Business and Other Risks

The Company is a telecommunications carrier, and the Group’s database contains accumulated data of communication records related to consumer communication activities and personal information of service users. For this reason, each company of the Group falls under the category of business operators handling personal information as defined in the Act on the Protection of Personal Information and is subject to regulations regarding the handling of personal information. Considering the importance of this information, the Group has established various regulations related to information protection, obtained Privacy Mark certification in February 2016, and conducts in-house training on personal information management by the Group. We strictly comply with laws and regulations, such as concluding confidentiality agreements with external contractors, and present them on our website, including our privacy policy. To date, we are not aware of any serious accidents or problems related to information management. However, the possibility that this information will be leaked or used illegally in some form cannot be said to have been eliminated entirely. Therefore, in the event of such a situation, especially a leakage of communication records, there is a possibility that a business improvement order may be issued by the supervisory authority, which may affect the Group’s operating results and future business development due to claims for damages against the Group or a decline in the Group’s credibility.

The Group’s business is subject to and complies with legal restrictions such as the Wire Telecommunications Act, the Radio Act, the Telecommunications Business Act, and the Construction Business Act (permitted by the Governor of Hokkaido: Telecommunication engineering business). The Company is registered as a telecommunications carrier under the Telecommunications Business Act by the Ministry of Internal Affairs and Communications as follows

At present, we are not aware of any tightening of regulations by these laws, but if restrictions on business are tightened due to any change in these regulations or application of new laws and regulations, business activities may be restricted or costs may increase. In addition, although there is no concern about the revocation of the above registration or certification, if such an event occurs, it may hinder the Group’s main business activities and affect its operating results and financial position.

The Group has strengthened its internal management system for intellectual property rights in line with technological innovation and business expansion in the telecommunications and Internet business industry, but in the event that payment is required resulting from the Group receiving a lawsuit for infringement of intellectual property rights related to trademarks, etc. or a request for an injunction against the use of trademarks, etc. by any third party resulting from a discrepancy in the interpretation of contract terms and conditions or the establishment of intellectual property rights that the Group is not aware of, etc., it may affect the Group’s operating results and future business development.

In the industry to which the Group belongs, of which the main business is home use business, there are many competitors. In addition to strengthening its brand power, the Group is striving to differentiate itself by providing product development and planning, service providing price, communication speed and quality, value-added services, multilingual call centers, etc. which meet customer needs in a comprehensive manner. It can be an advantage in product and service capability, price competitiveness, name recognition and the customer base of other competitors including newcomers from other industries. In such a case, the Group’s operating results may be affected due to a decline in the Group’s profitability and a slowdown in customer acquisition.

The Group is working to further promote alliances with business partners such as distributors and partner companies to develop products and services, establish and strengthen sales systems, and develop further customer sales channels. Although the Group has good relationships with its business partners, if the expected effects are not obtained or if the alliance or cooperative relationship is dissolved for some reason, it may affect the Group’s operating results and financial position. In addition, a slowdown in sales through business partners’ sales channels with a high sales share of the Group may affect the Group’s operating results.

The Group does not own some of its own network lines and data center facilities but operates its business in the form of having telecommunications service lines provided by multiple domestic telecommunications carriers, and installing our own products and equipment in those facilities to provide services to customers. On the Internet, the amount of data used per user is increasing rapidly. As a result, the Internet industry as a whole has been unable to keep up with the demand for communication lines and has experienced a shortage of bandwidth. Although the Group strives to respond to these environments by highly efficient network operations, including streamlining line and bandwidth procurement, if there is a further shortage of equipment supply, these factors may constrain the Group’s business operations and expansion, and profitability may deteriorate due to increased procurement costs. In addition, we have concluded service provision contracts and lease agreements with the owners of network lines and data center facilities, and plan to continue the lease agreements, etc. after the expiration of the contract period. However, if the owner refuses to continue the contract as whole or in part for any reason, or if the owner requests a change in the contents of the contract, there is no guarantee that the Group will be able to renew the contract under the same terms and conditions as before.

The Group possesses a large number of facilities for the development of service products and manages the servers on which customer information assets are stored in the services provided by the Group at two or more locations in Japan to diversify risks. The data center has been implemented with maximum possible business continuity measures to ensure stable operation 24 hours a day, 365 days a year, including a redundant configuration that secures a detour route that is standard for registered electric power companies, an earthquake-resistant structure that can withstand large-scale earthquakes, fire extinguishing equipment, and a backup power supply in case of a power outage. In addition, we have a system in place to quickly detect failures and secure on-site response personnel. However, in the event of a system failure due to unforeseeable circumstances such as cyberattacks, system or hardware failures, power shortages or large-scale power outages at electric power companies, natural disasters such as earthquakes, typhoons, and floods that far exceed the expected level, wars, terrorism, and accidents, the Group’s business and operating results may be affected. In addition, in the event of a system failure due to a malfunction of the communication equipment or a defect in the program change due to a change in system settings or specifications, it may be difficult to provide our communication services on a large scale.

