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Business Risk

The main matters that may constitute risk factors among the information related to the Group’s business conditions are presented hereunder. Information that is not necessarily considered a business risk by the Group but constitutes important information necessary for making investment decisions or for understanding the Group's business activities is also actively presented from the standpoint of information disclosure for investors. The Group's policy is to recognize the potential for risks to materialize and then work to mitigate that potential and appropriately address any risk that does materialize.

Unless otherwise described, forward-looking statements in the following risks are based on the Group’s judgment made on December 20, 2016 and may therefore differ from actual results due to potential uncertain factors.

1. Trends in Internet Advertising Market and Competitive Environment

The Internet advertising industry, which is the main area of business developed by the Septeni Group, has rapidly expanded in recent years, for dozen years or so. However, the advertising business, and not just Internet advertising, tends to be highly susceptible to prevailing business conditions. If business conditions deteriorate going forward and the market size does not expand as much as expected due to the reduction of advertising expenses by advertisers, among other factors, the Group’s business activities, financial position and operating results may be significantly affected.

In addition, the competitive environment remains intense, so the Group is taking a variety of measures to establish a competitive advantage and bolster its overall competitiveness. However, these measures may not bear fruit and may not necessarily lead to the establishment of a competitive advantage, and if this is the case, the Group’s business activities, financial position and operating results could be impacted considerably.

2. Securing and Development of Human Resources and Dependence on a Specific manager

The Group considers human resources to be the greatest asset that underpins its growth. It also recognizes that the recruitment and development of outstanding individuals and continuous efforts to secure human resources in line with its business expansions and global development are key challenges for the Company. With this in mind, the Group places its maximum effort into the securing and development of competent human resources. That said, failure to secure or develop the necessary human resources due to intensifying competition for human resources, a supply-demand balance in the staffing market or other factors may have a material impact on the business activities, financial position, operating results and growth of the Group.

In addition, Mr. Koki Sato, Representative Director of the Company, plays an extremely important role in deciding and executing management policies and overall business strategies in the Group. The Group depends on the capabilities and skills of Mr. Sato in every aspect of its business. As a result, if Mr. Sato is dismissed from his job or has difficulties executing his duties for any reason, the Group’s business activities, financial position and operating results may be significantly affected.

3. Overseas Business

Considering “Expand advertising business globally” as one of the basic policies in the Midterm Business Policies, the Group has been developing businesses aggressively in numerous countries and regions overseas, including the United States, Europe and Asia. Consequently, the presence of its overseas business is increasing steadily. However, overseas business involves risks, including changes in global economic trends, fluctuations in foreign currency exchange rates, laws and regulations governing investment and competition, differences in business practices, industrial relations, and international politics, and if these risks materialize, the Group’s business activities, financial position and operating results may be impacted considerably.

4. New Businesses

Going forward, the Group will continue to create and develop new businesses proactively to achieve sustainable growth and diversify revenue sources. However, the launch of new businesses may lead to the inclusion of risk factors that are uniquely associated with such businesses, while at the same time numerous unpredictable risks including sudden changes in the business environment may arise in the course of the execution of new businesses. As a result, if the goals of the initial business plan cannot be achieved, there is the potential for the Group’s business activities, financial position and operating results to be substantially impacted.

5. Business Expansion through Mergers and Acquisitions (M&As)

The Group’s policy is to use M&As effectively as a measure to accelerate business expansion. It makes decisions on M&As after conducting a preliminary survey of target companies in conjunction with a range of subjects, including financial details and contract related matters, and examining risks exhaustively. Nevertheless, the Group may experience a problem that it does not understand during preliminary surveys, such as contingent liabilities or unrecognized liabilities that occur or are identified after the completion of relevant M&As, or need to post impairment losses on goodwill if it does not make expected progress in business development. In such cases, there is potential for the Group’s business activities, financial position and operating results to be substantially impacted. In addition, if any new business that the Group has not traditionally engaged in is included as the result of the acquisition of a company, there will be an additional risk factor related to such business.

6. Personal Information Management

A number of the Group companies handle personal information in the ordinary course of business. These companies have been improving their management system based on their personal information protection policy established chiefly pursuant to the Act on the Protection of Personal Information, while also proactively working to acquire certificates on information security, such as the Privacy Mark and ISMS. By doing so, they have been exercising the utmost care to manage personal information properly and prevent any leak. In addition, they are in the process of examining and adopting a framework for personal information protection in various countries, including the General Data Protection Regulation, from a range of perspectives. Even so, there is no denying the possibility of the leak of personal information attributable to any system failures, intentional or unintentional errors committed by internal or outside concerned parties, and/or criminal acts, among other factors. If this is the case, the Group may face claims for damages and losses, lose its credibility, and its business activities, financial position and operating results may be significantly affected.

7. System Risk

A majority of media platform business and a part of the digital marketing business provide services to customers from server-based computer systems via the Internet. We are constantly taking measures to ensure stable operation of these systems, including system augmentation and reinforcement of backup systems. However, if computer systems or communication networks are shut down by device failure, natural disaster, dramatic and unanticipated increases in access, computer viruses, or other circumstances, it could force services to be suspended, and this could diminish the trust placed in us by customers. Such a turn of events has the potential to seriously impact the Group’s business activities, financial position and operating results.

8. Severe Fluctuations in Asset Prices of Securities Holdings

The Group may hold marketable securities whose prices have the potential for substantial fluctuations (declines) due to the performance of individual companies and trends in financial markets, including stock in business partners and investment targets, etc. and various financial products for effectively utilizing surplus funds. If these asset values substantially decline due to drastic changes in the economic environment, etc. , it could exert a major impact on the Group’s business activities, financial position and operating results; for example, profits may decline as a result of being forced to recognize valuation losses or sales losses.

