Risks of Business Operations

Risks from the Business Environment

1. Profitability Trends

One aspect of our corporate strategy is proactive implementation of overseas development. We are currently opening our overseas target markets, which are the North American Market, the Chinese Market, and the Southeast Asian Market. We have subsidiaries in Cupertino, California, USA; Shanghai, China; Hangzhou City, Zheijiang Province, China; and Hong Kong, China. We also engage in sales activities in South Korea, Thailand, and Singapore.
Our company plan includes having each overseas subsidiary reach profitability in about three years from the time operations start. However, with major changes in each market and the surrounding environment, the sales growth does not always go according to plan; in such cases, our profitability is affected. There is also the possibility that profitability in the past does not indicate future profitability.

Consolidated Management Indicators

The primary causes for fluctuations in profitability between period 12 and period 16 are as follows.

Period 12(consolidated):

Despite reducing corporate IT investment due to the economic recession, we achieved sales figures that were the highest since the founding of our company due to strong trending of ASTERIA Warp sales. Cost reductions including subsidiary reorganization also had an effect, leading to profitability that greatly exceeded our initial predictions.

Period 13(non-consolidated):

Even in an environment of IT investment reduction in domestic companies, our company’s sales trended nicely as a result of strengthening our primary products, propelling sales, developing our internet services, and the like. In addition, improved efficiency in sales management allowed profit to greatly exceed our initial predictions.

Period 14(non-consolidated):

Throughout the challenging fiscal year, we placed our focus on steadily increasing sales within our conventional channels and applicable regions for ASTERIA Warp, our primary product. In addition, progress in our prior investments in the cloud and smart devices, where we excel, led us to achieve steady sales growth. Further, we rolled over our investment in marketing activities and the like for the Android market to the next fiscal year, changed the structure of our service sales, and made other attempts to effectively use funds. This all came together to lead us to profitability that has significantly exceeded our initial expectations.

Period 15 (non-consolidated):

Due to the establishment of our subsidiaries, we started using consolidated statements from this period. Despite the continued difficulty of the economic environment of a strong Yen and low stock prices as well as a slight decrease in the number of ASTERIA Warp licenses sold compared to the previous period, major improvement in Handbook, the ASTERIA Warp support service, led us to achieve sales at an all-time high. As for profit, business profit, ordinary profit, and period net profit all exceeded initial predictions, but after consolidating three overseas subsidiaries, the results are below expectations.

Period 16 (non-consolidated):

Our number of subsidiaries increased to four (0 domestic, 4 overseas) with the establishment of a Research & Development subsidiary in Hong Kong, China. As for the domestic economy, corporate profitability was expected to increase, being buoyed by the export industry and a cheap Yen. We increased sales of our primary product, ASTERIA Warp, and further, moved forward with sales and marketing activities for Handbook, a product made from smart device technology. This led us to achieve our highest-ever sales. Our profitability also greatly exceeded the previous year, driven by our increased sales.

2. Seasonal fluctuations in our profitability

License sales, which compose the largest percentage of our sales, are based primarily on orders from our “ASTERIA Warp Master Partners.” Many of our ASTERIA Warp Master Partners are system integrators that close their books in March, and tend to place orders at the middle and end of the fiscal year. As such, our sales tend to cluster in the second and fourth quarter, while our sales in the first and third quarters tend to be small in relation to the total sales. In addition, sales are influenced by economic trends. Thus, the quarterly percentage of sales for period 12 through period 16 fluctuates from about 18.9% to as much as 33.1%, as can be seen below.
As such, our profitability fluctuates significantly each quarter, and it is possible that quarterly trends are not representative of future profitability.

3. Competitors’ Products

Our company provides software products for integrating and linking the data of corporate information systems. Needs for this type of software increase each year, and competitive products are available from venture firms and major software corporations alike. ASTERIA Warp is a unique product in that conventional system development methods, such as coding in Java, are not used at all. Even in such competitive conditions, according to a third-party investigation, ASTERIA Warp has kept a high market share for seven years as a data linking software for internal and external corporate data. However, our business and profitability may be affected in the future by the arrival of unexpected competitive products or price wars with competing products.