The Group regularly patrols social media sites and reports on the results of patrols at the Executive Officers’ Meeting and works to dispel reputational damage by appropriate disclosure of information as necessary. However, in the event of reputational damage caused and spread by social media or Internet posting, regardless of the accuracy of the content, there is a possibility that the brand power may decline, and the Group’s business performance and financial position may be adversely affected.

The Group develops routers and other communication equipment in-house and regularly updates the firmware and replaces it with new products every few years. However, in the event of the deterioration of parts that make up these products or the infection of a computer virus that exploits the vulnerability of the products, the Group may incur temporary service suspension or replacement costs, which may affect the Group’s operating results and financial position.

Amid the acceleration of Internet access and the emergence of Internet connection products such as IoT and cloud services, if the introduction of new services and products is delayed, it may hinder customer acquisition and retention, and the Group may lose its competitiveness compared to its competitors. Even within the company, if system enhancement and training of human resources to improve operational efficiency are delayed, the company may lose its advantage over competitors.

The Group clarifies the warranty details and roles of products for product development and manufacturing subcontractors and investigates and audits subcontractors for new development to prevent the purchase of illegal or dangerous products. However, if we purchase any illegal or dangerous product, we may have no choice but to dispose of the product, or if we have already introduced it, we may incur a replacement cost, which may affect the Group’s business performance.

To further strengthen the Group’s sales activities and expand its business, we are hiring new graduates, strengthening the hiring of mid-career experts and people with work experience, and are also actively introducing a referral system and the recruitment of alumni and other personnel. In addition, we will continue to focus on revitalizing human resources, such as conducting training according to the level of employees. However, if recruitment activities and human resource development based on the above policy do not proceed as planned, it may affect the Group’s operating results and financial position.

Masanori Inomata, president and chief executive officer of the Group, has played an important role in the determination of management policies and business strategies, as well as in the process of developing new businesses, building business models, and commercializing them, as the chief executive officer of the Group since the start of our business. The Group is working to build a management system that is not unduly dependent on Masanori Inomata by delegating authority, developing executive candidates, and sharing information among officers and executives at meetings of the Board of Directors and Executive Officers. However, if it becomes difficult for Masanori Inomata to carry out his business for any reason, it may affect the Group’s operating results and financial position.

The Group’s Home-Use Business has an earnings structure that combines both ongoing revenue from long-term contracts and one-time revenue generated at the time of service introduction according to the contract type. With regard to ongoing revenue from long-term contracts, the profit margin tends to be low at the beginning of the occurrence of usage fee sales for new contract projects, and the profit margin is lower than the one-time revenue generated at the time of service introduction because the depreciation of communication equipment built as an upfront investment in response to orders is carried out using the declining balance method. Meanwhile, the Business-Use Business introduces services for various types of facilities and stores. While project-specific factors, sales volume, and profit margins may vary, transaction amounts here may be larger than the Home-Use Business. In the current phase of business expansion, the Group’s overall profit margin may fluctuate due to factors including a decline in segment profit margin resulting from an increase in the proportion of ongoing revenue from new contract projects in the Home-Use Business at the beginning of the service, or variance in the number and scale of projects in the Business-Use Business. This could affect the Group’s operating results and financial condition.

In the home use business, the Group installs and configures Internet connection devices for customers (hereinafter referred to as the “initial introduction service”). Of these, the initial introduction service, which is not considered to be an obligation to perform as an integral part of the service provided by the Internet service (hereinafter referred to as the “monthly usage fee services”), is recognized as earnings at the time of completion of the installation and configuration of the Internet connection devices, and the sales recognized as earnings at a single point of the initial introduction service in the current consolidated fiscal year were 2.126 billion yen, which is equivalent to 17% of the consolidated sales. However, since it is practically difficult for the owners of rental properties such as condominiums and apartments, who are our customers, to be present on the day of construction, it is difficult to obtain documents such as construction completion reports on the day of construction. As an alternative, we will confirm that the communication equipment such as routers installed on site is connected to the Internet (hereinafter referred to as the “connectivity test”), and the date of confirmation shall be the sales recording date. As a result, if the connectivity test does not work effectively, or if the test results are improperly adjusted, sales may not be recorded in the appropriate accounting period. In addition, if sales are recorded without the connectivity test, sales related to the initial introduction service may not be recorded in the appropriate accounting period.

