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 of software

Some companies insist that the free software open for public consumption and OSS violate intellectual property, including copyrights and patents.

Our group closely watches the activities of the companies conducting these litigation acts. If these arguments were accepted, our group would be forced to review its OSS-related business. This could affect the business results of our group. The group has not yet experienced a claim for damages or an injunction involving property rights including copyrights, but it is difficult to completely understand the current state of intellectual property rights in our group’s business areas, and so there is the possibility that other companies have patents beyond our group’s knowledge. It is possible that a third party’s patents will be newly established in the business areas of our group and a claim for loss or an injunction on use is filed against the group. This could affect the business results of our group.

2. Competition

The IT industry is experiencing severe competition as large- and small-sized system integrators, computer manufacturers, and software vendors operate business in their specialized business areas and technology areas and in their experienced and proven industries.

Our group will strive to further strengthen the systems for development and sales, but competition with existing competitors and entry of new competitive companies weaken our advantage and could affect the business results of our group. 

3. New businesses

Our group operates business in the global IT industry where new technologies are developed every day. To maintain businesses under such an environment, the group needs to create businesses corresponding to the new needs of the market, establish subsidiaries and affiliates, and actively develop new products and services. In a case where changes in the internal and external business environment prevent an advance as planned, the group may review the plan (including changes in development and marketing plans). They may be suspended when we determine them unprofitable in light of business plans.

To create new businesses and develop new products and services, our group may make a prior investment. If funds were not raised for the prior investment, they could not be conducted as planned. This could have an effect on the financial positions and business results of our group.

4. Fluctuations in exchange rates

Our group sells and purchases some products in the US dollar and converts revenues and assets of overseas subsidiaries into the yen on the consolidated financial statements. Fluctuations in exchange rates may have an effect on the profit and loss and the financial positions of our group. We take effective measures to avoid such risks, but larger-than-expected fluctuations in exchange rates could have an effect on the business results of our group when we cannot avoid such risks.

5. Business system of our group

Securing human resources

For further growth in the future, our group needs to develop new technologies toward the next generation in an open system infra business and application business and consider securing and developing superior human resources as a significant task. Our group had given top priority to securing human resources and strived to keep an optimal personnel composition.

If our group failed to hire and develop human resources as planned, our business system would be weakened. This could have a negative effect on the business strategy and the business results of our group.

Dependency on specific persons

The businesses of our group are driven by the Representative Director and President Nobuo Kita. He plays a significant role in determining management policy and general management strategy of our group, and then it is considered that the group significantly depends on him.

Our group promotes delegation of authority within the management system, increases members of the management system to strengthen the management organization following the expansion of business scale while it strives to increase organizational strength by recruiting experts and experienced persons in various areas according to the expansion of business areas. In respect of the execution of daily operations, the “executive board” and the “management council”, which consist of executive officers, were established. The group establishes the system not excessively depending on the individual competence of the President Kita by granting the deliberation function for daily operations to these systems. Those with rich experience in the IT sector were externally brought on to the Board of Directors to get sound advice.

We will continue to secure superior human resources to build a management system not excessively depending on the president and focus on an improvement in the quality of officers and employees. If it was difficult for the president to be engaged in the management of our group for any reason before achieving construction of the system and improvement in human resources as planned, the business strategy and the business results of our group could be negatively affected.

6. Subsidiaries

Our group makes capital subscription and acquires corporations to lead changes in the market environment of the IT sector. The Company will continue to seek further growth in business results by developing new products and services through a combination of management resources of investees and subsidiaries, including technology, sales capacity, and management know-how. Weak business results of investees and subsidiaries may have an effect on the business results of our group. If changes in the business environment and competition surrounding investees and subsidiaries bring about obstacles to implement business plans as planned, impairment loss will arise in goodwill. This may have an effect on the business results of our group.

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

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. Relationship to Otsuka Corporation

Otsuka Corporation (hereinafter “Otsuka”) is the largest shareholder with 18.53% of voting rights of the Company as of December 31, 2015, and falls into the category of Other Affiliate. The Company has a tight business relationship with Otsuka, but there is no restriction on fundraising and business management. Decisions are made under the responsibility of our group ensuring the independence of management. The Company will seek to increase transactions with Otsuka, but if there was any problem in cooperation with Otsuka for any reason or if Otsuka changed its cooperative system with the Company due to changes in its management policy, this could have an effect on the business results of our group.

10. 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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