regions. We put effort into enhancing our operational and risk management systems to regularly gather information from each country in which we operate in a timely manner and make prompt decisions. However, if these events take place, there is a risk we will not be able to continue operating in this region. There is also the risk of a significant decline in demand and the risk of withdrawing from seed production in this region. This may negatively impact our business performance.
(6) Currency Exchange Fluctuation Risks
SAKATA Group produces and sells its products in various locations overseas. The financial statements that are prepared in the local currency of each region are then converted to Japanese yen in order to prepare the consolidated financial statement. Therefore, even if fluctuations in foreign exchange rates do not cause the local currency to fluctuate, it affects our business performance. Moreover, currency exchange fluctuation affects international transactions in which we source or export some of our raw materials and products. To minimize this impact, we keep a constant eye on changes in each currency and put effort into reducing risks under an appropriate management system by utilizing forward exchange contracts and currency options. However, if there is a drastic, unexpected fluctuation in exchange rates, it may negatively affect our business performance.
(7) Business Partner Credit Risk
SAKATA Group conducts transactions with various domestic and international clients and suppliers, and we grant credit in the form of accounts receivable and advance payments. We implement measures to manage credit risk, such as setting transaction limits based on regular credit checks and credit risk and appropriating allowance for doubtful accounts. However, if the financial condition of our business partners declines or they go bankrupt, it may negatively impact our business performance.
(8) Risks due to the spread of COVID-19
The restriction of people’s and goods’ movement and the economic trends of each country accompanying the global spread of COVID-19 are affecting the conditions of the agricultural and horticultural markets, including the seed industry.
The main risks of our business include the following.
a. Risk of decline in the consumption of flowers and vegetables due to a global recession
b. Risk of decline in demand for flowers as a result of a decreased number of tourists and events due to the restriction of people’s movement
c. Risk of decline in planting itself in the vegetable and flower production sites due to labor shortage
d. Risk of not delivering seeds to the production area in time for planting season due to logistics chaos
e. Client credit risk
f. Risk of currency exchange in emerging countries
SAKATA Group, we have established a crisis management committee chaired by the president in February 2020. We are focusing our efforts on fulfilling our responsibility of stable seed and seedling supply as the top priority to ensure the safety of our stakeholders and support food production.
Our accounting estimates are based on the assumption that the COVID-19 pandemic will gradually calm down through the second half of the fiscal year ending May 2022. Under this assumption, we calculate accounting estimates, such as inventory asset valuation, impairment accounting for non-current assets, and the recoverability of deferred tax assets, based on all the information available at the time of preparing the consolidated financial statements. However, it is still unclear when the COVID-19 pandemic will end, so it is difficult to predict its net impact. If the situation worsens beyond the aforementioned assumption, then there is a risk it may negatively affect our business performance.