Operational Risks

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.

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. Subsidiaries and affiliates

The Group has been investing in and acquiring other companies to stay ahead of the changes taking place in the IT industry. The Group will continue to leverage the technical prowess as well as the sales and management expertise provided by subsidiaries and affiliates so as to develop and market new products and services and maintain growth momentum. However, less-than-optimal performance of subsidiaries and affiliates could undermine the Group’s financial position and business performance.

7. Corporate buyout and strategic alliance

Our group, in the course of business expansion, may invest in other companies through corporate buyouts or strategic alliances. In making such decisions, the group does detailed due diligence on business activities, contracts, and financial composition of potential acquisitions and examines them in order to avoid risks, but the occurrence of contingent/unrecognized liabilities, unexpected weak business results, and disappointing results of measures after corporate buyouts or strategic alliances could have an effect on the financial positions and business results of our group.

8. Stock options

Our group, to improve officers’ and employees’ willingness to contribute to our businesses and their awareness of participating in business management, the Company adopts the stock option plan using equity warrants. Specifically, there is the stock option plan in the company based on a resolution approved by the Board of Directors as of May 13、2014 and May 20, 2015.

The exercise of stock options would dilute the value of shares of our group per share. The balance of supply and demand may fluctuate for the short term depending on the equity price of our group, and this has an effect on stock prices.

Our group may grant stock options as an incentive plan in future to motivate officers and employees and secure superior human resources. Additional grants of stock options could dilute the value of shares.

9. Natural disasters

The Group companies in Japan operate out of two locations—SIOS Building in Minami Azabu and NBF Platinum Tower in Shirokane, both in Minato-ku, Tokyo—to achieve greater operational efficiency. Should either or both locations be struck by a major natural disaster or cease to function optimally, the Group’s normal business operations might be disrupted and its financial position and business performance might be adversely affected.

10. Providing support for system development and implementation

The Group provides support for system development and implementation to corporate clients. If a project to provide such support 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 affect the Group’s financial position and business performance.

11. Selling management support systems to financial institutions

Selling management support systems to financial institutions is one of the businesses in which the Group engages. In this business, the contract price of a project runs high, and revenue is prone to fluctuate significantly depending on the number of deals that can be closed in a given period. Therefore, the number of large projects the Group can sign up for might affect its financial position and business performance.

12. Relationship with Otsuka Corporation

Otsuka Corporation (hereinafter “Otsuka”), which held 18.42% of the voting rights of the Company as of December 31, 2018, 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.

13. Managerially significant contracts

Our group considers the following contract in its businesses a managerially significant contract. If the contract were not renewed, this would have significant effect on the business results of the group.

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”)
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