9.Media Platform Business

The Group develops business in the content market, and this market is characterized by dramatic changes in user needs as well as large numbers of competitors. The Group is striving to increase revenue by working to provide content with high user satisfaction levels, but if we are unable to appropriately respond to changes in user needs and intensifying competition and therefore unable to provide appealing content, there is the potential for the Group’s business activities, financial position and operating results to be substantially impacted; for example, by a decrease in fee revenues. In addition, media platform business provides content to users through platform providers such as social networking services and app markets. For this reason, if these companies change their business policies, etc. and transaction terms are revised or it becomes no longer possible to provide content, it could seriously impact the Group’s business activities, financial position and operating results.

10. Intellectual Property Rights

The Group recognizes the importance of protecting and controlling intellectual property rights and operating each business with the utmost care to avoid infringement of any third party’s intellectual property rights. However, in the case that we infringe on a third party’s intellectual property rights, due to procedural flaws or errors caused by managers, there is a possibility that we will be requested to pay compensation for damages or stop using such rights, and this has the potential to seriously impact the Group’s business activities, financial position and operating results.

On the other hand, the Group is taking proper measures to protect its intellectual property rights, pertaining to services and content owned by the Group, from infringement by third parties. However, if, for some reason, the Group’s intellectual rights are infringed, there is the possibility that the Group’s business activities, financial position and operating results will be materially affected, due to such effects as a decline in competitive advantage.

11. Internal Control Systems

Positioning the enhancement of corporate governance as a key management challenge, the Group is implementing diverse measures to maximize its corporate value. In addition, to secure the proper implementation of operations and the reliability of financial reports, it is working to establish, improve and operate a system that makes the relevant internal control systems function effectively. However, if sufficient internal control systems are not established in a timely fashion due to a rapid expansion of business or other factors, the Company may have difficulties operating businesses appropriately, which may have a significant impact on the Group’s business activities, financial position and operating results.

12. Dependence on a Specific Customer

In the digital marketing business, transactions with a specific customer may expand sharply against the backdrop of an increase in the advertising budget and an improvement in the cost-effectiveness of Internet advertising, among other factors, thereby leading to an increased presence in the sales breakdown. In this case, if transactions with the relevant client decline significantly due to a change in its business policy or other reasons such as operating results trends, the Group’s business activities, financial position and operating results may be significantly affected.

13. Laws and Regulations

The Group’s main business domain is not subject to any legal restriction that significantly limits the development of businesses at this point. That said, given the diverse use of the Internet, it is possible that relevant laws and regulations will be newly established in the future, existing laws and regulations will be revised or interpreted differently, and/or voluntary industrial restrictions will be established as rules equivalent to laws and regulations, coupled with a request for compliance therewith. If this is the case, the Group’s business activities, financial position and operating results may be substantially impacted, depending on the details of the requirements.

14. Operational Risks

When executing operations, the Group takes a variety of measures, such as double checking through third parties excluding those in charge of relevant operations and the use of a range of information systems to improve accuracy and efficiency in operations. However, with some operations carried out by people, there may be errors in paperwork due to misrecognition on the part of managers or malfunctions, among other factors. Depending on the type of operation, errors in paperwork may result in a hindrance to stable services, the occurrence of economic losses and/or the leak of personal information, among other issues, which may seriously impact the Group’s business activities, financial position and operating results.

The Group has been working on the standardization and documentation of internal regulations and paperwork processes. Nevertheless, knowledge necessary for the execution of operations may not be fully shared or possessed due to organizational restructuring and an increase in the number of employees resulting from the expansion of the Group’s businesses. An increase in paperwork errors and decline in productivity that may occur as a result could seriously impact the Group’s business activities, financial position and operating results.

15. Corporate Social Responsibility

The Group understands that corporate social responsibility, such as the implementation of environmentally friendly initiatives, the improvement of working conditions and respect for human rights, constitutes important management issues for the sustainable development of society. With this in mind, the Group has been acting to create such a society in all business activities in which it engages, including those related to supply chains. However, despite the Group’s efforts, if it has any issues related to environmental contamination, industrial safety and health such as the occurrence of industrial accidents, and/or any issues related to human rights such as discrimination of foreign workers, the Group’s social credibility will be downgraded, which could cause clients to terminate transactions or the Group to withdraw from some businesses. If this is the case, the Group’s business activities, financial position and operating results may be affected significantly.

16. Impacts of Disasters

Natural disasters, fires, abnormal weather conditions attributable to climate change (torrential rainfall, floods and water shortages), the global spread (pandemic) of severe infections with high fatality rates, wars, and/or terrorist attacks, among other matters, may seriously affect the Group’s business activities, financial position and operating results if they take place in countries or regions in which the Group conducts its businesses.
In addition, the Group, along with the implementation of preliminary disaster reduction programs, has been taking proactive measures through the placement of a system for confirming the safety of employees and providing training and educational programs according to its business continuity plan (BCP), in which procedures for recovery and action guidelines are described in the event of an emergency. Even so, if additional expenses need to be allocated for countermeasures due to the occurrence of large-scale disasters, there is the potential for the Group’s business activities, financial position and operating results to be substantially impacted.

17. Capital and business Alliance with Dentsu Inc.

The Company concluded a capital and business alliance agreement with Dentsu Inc. on October 30, 2018. Currently, the Company is in the process of working on a range of measures to maximize business synergies through the establishment of a close collaborative business relationship with Dentsu Inc. pursuant to the agreement. That being said, initially expected results may not occur due to unexpected incidents following the conclusion of the agreement or changes in the business environment, among other factors. Besides, the capital and business alliance may be terminated in the future for certain reasons. Taking these factors into consideration, the capital and business alliance with Dentsu Inc. may have a significant impact on the Group’s business activities, financial position and operating results.