The Group’s operation is expected to be greatly influenced by the changes in global and domestic economic trends, market growth, and the result of the Group’s business strategies. The Group’s performance, financial standing and stock prices may alter significantly from initial forecasts. Risks that could substantially affect the Group’s performance, financial position and stock prices are as follows. These forward-looking statements are being made at the determination of the Group at the present time.
Risks related to the Group’s reliance on distributors to sell flagship products and the change of financial health of these clients
The majority of the Group’s products are sold to users through its distributors. Client sales conditions and changes in management climate (such as M&A or bankruptcy) could lead to a significant fluctuation in the Group’s performance. The distributors also sell products that of the Group’s competitors, and although the Group pursues to drive sales by reaching out effectively to its distributors, there is a risk that the competitors’ products may be prioritized before the Group’s. Furthermore, any changes in the client management climate (such as M&A or bankruptcy) causing delayed or uncollectable payment of debt could also significantly impact the Group’s financial standing.
Risks associated with changes in the national budget and local government policies affecting sales to schools and local municipalities
Due to the nature of its sales, the Group’s performance in public schools and local municipalities may be significantly impacted by fluctuations in the national budget and its distribution to local municipalities, along with budget consumption conditions of these municipalities.
Risks related to internet regulations, free services provided by NPOs and other organizations, and services mounted on future OSs at no cost
In the event internet regulations move forward to allow government or NPOs to offer initiatives similar to the Group’s web filtering business at low or no cost, the Group may have no choice but to amend the Group’s business model and earning model. It is also possible that, in the future, services similar to the Group’s web filtering software may be mounted on computer OSs at a very low cost, and although the quality of such “service” may be inferior to the web filtering solutions offered by the Group, users may actively choose to use these “services”. Such instances may significantly impact the Group’s performance and financial standing.
Risks of specializing in the security business
The Group is dedicated to the security business, which involves developing and selling web filtering software and email filtering software designed to block problematic contents in the internet. Future declines in security market demands due to deteriorating economic climate and other factors may significantly impact the Group’s performance and financial standing.
Risks associated with the Group’s fourth quarter earnings accounting for a large proportion of overall net sales
There is an inclination that the Group’s fourth quarter earnings are higher compared to other quarters in terms of net sales for the full fiscal year. This is mainly attributable to the common practice by private enterprises and public sectors to place orders for IT products in March, at the end of their fiscal year. The Group takes this seasonal factor into account when making its full year plans and will continue to pursue to maintain and expand current sales level. However, the Group’s performance and financial standings may see a significant impact if the Group fails to acquire orders as planned for the relevant period for any reason, or experiences delays in receiving orders due to matters related to the client and distributors.
Risks associated with the concentration of the Group’s issued and outstanding stocks to specific shareholder(s)
While the total number of issued and outstanding stocks by Digital Arts Inc. is 14,133,000 shares (including Treasury stock) as of May 11, 2016, the number of shares owned by parties other than the members of the board is comparatively lower at 10,586,220 shares. For this reason, if there shall be a concentrated ownership of shares by institutional investors from home and aboard, the number of shareholders would decrease due to stocks concentrated to a specific shareholder, and may risk a conflict with delisting standards. In the same way, if stocks are sold intensely and over a short term by institutional investors from home and abroad, the value of stocks may fluctuate greatly.
Risks associated with the future decline of internet use in business, schools and homes
The internet is a technology that developed rapidly on a global scale, and today, is considered an indispensable form of information infrastructure. Currently, the Group’s net sales is mainly composed of products and services related to the internet, therefore, if the existence of the internet fades or the use of internet declines in the Group’s target markets or “Business/Enterprise”, “School” and “Government”, this may have a significant impact on the Group’s performance and financial standing.
