Risk Factors

The risk factors associated with the businesses of ValueCommerce and subsidiaries (the “Group”) are described below. ValueCommerce (the “Company”) is aware of the following risk factors and seeks to avoid/mitigate/transfer them if they are likely to occur. In the meantime, risks relating to the company are not limited to the risks described here.
This description may contain forward-looking statements on future results and projections. These are based on information currently available on March 28, 2019 and on certain assumptions that we deem reasonable.

1. Business environment

(1) e-commerce market

To maximize the performance, “Gross Merchandise Value (GMV)” of the commerce business operators, our clients, the Group provides marketing solutions from attracting customers to maintaining them, and they are correlated with the expansion and diffusion of the e-commerce market. We expect the e-commerce market to continue to expand. However, if the merchandise volume does not expand as expected due to rapid changes in the environment surrounding the Internet and other factors, the Group’s results could be significantly affected.

(2) Trends in the Internet advertising market

The Group provides marketing solutions, including a pay-per-performance Internet ad distribution service on the Internet, and they are correlated with the expansion and diffusion of the Internet advertising market. Although the Internet advertising market is expanding, the advertising market is susceptible to the business environment. The adverse effect of a decline in aggregate ad spending in the Internet advertising market due to volatile business conditions could significantly affect the Group’s results.

(3) Consumer behavior

The Group provides services primarily to support B-to-C e-commerce, and these services are correlated with consumer spending trends. If long-term stagnation in the domestic market results in sluggish growth in the domestic e-commerce market and Internet advertising market, the Group’s results could be significantly affected.

(4) Legal restrictions

The Group has not seen any particular legal regulations that could significantly affect the Group’s businesses. However, if any laws, administrative guidance, or other regulations for Internet users and businesses are enacted that would restrict the use of the Internet for commercial or advertising purposes, the Group’s businesses and results could be significantly affected. In addition, if the technologies, including cookies, that the Company’s network uses to distribute ads, track orders, and prevent irregular practices are regulated and restricted, a large investment would be required to develop alternative methods, the Group’s results could significantly affected.

2. Business characteristics

(1) Competition

In the Internet advertising market where the Group operates its business, intensified competition due to the development of new technologies, the entry of new companies into the market and among other factors are expected. The Group seeks to increase its competitiveness by developing new functions and business alliances. However, if the Group cannot attain a sufficient competitive advantage through differentiation against its competitors, the Group’s results could be significantly affected.

(2) Changing business models

In the Internet advertising market where the Group operates its business, the pace of change in the associated technologies and business models is fast, and business models using smart devices, etc. have been expanding recently. To maintain the provision of services of a certain level as an Internet business operator, the Group needs to respond actively and flexibly to changing technological innovations and business models. However, if the Group is unable to follow the changes and adopt or apply the new technologies and business models needed for the reinforcement of the existing services and the introduction of new services appropriately and effectively, the Group’s results could be significantly affected.

(3) Systems

Maintaining stable system operation is necessary for the Group’s businesses, and the Group conducts routine maintenance. The Group continuously makes capital expenditures and reviews the configuration of its systems in anticipation of the demand for its services. However, the failure of one of the Group’s mission-critical systems or the temporary inability to provide services due to a delay in a system’s response time, equipment failure, manmade disaster, accident, or other reasons could significantly affect the Group’s results.

(4) Dependence on external environments and technologies

In providing its services and support, the Group uses systems created by third parties and external infrastructure. The Group’s systems only work if the third-party systems employed by the users of the Group’s services work properly. A failure in the external environment could significantly affect the Group’s businesses.

(5) Harmful websites (antisocial websites, including websites associated with malicious business practices and solicitations)

The Group approves the use of each service only if the participants vow to comply with laws and regulations as well as the Group’s bylaws. The Group also checks the content of the websites, primarily to determine whether the websites are antisocial, whether they have violated laws, whether they include expressions pertaining to a performance guarantee, and whether they conflict with the related laws and regulations. If the Group finds that any of its bylaws have been violated, it asks the participants to correct the violation(s). If the participants do not correct the violations, the Group removes them from the network. However, it is actually difficult to guarantee that all websites will be exhaustively monitored. Failure to prevent illegal activities, such as the promotion of illegal products, exaggerated advertising claims and malicious solicitations, and to ensure a sound network, which is indispensable for the Group’s services, could significantly affect the Group’s confidence and results.

