Business and other risks
Of the matters that affect the business as well as financial and accounting conditions of the Sansan Group, those that could have a significant effect on the decisions of investors are described below. While recognizing the possibility that these risks could occur, the Group’s policy is to avoid any occurrence and to work diligently on a response should any risk arise. It is our belief that investment decisions with regard to the shares of the Group need to be made after careful consideration of this section and of content other than that described in this text.
Matters in the following that relate to the future are based on the judgment of the Group as of August 28, 2019, and may differ from actual results due to the inherent uncertainties.
1. Risk with regard to internet usage environment
As the Group mainly targets internet-related business, the internet usage environment is a fundamental condition of the Group’s business, In the years to come, should there be a major change in the internet usage environment—due to the introduction of new regulations with regard to the use of the internet, incidents of malpractice or other unexpected factors—the possibility exists that this could adversely affect the Group’s business performance.
2. Risk with regard to cloud business
A service that provides application functions via the internet, the cloud is recognized as a new method and concept in software sales, and its market penetration is increasing. On the other hand, there remains the possibility that, in the years to come, competition at the enterprise level dealing with the cloud will intensify. In such a business environment, if a product or service with a more innovative concept were to emerge at another company, or if demand for the cloud itself were to be significantly lower than the Sansan Group’s forecasts, the possibility exists that these situations could adversely affect the Group’s business performance.
3. Risk with regard to competition
The Sansan Group converts business cards into data by combining technology that is evolving on a daily basis by means of, for example, machine learning with human efforts. Since the Group’s establishment, the source of its competitiveness has been the ongoing development and operational management of a unique system that accurately and efficiently converts large numbers of business cards into data. However, should competition intensify due to increased rivalry from existing businesses or the emergence of new market entrants, the possibility exists that this could adversely affect the Group’s business performance.
4. Risk with regard to responses to technological innovation
The Group’s policy is to proactively invest in new technologies and build unique services in a timely manner. However, in the event of delays in responding to technological innovations or the incurring of expenses such as unexpected development costs, the possibility exists that these could adversely affect the Group’s business performance.
5. Risk with regard to prior investment in advertising activities
In the businesses handled by the Group, a certain amount of prior investment is necessary, for example in advertising and development activities as well as in the strengthening of the sales structure, with the aim of expanding sales while taking advantage of the merits of being a pioneering company. Up to now, the Group has been particularly active in investing in advertising, mainly TV commercials, to raise its profile, as advertising directly contributes to new user acquisition.
Consequently, however, in addition to recording operating losses, the Group had cumulative losses in the fiscal years ended May 31, 2017 and 2018. Although it is the Group’s policy to look carefully at cost-effectiveness with regard to future advertising activities, should there be a reduction in our investment in advertising the possibilities exist that new orders and new users could be affected and that, depending on the Group’s advertising investment policy, that this could adversely affect the Group’s business performance.
6. Risk with regard to Eight Business
The Group’s Eight Business operates a free app-based business geared toward individuals. In previous years, segment losses were recorded in the previous consolidated fiscal year and in the current consolidated fiscal year as a result of prior investment, including proactive advertising activities.
In the Eight Business, we are focusing currently on developing and deploying paid services. However, if the acquisition of users and the progress of monetization measures do not proceed as planned in the years ahead, the profitability of the Eight business would be delayed, which may affect the business and performance of the Group, and the possibility exists that this could adversely affect the Group’s business and business performance. Particularly as BtoB services (such as "Eight Company Premium," the advertising service "Eight Ads" and recruitment-related service "Eight Career Design") are in the post-launch process, there is the possibility that past performance alone may not provide sufficient information to determine future performance.
7. Risk with regard to overseas development
The Group’s policy is to advance overseas expansion to achieve high growth. It is, however, undeniable that there is a higher risk than business development in Japan, including business customs related to business cards overseas and differences in the business environment. In the event that we were unable to cope with that risk, or market development or monetization does not proceed as expected compared with Japan, the possibility exists that this could adversely affect the Group’s business performance.
8. Risk with regard to handling of personal information
In addition to the personal information of its employees, there are cases where the services provided by the Group involve users’ personal information and also the personal information of third parties held by users. Fully recognizing the importance that needs to be placed on the handling of personal information, the Group is building and operating a personal information protection management system, while taking the utmost care in managing personal information. The Group also strives to comply with the requirements of the Personal Information Protection Act (PIPA), which fully came into effect in April 2005, and the PIPA guidelines issued by the Personal Information Protection Commission. Having in October 2007 received the PrivacyMark certification from JIPDEC as a company that satisfies the Personal Information Protection Management Systems Requirements (JISQ15001: 2006), the certification has been renewed every two years since November 12, 2007. The Group also strongly recommends that all its employees acquire the qualification of a personal information protection professional certified by the All-Japan Information Learning Promotion Association.
With regard to the Group’s handling of personal information, this is subject not only to domestic laws but also to laws and regulations overseas (hereinafter referred to as “overseas laws, etc.”), including the EU General Data Protection Regulation (GDPR). The Group conducts the necessary investigations with regard to the applicable areas through local law firms and other organizations and, using survey reports on trends in overseas laws, etc., also gathers information on such overseas laws, etc. and takes the necessary measures based on them.
In the course of providing its services, there are cases in which the Company will consign part of the business of converting business cards to a third-party subcontractor under the Company’s responsibility. Even in such cases, we comply with domestic and overseas laws, etc., while managing the safety of subcontractors in an appropriate and rational manner.