Limitation in protecting intellectual property rights (including patents)
The Group takes appropriate measures both domestically and in overseas to protect any and all technology and know-hows developed on its accord, however there are certain areas in the world where the Group’s intellectual property rights may have no or limited protection. For this reason, the Group may not be able to completely prevent its competitors to analyze and research the Group’s native technologies and provide similar products to the market. While the Group pays utmost attention to not infringe intellectual property rights and copyrights when offering new products and services, there may be a risk at some future point where other parties may consider the Group infringing on their intellectual property rights and copyrights.
Risks associated with the Group’s technology obsolescence and deterioration of technological innovation
The Group undergoes development activities to upgrade technology and enhance quality for current/ future products and services. However, if there shall be obsolescence in the products and services provided by the Group or a deterioration of the Group’s technological innovation, the Group may lose its competitive edge against other products and services on the market. This may have a significant impact on the Group’s future performance and financial standing.
Risks associated with bugs and defects on products offered by the Group
The Group develops and markets various products around the framework of “web filtering software”. Countless quality controls are performed in course of developing and marketing software in order to take all possible means to ensure that the program operates properly. However, software bugs (defects) unexpected at the time of launch may be confirmed post-launch, and in such circumstances, the Group will promptly release update patches to correct the issue. However, in the event that the Group requires a long period of time to resolve such bug issues or if the issue could not be resolved, the Group’s performance and financial standing may be significantly affected due to reduction of sales and goods being returned.
Risks associated with undeliverable service due to issues in the mainstay system (server) owned by the Group
The Group’s services essentially take the form of providing URL and other information from servers administered by the Group. The Group positions these servers as the most critical mainstay system and makes every effort to provide consistent service by taking necessary safeguards, such as server duplication and backups. However, servers are hardware and may result in service suspension due to unexpected shutdown, malfunction, and loss of material information (URL database, client data, technological information that are at the core of the Group’s service). The Group’s service may also be interrupted due to suspension of business at the facility where the Group’s server is located, problems with internet service providers and telecommunication carriers, and disclosure of information due to hacking attacks and theft of material data. The Group has acquired the Privacy Mark and continues to take necessary provisions for information security and preventing data loss, however in the event the Group’s service is suspended regardless of its duration, this suspension could lead to a decline in the Group’s credibility, which may significantly impact the Group’s business performance and financial standing.
Reliance on key management, and securing/developing talented technical experts and key personnel
The Group’s operation is heavily dependent on key management personnel, such as CEO Toshio Dogu. In the event these management personnel takes an extended leave due to illness or injury, leaves the Group or deceases, such factors may have a significant impact on the Group’s performance and financial standing. Moreover, the Group’s success and growth rely heavily on talented technical experts, and while the Group consistently works on securing and developing key talents, failing to secure and develop technical experts and key personnel in the future may have a significant impact on the Group’s growth, business performance and financial standing.
Risks pertaining to merger and acquisitions, and assignment/acquisition of business rights
Digital Arts Inc. is a public company listed on the First Section of Tokyo Stock Exchange, where CEO Toshio Dogu is the largest shareholder with 4,507,648 shares (includes treasury shares), which is approximately 31.9% of the total issued and outstanding stocks of 14,133,000 shares (including Treasury stock) as of March 31, 2016. As a public company, the possibilities of mergers and acquisitions cannot be denied, and the entire or part of the Group or its business rights may be acquired, merged or assigned at some point in the future. Such factors may significantly impact the Group’s performance and financial standing. Similar impact would be seen if the Group performs mergers and acquisitions, or acquires business rights.
Risks associated with natural disaster, disaster, terrorist activities, biological viruses, and power outage
The Group’s business performance and financial position may be significantly affected due to unforeseen situations, such as disasters, including earthquakes and other acts of God, domestic terrorist activities, outbreak of war at home and abroad, and epidemic of biological viruses, such as malignant influenza. In addition, insufficient power supply due to nationwide/ regional power outage or problems in the buildings where the Group performs its business may cause the Group to suspend its business activities and services, and in turn, significantly impacting its business performance and financial position.