(6) Information security

Since the Group has a vast quantity of information assets related to transactions in providing services, it has established a basic information security policy to manage the information assets appropriately. The information security officer undertakes periodic assessments of appropriateness and makes efforts to carry out operations continuously and efficiently. However, if damage such as human error in operations or intentional illegal acts, system failures due to natural disasters, cyberattacks including malware infections or targeted attacks, information leakage, data destruction or alteration, or service suspension due to the vulnerability of systems or products occur, the reliability or corporate image of the Group could decline and a huge amount of expenses may be incurred for compensation for damage and the modification of security systems. This could, as a result, reduce the Group’s competitiveness and significantly affect the Group’s businesses and results.

(7) Personal information management

The Group has obtained personal information of service users in providing services. The Group takes every possible means to ensure the protection of personal information by establishing and observing a privacy policy regarding the handling of such information. In addition, when the management of personal information is outsourced, the standards for selecting a contractor are determined and the management of personal information is entrusted only to a contractor who can implement information security measures at least at a certain level. However, if personal information is leaked or otherwise handled inappropriately due to intentional attacks/errors of related parties of the Group or the contractor, attacks by a third party with malicious intent or unforeseen situations, the reliability or corporate image of the Group could decline and a huge amount of expenses may be incurred for compensation for damage and the modification of security systems. This could, as a result, reduce the Group’s competitiveness and significantly affect the Group’s businesses and results.

(8) Intellectual property rights

The Group has acquired the patent rights of technologies and business models that form a foundation for the services provided by the Company, and has registered various trademarks in Japan and abroad. However, there is no certainty that the patent rights that the Group has not acquired at the present time will be acquired going forward. In the meantime, when various business operators in Japan and abroad acquire patent rights and other intellectual property rights in the business areas of the Group, lawsuits or claims against the Group may occur depending on the content. This could significantly affect the Group’s businesses and results. In addition, the Group engages in business activities while constantly taking care not to infringe the intellectual property rights of third parties. However, it is difficult to fully grasp the current status of intellectual property rights in the business areas of the Group. If the Group infringes the intellectual property rights of third parties, it may subject the Group to damages or injunctions of use. If these situations arise, the Group’s businesses and results could be significantly affected.

(9) Natural disasters, infectious disease outbreaks, accidents, and emergency situations

Since the personnel and material resources of the Group are concentrated in Tokyo, the Group is likely to be affected by natural disasters including earthquake or fire, and damage of tangible assets, power outage, or lines failure associated with the disasters. The Group strives to undertake improvements to the physical environment to ensure that it can withstand disasters, not to mention ensuring the lives and safety of directors and all employees. The Group also makes efforts to take companywide measures, bearing in mind the prevention of health damage and the continuation of important businesses as to infectious disease outbreaks. However, business continuation during a disasters and recovery from the disaster may not go well due to unforeseen damage, which could significantly affect the Group’s business continuation and results.
If accidents/incidents or terrorism/international disputes occur triggered by events outside natural disasters and they invite business suspension or business incompetence due to the impact of the emergency, they could significantly affect the Group’s businesses and results.

(10) Organizational structure and human resources

To expand operations and respond to the diversification of stakeholders’ needs, the Group aims to improve its personnel distribution, organizational structure, and internal control system. In the meantime, the Group needs to secure excellent human resources in a timely manner to facilitate operations for further growth. However, if the Group cannot recruit or cultivate competent human resources as expected or if key persons leave the Group, this could generate problems in the Group’s operations and significantly affect the Group’s businesses and results.

(11) Internal control

The Group strives to strengthen its internal control system in order to prevent a negative influence on business operation through human error due to occupational causes or a dishonest act of the internal persons concerned, etc. In addition, the Internal Audit Office evaluates the internal control system and the execution situation of business, and provides concrete advice regarding business improvement. However, if a problem occurs in business operation according to an unforeseen situation, the Group’s businesses and results could be significantly affected.