However, in the unlikely event that, despite the above efforts, personal information is leaked from the Group or an outsourced company—for example as a result of a natural disaster or accident, unauthorized access by malicious external parties, and leakage, loss, falsification or unauthorized use of customer information due to internal intentional or negligence—the possibility exists that this could cause a loss of credibility or financial losses through compensation for damages and adversely affect the Group’s business performance.
9. Risk with regard to laws
The Group is subject to various laws and regulations relating to corporate activities, such as the Law Concerning the Limits of Liability for Damages of Specified Telecommunications Service Providers and the Right to Request Disclosure of Identification Information of the Senders. Also, in the years to come in Japan, legal regulations may be upgraded by new laws that establish new privacy-related laws and regulations and regulate internet-related business operators. Furthermore, since the internet is a network that transcends national borders, it is assumed that the internet will be affected by other countries’ legal regulations, and thus the possibility exists that these could adversely affect the Group’s business performance in the future.
10. Risk with regard to stability of equipment and networks
The servers that support the Group’s businesses are managed by a cloud service platform contracted by the Group, and plans are devised to, for example, distribute the load through the use of multiple servers and implement regular backups, while efforts are made to prevent system failures. To prepare for the event of a failure, we have in place a real-time access log check function and a mechanism for notifying staff immediately of software failures. We also conduct recovery drills that assume that a failure has occurred.
However, in the unlikely event that the use of the Group’s facilities and network is hindered—despite the above efforts, due to natural disasters such as fires and earthquakes, external damage, system failure due to human error, and other unexpected events—the Group would be forced to suspend services, and the possibility exists that this could adversely affect the Group’s business performance.
11. Risk with regard to investment, such as in system infrastructure
In accordance with the expansion of its business, the Group makes and plans investments in system infrastructure. In the event that unplanned hardware or software investments were to become necessary, brought about by a sudden increase in the number of users and accesses in excess of the Group’s assumptions or rapid advances in internet technology, the possibility exists that these could adversely affect the Group’s business performance.
12. Risk with regard to defects, such as in service provision
It is generally said that the use of advanced software cannot completely eliminate the occurrence of problems, and thus there remains the possibility that various problems may also occur in the Group’s applications, software and systems.
We will continue to maintain and build highly reliable development systems in the years to come. However, were a fatal flaw to be discovered that hindered the operation of the Group’s businesses, and the Group be unable to properly resolve the problem, the possibility exists that this could adversely affect the Group’s business performance.
13. Risk with regard to matters of intellectual property rights, such as infringement
The Group’s software and programs are independently developed and designed by the Group, which conducts patent infringement and other searches through patent offices.
The Group also pays careful attention not to infringe on the trademark rights of third parties, such as when applying for and registering trademarks for the names of its services. With regard to some trademarks, there have been cases where the registration of the trademark has not been approved due, for example, to a third party having registered a similar trademark. From these cases, the Group thus recognizes the need to take the necessary measures as a Group.
However, the possibility of a claim for damages or injunction due to a patent or trademark infringement from a third party cannot be completely rejected, and in that event the possibility exists that these could adversely affect the Group’s business performance.
Also, in the event that the intellectual property rights held by the Group were infringed by a third party, the possibility exists that this could adversely affect the Group’s business management due, for example, to the need to take action, including legal measures.
14. Risk with regard to establishment of business management system
The Group advances the maintenance of its internal management system in line with the expansion of its business and the increase in the number of employees and has plans for further enhancements and upgrades in the years to come. Should the Group prove unable to keep pace with the business structure and internal management system according to the business scale in terms of appropriate human and organizational responses, the possibility exists that this could adversely affect its business performance.
15. Risk with regard to training and securing of human resources
Actively hiring talented human resources, the Group is working to expand systems by conducting, for example, in-house education. However, if the Group were unable to secure adequate human resources, or if employees who are currently working for the Group were to leave, the Group’s business performance may be affected. In the Sansan business, it is particularly necessary to secure sales staff to expand the business in the future. In the event that hiring were not to proceed as planned or if there were an outflow of sales people, the possibility exists that these could place restrictions on business expansion and adversely affect the Group’s business performance.
16. Risk with regard to dependence on specific people
The Company's representative director and CEO, Chika Terada, is the founder and major shareholder of the Company and plays an important role in determining management policies and business strategies. For that reason, to create a system that does not excessively depend on him, the Group is working to share information between officers at the Board of Directors and strengthen its management organization. In the current situation, if it were for some reason to become difficult for Mr. Terada to continue the business of the Group, the possibility exists that this could adversely affect the Group’s business performance.
17. Risks with regard to business cards and positioning of business card exchanges
The services provided by the Group depend on the practice in business settings known as business card exchanges. If changes in business card exchange practices and technological innovations were to cause changes in the importance of business card exchanges—such as in the value of business cards themselves, cultural background, the business card management policies at customer companies, and social positioning—the possibility exists that such changes could adversely affect the Group’s business performance.
18. Risk with regard to granting of incentives
The Group has granted stock options to motivate executives and employees. As of August 28, 2019, the number of such options was 980,596 shares, or 3.16% of the total number of shares issued. The Group’s policy in the years ahead is to continue the incentive plans, including the introduction of stock options, to improve the motivation of executives and employees. However, should these stock options be exercised, the possibility exists that this will cause existing shareholders’ stock values to be diluted.