Operational Risks

The following describes the main matters we think have a significant effect on decisions of investors in respect of the risk of business deployment of our group. Also for matters not applicable to such risk factors, those we think significant in investment decisions and the understanding of our group’s business activities are described from the viewpoint of aggressive information disclosure to investors.
Our group will strive to avoid these risks and deal with these risks if occurring after recognizing the potential occurrence of these risks. We think it necessary to make decisions on investment in our shares after carefully examining the matters stated in this item and matters other than this item stated herein. Please note that those stated below do not comprehensively cover all risks related to investment in shares of the Company.
We have omitted providing information regarding the likelihood and timing of each risk’s emergence or the extent of its projected impact on the Group’s financial position and results of operations, as we cannot quantify them reasonably.

1. Intellectual property rights in software

Some companies claim that publicly available free software applications and OSS applications infringe copyrights and patents that they own, and have taken legal action against such alleged infringements.

The Group will continue to pay close attention to such companies that have filed lawsuits. Should their claims of infringement be upheld in court, the Group would be compelled to change course in its OSS-related businesses, which in turn could affect the Group’s financial position and business performance.

The Group has been selling software applications developed in-house and has, to date, never faced any liability claims or injunctions filed by other companies for alleged infringements of intellectual property rights, including copyrights. There is, however, always a risk that other companies may own patents and other intellectual property rights of which the Group is not aware in the business sectors in which we operate as it is an almost impossible task to track every intellectual property right that others may have. Moreover, there is a possibility that a third party may establish a patent in the business sectors in which the Group operates. Should a third party file a liability claim or injunction against the Group for patent infringement, the Group’s financial position and business performance might be affected.

2. Competition

The IT industry is highly competitive with thousands of small and large system integrators, computer vendors, and software vendors vying for business in commercial and technology fields in which they excel, as well as in industry sectors in which they have amassed experience and expertise.

The Group will continue to step up its research and development efforts and enhance the effectiveness of sales and marketing operations so as to maintain a competitive edge in this market. However, if the Group’s competitive advantage were to be seriously threatened by existing competitors and disruptive new entrants, the Group’s financial position and business performance might be affected.

3. New businesses

The Group operates in the global IT arena, in which new technologies and solutions constantly emerge. To sustain the growth of the Group’s business in this industry, it is imperative to meet the ever-changing needs of the market by creating new businesses, adding new subsidiaries and affiliates, as well as developing and delivering new products and services. However, if changes in internal and external business environments should prove to hamper us from pursuing such ventures as scheduled, we might reconsider our development and marketing plans. If we determine that any of these initiatives would not generate sufficient return as expected, we might terminate its implementation in midcourse.

We sometimes invest upfront when creating new businesses and developing new products and services. If we cannot raise sufficient capital to invest in such ventures, we might not be able to pursue them as planned, which might affect the Group’s financial position and business performance.

4. Currency fluctuations

Fluctuations in foreign exchange rates may affect the Group’s financial position and business performance, as procurement and sales of some of the Group’s products are denominated in foreign currencies, and as the revenues, profits, and assets of our overseas subsidiaries posted in local currencies are converted into Japanese yen when preparing the Company’s consolidated financial statements. Although the Company takes steps to effectively alleviate risks associated with transactions denominated in foreign currencies, unforeseen fluctuations in exchange rates beyond its control might affect the Group’s financial position and business performance.

5. Talent pipeline

  1. Talent acquisition, development, and retention

    To remain on a solid growth path, the Group must continue to research and develop advanced technologies that will drive our open system infrastructure business and application business and continue to acquire, develop, and retain talent capable of meeting diverse business needs. The Group has been filling gaps in its talent portfolio by hiring employees with potential for growth.

    If talent acquisition, development, and retention should not proceed as planned, our talent pipeline is likely to lose its robustness, which might affect the Group’s business strategy and performance.

  2. Dependence on a key person

    Nobuo Kita, the Company’s representative director and president, has been at the helm of driving the growth of the Group’s business by setting long-term management policies and making strategic business decisions. The Group realizes that it depends heavily on his leadership and vision for the success of its business.