3. Strong dependence on specific business models

To realize the vision of “To Be the Best Performance Marketing Company Representing Japan”, the Group expands its businesses based on the business model whereby the Group’s revenues will increase by improving the performance, “Gross Merchandise Value (GMV)” of commerce business operators, our clients. Accordingly, if the performance of the clients does not improve as expected due to the worse results of the clients or changes in their marketing policies, the Group’s results could be significantly affected.

4. Relationships with business connections

(1) Business alliance with Yahoo Japan Corporation

Yahoo Japan Corporation, a fellow subsidiary of the Company, is our major customer. The Company has formed a business alliance with Yahoo Japan Corporation, principally to expand operations by strengthening its business ties. The Company’s policy for doing business with Yahoo Japan Corporation is to increase profits for both companies. The Company achieves synergies by linking its services to their businesses, including the commerce business. However, the Company’s services partly depend on their businesses, and if a competition problem arises within the parent company Group in the businesses the Company engages in, if parent company Group changes its management policy in relation to the Company, or if the alliance cannot be sustained for other reasons, the Group’s businesses and results could be significantly affected.

(2) Major advertisers and publisher media

The Group seeks to acquire new clients so that it will not depend too strongly on specific industries and advertisers. However, the Group strives to improve its results by providing consultations for those advertisers with which it has good, stable relationships, based on the advertising techniques and marketing data of the Group. As a result, sales from certain advertisers could account for a greater percentage of total revenues. Changes in the business strategies or financial situation of these advertisers, or their policies regarding transactions with the Group, could significantly affect the Group’s results. Despite maintaining its relationships with these publisher media that can attract a lot of clients and that have strong advertising, changes in these publisher media’s business strategies, financial situation or their policies regarding transactions with the Group could significantly affect the Group’s results.

5. Future business expansion

(1) Risks associated with investing in/loaning to and developing new businesses

To expand its businesses, the Group could establish subsidiaries and joint venture companies or acquire other companies in Japan or overseas. Investments and loans for these activities could be large compared with the Group’s current operation scale. If the Group initiates new businesses, it might not develop them as planned due to unexpected factors. These situations could significantly affect the Group’s businesses and results. It is hard to accurately estimate the effect on the Group of the status of the businesses the Group has invested in/loaned to, or the effect on the Group of new businesses. The Group may not recoup its investments or loans due to unexpected circumstances, which could significantly affect the Group’s results.

(2) Risks associated with the development of global operations

As for the business model of the Group, its services can be rolled out and provided not only in Japan, but also abroad. If unexpected changes in regulatory requirements or political or economic factors that have an adverse effect or social confusion due to terrorism/conflicts/natural disasters occur in business development abroad in the future, the Group’s results could be significantly affected.

(3) Risks related to financing

To expand its businesses, the Group must meet the financial requirements for the development of new technologies and capital expenditures. The Group will mitigate risks by diversifying its fund-raising methods, including capital market financing. If the Group cannot raise funds due to changing circumstances, the Group’s results could be significantly affected.

6. Other

(1) Dividend policy

The Company regards returns to shareholders as one of its important management policies. In terms of dividend policy, our basic policy is to pay dividends in accordance with results while securing internal reserves for investments for future growth. We have set a target of a consolidated dividend payout ratio of at least 30%. However, the Company may not be able to achieve the target dividend payout ratio due to rapid changes in the business environment.

(2) Stock dilution due to the exercise of stock options

The Company grants stock options to enhance the motivation of directors and employees to achieve improvements of corporate value in the long term. The number of shares to be issued per stock acquisition right as of the last day of December 2019 is 38,800 shares, and the ratio of this to the total number of shares issued, 34,471,000 shares, is 0.11%. If new shares are issued and the total number of shares issued increases due to the exercise of stock options that could be newly granted in the future, the stock value per share may be diluted and have an impact on stock price formation.

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