The major risks that the management recognizes may have a significant impact on the Company’s financial position, business performance, and cash flow (hereinafter referred to as “business performance”) as well as stock price and so on are as follows.
It is difficult to clarify the probability and timing of risk realization due to the complexity of the risk. However, risks are classified into “particularly important risk factor” and “important risk factor” based on the correlation with the characteristics that the Company is a fabless semiconductor/IP vendor with an emphasis on research and development.
In addition, forward-looking statements are based on the judgment by the Company at the time the statements were made.
Particularly Important Risk Factors
The Company’s business is closely related to image processing, graphics processing and AI technologies whose remarkable progress has led to not only releases of new models one after another but also the enhancement of their functions.
The Company has the policy of responding to the technological progress by improving technological capabilities while keeping a close eye on technological trends. However, in case the business environment changes drastically due to the development and diffusion of new technologies beyond the Company’s expectations and the Company cannot respond to it promptly or appropriately, or in case the Company’s technologies become obsolete because competitors develop superior ones, the Company’s business performance may be affected resulting from a decrease in sales of products and services.
Customers’ market trends
The Company’s products are intended for markets such as amusement machines, in-vehicle products, industrial equipment, and mobile consumer equipment, and are used as software and hardware for customers’ products in those markets.
Products in each of those markets have such a short life cycle and its technological innovation is so rapid that the Company should closely monitor market trends and actively develop new markets to maintain and increase its sales and profits.
The Company constantly analyzes information from customers and external organizations to develop new products and new markets in response to changes in market trends. However, if market trends change beyond the Company’s expectations and the development of new products or new markets is delayed, the Company’s business performance may be affected.
Research and development
The Company is developing new technologies and products that can respond to future changes in needs in the fields of image processing, graphics processing and AI. Accordingly, each R&D project is carried out while assuming the functions required by the growing market. However, it is not always possible to recover all the R&D expenditures invested, which may affect the Company’s business performance.
In addition, if development projects are significantly delayed or the development itself is aborted, the Company’s business performance may be affected.
Securing and developing human resources
The Company recognizes that securing and developing superior human resources is essential for future business expansion. For this reason, the Company has introduced a remuneration system and a stock compensation system for rewarding officers and employees, but none of which will continuously secure talents. In case the Company fails to secure enough adequate talents, its business expansion may be restricted, which may affect its business performance.
Important Risk Factors
Reliance on the representative director
Tatsuo Yamamoto, Representative Director of the Company, has experience as an engineer in the past and is familiar with the Company’s business and technologies. In addition, he makes use of his extensive personal network to conduct sales activities both in Japan and overseas, thus the Company’s reliance on him in terms of technology and sales is extremely high.
In order to alleviate this high dependence as much as possible, the Company established a system with two representative directors and appointed a person who is familiar with AI technology as a director on June 19, 2020. However, it is expected that the dependence on him will remain high especially in terms of technology and sales for the time being.
Under such circumstances, if he becomes difficult to execute operation at the Company due to factors such as retirement, the Company’s business activities may be hindered and its business performance and business development may be affected.
Sales system of LSI product
The Company basically adopts a distributorship system and sells LSI products through trading companies. Sales to the main distributor, Restar Electronics Corporation in the fiscal year ended March 2021 were 407 million yen, accounting for 40.3% of total sales, and most of them came from sales of LSI products. The Company has built good relationships with the distributors including Restar Electronics, but if problems with them occur in the future, the sales of LSI products may be hindered and the Company’s business performance may be affected.
Outsourcing of LSI product
As the Company is engaged in business activities specialized in R&D operations without its own manufacturing facilities, the Company outsources the manufacture of LSI business products to semiconductor manufacturers and module manufacturers. The Company selects contract manufacturers after carefully examining their technical level, manufacturing capacity, management capacity, and management stability. However, in case there is a problem with the production at a contract manufacturer for any reason such as when it fails to secure a sufficient production quota or a problem that cannot be normally assumed causes problems at its facilities, or in case a manufacturing contract is terminated and an appropriate alternative manufacturer cannot be secured, the production of LSI products may be hindered and the Company’s business performance may be affected.
Shortage of supply of semiconductors, components, etc.
As a fabless company, the Company is dependent on contract manufacturers and suppliers for the manufacture of its products in the product business. Therefore, the Company tries to reduce opportunity losses as much as possible by securing production lines in advance and placing orders for products and supplied parts as early as possible. However, if product deliveries to the Company are delayed due to global supply shortages of semiconductors, components, and other materials, the Company’s business performance may be affected due to a decrease in product sales. In addition, if the manufacturing of customers’ products that incorporate the Company’s LSI products, IPs, software, etc. stagnates due to a shortage of semiconductors and components, the Company’s business performance may be affected due to decreases in product sales and royalty income.
Possibility of infringing the intellectual property rights of third parties
The Company has received no notices from third parties about infringement claims and lawsuits of intellectual property rights and so on regarding the technologies of IP cores/LSI products it offers and the expressions it produces.
The Company always investigates the possibility that its IP core technology may infringe patent rights of third parties, but it is difficult to eliminate the possibility that the Company’s technology and expression of IP cores/LSI products may infringe the intellectual property rights of the third parties. If the Company is claimed or sued for the infringements in the future, and its business is suspended or a financial burden such as damages is imposed, the Company’s business performance and social reputation may be affected.
Natural disasters and accidents
In case the business locations of the Company and/or its business partners suffer damage from natural disasters such as earthquakes and typhoons, accidents like fires, and terrorism, the Company’s business activities may be hindered and its business performance may be affected.
Risk of spreading infections such as new coronavirus
If the infection of epidemics such as new coronavirus spreads to officers and employees of the Company, the business performance may be affected by temporary suspension of business activities. In response to the global pandemic of new coronavirus infection in 2020, the Company has expanded telework (working from home) system to all employees, taken measures to minimize the risk of infection such as thorough infection prevention at the office, web conference utilization, and suspensions of unnecessary outings, business trips and dinners, and made it clear how to deal with infection (or when there is a suspicion of it). As a result, no infected person has been confirmed so far.
In addition, in case the amusement machine market is significantly slumped due to the spread and prolongation of new coronavirus infections, or in case the customer’s willingness to invest in development declines, the Company’s business performance may be affected by a decline in sales of the graphic processor “RS1” or a stagnation in the professional service business.
Information management system
The Company recognizes that information management is important in its business activities including research and development. Therefore, the Company establishes systems and inhouse structures for information management including taking precautions against computer intrusions such as computer virus detection and firewall construction, taking preventive measures against information leakage such as restricting the managers who can access information, concluding confidentiality agreements with executives, employees, and customers, conducting entry/exit management, and multiplexing data management work so that operations may not be hindered due to hardware failure.
However, even with these systems and structures, it is difficult to eliminate the possibility of information leakage. In case important information such as technical information leaks outside the Company for some reason, the Company’s competitive advantages become impaired, and its business performance and business operations may be affected.