In the consolidated balance sheet for the current fiscal year, the Group recorded a net amount of 6,956 million yen in communication equipment. This is a fixed asset such as routers and access point equipment owned by the Company to provide Internet connection service to customers. The balance of assets is equivalent to approximately 57％ of the consolidated total assets for the current consolidated fiscal year. The communications equipment will be installed at the customer’s facility, etc., and will be disposed of for accounting purposes at the end of the Internet connection service. Of the 52 million losses on disposal of fixed assets recorded in the current fiscal year, the amount of loss on disposal of fixed assets related to communication equipment was 51 million yen. The Group confirms the Internet connection of the router and other communications equipment (connectivity test) to confirm the presence or absence of the actual product, and as of the end of the current consolidated fiscal year, the Group owns 736,522 of communication equipment and 12,166 of communication equipment that was disposed of during the current consolidated fiscal year. Due to the large volume of this communication equipment, if they are not disposed of in a timely manner at the end of service, assets may be overstated on the consolidated balance sheet, and net income attributable to the parent company’s shareholders may be overstated.

The Group has communication equipment to provide Wi-Fi communication services. These assets are used in two reporting segments: Home use business and business use business. In the event that a return on investment is not expected due to a decline in profitability in these businesses, the Group’s book value will be impaired, and such reduction will be recorded as a loss of impairment, which may affect the Group’s financial position and operating results.

To maximize the corporate value of the Group, the Group has positioned the enhancement of corporate governance as one of the most important management issues and is implementing a variety of measures. The Group maintains and builds an appropriate internal control system by conducting internal audits led by the internal auditing office and establishing and improving internal controls by the internal control team of the business management division, but in the future, if the establishment of a sufficient internal control system cannot keep up with the rapid expansion of the business, it will be difficult to conduct appropriate business operations, and it may affect the Group’s operating results and financial position.

Due to the nature of the Group’s business, it is necessary to invest in communication equipment in advance of revenue. In the current phase of business expansion, the scale of communication equipment investment is on the rise, and in terms of funds, we raise funds by borrowing from financial institutions in addition to cash on hand. In the real estate business, we also raise funds for the purchase of real estate for sale through borrowings from financial institutions in addition to cash on hand. In order to maintain the soundness of its financial position, the Group adjusts the amount and timing of borrowings while considering the balance with cash on hand, but if market interest rates rise or the risk premium in the telecommunications industry or the Company rises, interest expense may increase, which may affect the Group’s operating results and financial position. In addition, when raising funds, we confirm the status of sales orders, the outline of real estate for sale, the development of communication equipment within the product development division and the inventory status of each product and equipment by the construction and operation department. We request financing from financial institutions for each project without relying on a specific financial institution and obtain their approval for financing.
However, if fundraising is necessary for the Group to be constrained by any factor, it may affect the Group’s operating results and financial position.

Since the manufacture of communication equipment sold by the Group is carried out through a partner factory in Taiwan, transactions are denominated in U.S. dollars. As a result, U.S. dollar-denominated expenses, assets, and liabilities have been incurred. In addition, we purchase overseas communication terminal equipment through domestic companies. Therefore, in case of yen’s depreciation trend in the exchange rate between the Japanese yen and the U.S. dollar depreciates, the purchase price converted into yen will increase. In order to respond to the rapid depreciation of the yen, the Group will take risk avoidance measures such as foreign exchange contracts, but depending on the situation at the time, it may not be possible to properly reflect such an increase in sales prices, which may lead to a decline in the profit margin of the Group’s business performance. On the other hand, in the case of the yen’s appreciation trend, depending on the situation, it may be necessary to reduce the selling price to return the profit of a strong yen. As a result, the price difference from the cost of goods purchased in advance is reduced and it may cause a decline in the profit margin.

The Group has established an internal control system to ensure the appropriateness of financial reporting. However, if internal control over financial reporting does not work and inappropriate financial reporting is made, the Group’s business performance may be affected, including loss of credibility, a decline in market valuation, and delisting.

The Group strives to identify cases that show signs of complaints and prevent complaints by sharing information by creating manuals for responding to complaints and records of responses. In addition, we strive to prevent accidents at construction sites by regularly reviewing work instructions to construction contractors. However, in the event of a failure to respond to customers or an accident at a construction site, lawsuits for damage may occur, which may affect the Group’s business performance.