    To manage the growing business more effectively, the Group has been shoring up the management team by delegating decision-making authority to lower-level members in the team and bringing in additional members to the team. To accelerate business expansion, the Group has been hiring experts and professionals with experience in the fields into which the Group has been diversifying. The Executive Committee, which comprises executive officers and others, has been established to collectively address day-to-day operational issues without relying too heavily on Kita’s leadership and counsel. In addition, the Company has on its board of directors an outside director who has years of experiences in the IT industry, and seeks his professional advice.

    The Group will continue to build a stronger management team by bringing in new members internally and externally so as to make it less dependent solely on Kita’s leadership. If, for whatever reason, Kita should become unable to continue his leadership role in the Group before the Group makes its management team more robust as planned, it might affect the Group’s business strategy and performance.

6. Acquisitions and strategic partnerships

The Group has the option to acquire all or a portion of a company outside the Group as part of its efforts to expand its business. Before making decisions on acquisitions or strategic partnerships, we conduct a thorough due diligence assessment of the business details, contractual obligations, and financial soundness of a potential target for acquisition or partnership to identify and avoid risks. This, however, does not preclude the possibility that, after investing in or acquiring the company, we might find the company having contingent or unidentified liabilities or not delivering performance as expected or planned, which might adversely affect the Group's financial position and business performance.

7. Major disasters and pandemics

The Group maintains disaster preparedness by inspecting the condition of its facilities and equipment and conducting emergency exercises periodically. However, should a major natural or human-caused disaster occur in areas in which the Group operates, the Group’s normal business operations might be disrupted by human or property damage, and its financial position and business performance might be adversely affected.
To reduce chances of employees contracting COVID-19 and to keep operations running amid the pandemic, the Group has asked its employees to switch to teleworking completely except in a few cases where in-office work is required with stringent preventive measures in place against the virus. However, should the pandemic continue to spread at an alarming rate and the Group’s normal business operations be disrupted, its financial position and business performance might be adversely affected.

8. System risks

The Group’s businesses rely on uninterrupted access to computer systems, cloud services, and communication networks. To reduce chances of disruption caused by system failures or cyberattacks, we have in place a variety of safeguarding measures, including 24/7 system monitoring, a redundant system configuration, backups, and multilevel cybersecurity solutions. Should these stringent safeguarding measures be compromised by a systemwide failure, a cyberattack, unauthorized access to the system, or a computer virus, which might result in disruption of our computer system or in leakage, damage, or tampering of critical data in our possession, the Group’s financial position and business performance might be adversely affected.

9. Providing support for system development and implementation

The Group provides support for system development and implementation to corporate clients. Before signing a project contract with a client, we conduct an extensive feasibility study to determine whether the project can be completed on schedule. If a contracted project should fall behind schedule, project cost might increase, opportunity cost might be incurred, and/or a delay penalty might be imposed upon us by a client, any one of which might adversely affect the Group’s financial position and business performance.

10. Selling management support systems to financial institutions

The Group sells management support systems to financial institutions. In this business, revenue is prone to fluctuate significantly depending on the number of big project deals that can be closed within a given period. To mitigate the impact of such risks, we will diversify our revenue sources by expanding the subscription-based business. Until revenue diversification can be achieved, however, the number of large projects the Group can sign up for might affect its financial position and business performance.

11. Relationship with Otsuka Corporation

Otsuka Corporation (hereinafter "Otsuka"), which held 18.38% of the voting rights of the Company as of December 31, 2021, is the largest shareholder in the Company and is the Company’s affiliate company. Although the Company maintains a close commercial relationship with Otsuka, the Company makes business decisions independently and manages its business for the best interests of the Group, free from interference from Otsuka in terms of financing and operational decisions. The Company intends to increase business with Otsuka, but if the relationship with Otsuka should deteriorate or if Otsuka’s management should decide to reconsider its support for the Company, the Group’s financial position and business performance might be affected.

12. Managerially significant contracts

The Group has the following significant business contract. Should the other party choose not to renew this contract for business or other reasons on its part, it might materially affect the Group's financial position and business performance.

Name of contracting company
SIOS Technology, Inc.
Name of counterparty
Red Hat K.K. (subsidiary of Red Hat, Inc.)
Term of contract
One year from July 1, 2010 (after then, automatically renewed every year)
Details of contract
Contract to sell products of Red Hat K.K. (“Distribution contract”)