4. New Products and Services

We have achieved improved profitability by providing valuable new products and services to the world, and believe that increasing sales through the development of desirable new products and services are an important element in the growth of a company. As such, we proactively build our corporate strategy around revolutionary technologies developed in recent years, such as XML technologies, cloud computing technologies, smart device technologies, and the like.
However, technological innovation occurs rapidly in software, and because it is extremely difficult to predict these technological innovations, we may or may not be able to consistently develop desirable, new products in a timely manner that are compatible with technological innovations. Our business and profitability may be affected in the future due to incorrect predictions or missing technological innovations or market trends that affect our company’s profitability.

Risks of Our Business Practices

1. Degree of reliance on specific products

In order to achieve highly profitable growth, we have eliminated services that fall under a profitability model that depends on the number of people, but have instead taken a corporate strategy of increasing the sales percentage of licenses and support (called “product-related sales” below), which are sales directly related to our package products that we develop in-house. Since Period 5 (when we released ASTERIA R2, which was our first general data-linking software product), the percentage of our “product-related sales” has risen as ASTERIA Warp partners have increased and the percentage of our service sales has diminished accordingly. In period 16, such “product-related sales” occupy 87.9% of total sales (see table below). This shows that in the current fiscal year, much of our company’s sales depend on the sales of ASTERIA Warp.
Demand for ASTERIA Warp has steadily increased since its release. In March 2014, the number of installs totaled 4,360 companies, and has continued to increase; however, our profitability may be significantly impacted if a major change in demand for ASTERIA Warp occurred due to changes in the market environment, and other internal and external economic factors.

(Units: thousands JPY)

2. Reliance on ASTERIA Warp Master Partners (Distributors)

A majority of license sales for ASTERIA Warp are sold to end user companies through distributors called ASTERIA Warp Master Partners. This boosts sales of our products and reduces risks associated with collecting money.
While we recognize that it is highly unlikely that many of the sales contracts with these partners would be cancelled at once, if such a thing were to occur for some reason, our company’s profitability would be significantly affected.

3. Profitability of Licenses

Our license sales fall under a business model of selling software planned and developed by our company to an unspecified large number of customers. As such, unlike software that is developed for a specific customer, our development costs hardly increase when the number of licenses sold increases, and thus, our profit structure is such that our profitability rises with the number of licenses sold.
However, in an ever-changing market, research and development for new products must be continually carried out to maintain such a business model. As such, our profit may, at times, be swallowed up by investments in research and development. Thus, there is the possibility of increased sales in our license business not directly leading to increased profit in our group.

4. Profitability of Internet Services

We provide products such as Handbook, OnSheet, and SnapCal as internet services that belong to the sales division of services. The profit model for these services is different from the income model for ASTERIA Warp, which has proved successful (see table below). The income model for these services is like that seen in other companies, where continuous profit expansion can be expected when successful. However, the amount of sales in the period the service is started is very small, and it is difficult to make an accurate prediction immediately upon starting to provide service. Thus, when profit from internet services does not come in as planned, there may be a significant impact on our profitability.

5. Reliance on Specific Individuals

Yoichiro Hirano, who is our President and one of our company’s founders, plays a major role in determining corporate policies and corporate strategy, as well as in driving business. It is predicted that any unexpected circumstances befalling Mr. Hirano will have a significant impact on future results and business development.

In addition, Toshiyuki Kitahara, who is our Vice President, Chief Technical Officer, and Chief Information Officer, plays a major role in research and development, as well as in determining product strategy. In the event that Mr. Kitahara is rendered unable to work, it is predicted that there may be impacts on our company’s research and development.

As such, we have taken measures to prepare a management system that does not depend excessively on these two individuals, and to reduce risk by transferring rights and educating and strengthening human capital, but because our degree of reliance on these two individuals is high, if either of them are rendered unable to work for any reason, it may have an impact on our profitability and business development.

6. We are a Small-Scale Organization

We are a small-scale organization with 4 people on the Board of Directors, 3 Auditors, and 60 employees, current as of March 31, 2014. The internal management system is in alignment with our current scale. We intend to increase our personnel as we expand our business, and plan to strengthen our internal management system accordingly.
In the event that we are unable to provide appropriate and sufficient organizational support for the expanded business and increased personnel, this may have an impact on our business and profitability.

7. Securing Human Capital

We have focused on acquiring a small number of exceptionally talented people with strong ability and drive in order to continue providing high-quality products that meet the market needs. As such, in the event that a core employee leaves the company without warning, it may cause a significant change in our member composition.

To prevent such circumstances from occurring, we intend to continue employing and educating superior talent while providing an attractive work environment as we expand the business. However, if we are unable to secure sufficient amounts of such human capital, it may have an impact on our business and profitability.

Risks from System Trouble

1. Defects in Software Provided by our Company

ASTERIA Warp, our primary product, is used in systems of high societal importance such as bank statements and news information broadcasting. Our company pays the utmost attention to quality management to prevent occurrences of defects (errors, bugs, and the like) in our software attributable to our group, and has taken risk-reducing measures for when defects do occur, such as software user license agreements and obtaining damage insurance. However, it cannot be guaranteed that a defect attributable to our group will not occur in the future. As such, there is a possibility that our business and profitability will be impacted by occurrences of liability for damages due to software defects or loss of trust from society.

Service Operation Trouble

Handbook has an overwhelmingly high number of cases where our company uses a cloud server. Our company pays the utmost attention to the operation of our cloud service to prevent occurrences of service being unavailable due to reasons attributable to our group, and has taken risk-reducing measures for when defects do occur, such as software user license agreements and obtaining damage insurance. However, it cannot be guaranteed that a defect attributable to our company will not occur in the future. As such, there is a possibility that our business and profitability will be impacted by occurrences of liability for damages due to software defects or loss of trust from society.

Internal System Trouble

While we have taken measures to counteract the effect of disasters, such as a backup system for our internal computer systems, there is a possibility that our business and profitability will be impacted if system trouble occurs due to reasons unpredictable at the present time, such as disasters including earthquake and fire, computer viruses, suspension of electricity supply, communication damage, or service interruptions or suspension due to communication providers.

Risks concerning Intellectual Property

At present, our group is unaware of any third parties who have acquired our patent rights, product rights, and other intellectual property rights that would impact our group’s business activities. Additionally, we have never received a warning relating to intellectual property rights from a third party, nor have we filed an infringement lawsuit. However, there is a possibility that our business and profitability would be impacted if a third party were to claim intellectual property right infringement relating to our future business activities causing our business operations to stop; if we were to be placed under a financial burden such as a compensation for damages; or if licensing a third party’s intellectual property rights were to become necessary, requiring a royalty payments, or if we are unable to obtain a license.

Risks concerning Dividend Policy

When it comes to dividend policy, we recognize the importance of strengthening our profitable growth and our financial structure that acts as a foundation supporting such growth. Thus, our basic policy includes proactive profit sharing to stockholders based on our company’s profitability conditions, keeping a balance between internal reserves and distributed profit.

Our group’s basic policy is to distribute dividends at the end of each period, once per year. The organization determining dividends is the Board of Directors.

Our group has decided on period-end per-stock dividends of 380 yen (equivalent of 1.90 yen after split) in period 12; 730 yen (equivalent of 3.65 yen after split) in period 13; 2.90 yen in period 14, when the stock was split; 2.90 yen in period 15, and 3.00 yen in period 16. However, because the decisions for whether to have dividends and the amount thereof are made based on profitability, there is a risk as to whether we can continue to provide a stable dividend.

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