Business and Other Risks

Font size

In the business development of the Group, the main matters that may cause risks and other matters that may significantly affect the decisions of investors are as follows:
Recognizing the possibility that these risks may occur, the Group's policy is to endeavor to prevent them from occurring and respond to them if they do occur, but the Group believes that investment decisions regarding the Company's shares must be undertaken after carefully considering these matters together with matters noted elsewhere in this document. Furthermore, forward-looking statements below are based on the judgment of the Group as of the end of this consolidated fiscal year and may differ from actual results owing to the uncertainty contained therein.

1. Business environment

(1) Internet market: The Group engages in various beauty-related businesses that utilize the Internet. The Group believes that growth in the Internet market will continue, but if the steady increase in Internet users is impaired due to the introduction of new legal regulations, other unexpected factors, or a significant change in market trends, the business development, financial position, and operating results of the Group may be affected.
(2) Response to technological innovation: There is active technological innovation in areas related to the Internet, and the Group believes that it must act quickly to enhance systems in response to technological innovation and amend business strategies, etc. The Group pays close attention to new technological trends in areas such as artificial intelligence and the Internet of Things, mainly in its systems' functions, and has created a structure that facilitates prompt system development. However, if there are unexpected technological innovations, etc., there is a possibility that additional system development expenses may be incurred for the Group's response. In addition, if there are any hindrances in the Group's appropriate response to system development, etc., it may lead to a decline in the competitiveness of the Group's businesses or a loss of users, etc., additionally the business development, financial position, and operating results of the Group may be affected.
(3) Beauty-related market: The Group engages in businesses in the beauty-related market. Within the beauty-related market, the Group's main business area is the cosmetics-related market, which the Group recognizes as having the characteristic of being relatively immune to economic trends and other factors in regard to advertising and marketing activities, consumer trends, etc., However, if there is a significant change in market trends in future, the business development, financial position, and operating results of the Group may be affected.

2. Business development

(1) BeautyPlatform @cosme: The Group makes efforts to enhance its B-to-C and B-to-B services as it looks to strengthen its earnings structure, the foundation of which is the online BeautyPlatform @cosme. However, if these initiatives do not capture the needs of the users of its services and the number of users declines, the business development, financial position, and operating results of the Group may be affected.
(2) Soundness of site operation, etc.: On @cosme, registered members can freely post impressions of cosmetics, etc., and product evaluations (reviews), while the Group has established terms of use and guidelines regarding site operation, and endeavors to encourage registered members to use the site appropriately by clearly displaying them on the site. In addition to agreeing to the guidelines that posts are limited to one per product per registered user, the Group has built a system for monitoring the content of all posts, including contracts with external parties, and maintains the sound operation of the site by implementing certain rules, such as deleting posts if they are found to be arbitrary posts that are not based on actual product evaluations by registered users or inappropriate posts, etc., that the Group cannot allow when operating the site, including slander, bullying, infringement of intellectual property rights, or content that violates social morals or public order. However, if the Group is unable to respond sufficiently to inappropriate posts on the site and cannot maintain the soundness of the site, the support of users may decline, etc., and the business development, financial position, and operating results of the Group may be affected.
(3) New store strategy and new format development: The Group intends to accelerate the speed at which it opens @cosme STORE shops and develop new retail store formats. However, if this development does not progress as the Group expects, the financial position and operating results of the Group may be affected. In addition, if the necessity of stores declines owing to significant changes in the economic environment or other factors and a significant divergence occurs with the earning targets for stores in business plans, etc., the Group may be required to report an impairment loss on fixed assets used in stores and the financial position and operating results of the Group may be affected.
(4) Inventories: The Group conducts appropriate inventory management and sales forecasts to minimize sales opportunity loss from out-of-stock items and prevent excess inventories, However, if sales forecasts are inaccurate, insufficient inventories or excess inventories may occur and the financial position and operating results of the Group may be affected.
(5) New business development: The Group aims to expand beauty services outside of cosmetics retail stores and enter into new beauty-related businesses. However, if the Group is unable to provide beauty services and products that meet customers' needs or if it is unable to develop its businesses as planned due to changes in the market environment, the financial position and operating results of the Group may be affected.
(6) Overseas business development: In addition to expanding wholesale and E-Commerce sales of cosmetics, etc., overseas, the Group also aims to make a full-scale expansion into overseas businesses, including store operation, beauty portal site operation, and development of cosmetic products. However, if it becomes difficult to develop its businesses due to factors such as being unable to overcome potential risks, such as laws and regulations in each country, systems and regulations, political and social trends, culture, religions, user preferences, and differences in commercial customs, there is a possibility that the business development, financial position, and operating results of the Group may be affected.
In addition, items on a local currency basis in overseas businesses may be subject to the risk of foreign currency fluctuations owing to foreign currency rates at conversion, and if there is a significant divergence between expected foreign exchange rates and actual rates, the business development, financial position, and operating results of the Group may be affected.
(7) Business alliances and mergers and acquisitions (“M&A”): In order to expand the scale of its businesses and diversify its sources of earnings, the Group focuses on expanding its businesses through business/capital alliances and M&A with companies with a high compatibility with the services of the Group. However, if integration with the acquired company or relationship building and strengthening with partners does not progress as planned; if the business synergies, etc., initially expected cannot be obtained from the integration or partnership; or if the business alliance is ended for some reason, etc., there is a possibility that the Group may be unable to recover profits to cover the funds, time, or other costs required for investment and the business development, financial position, and operating results of the Group may be affected. In addition, the Group shall amortize related goodwill over a certain future period in accordance with accounting standards, but if it is judged that expected results may not be obtained due to changes in the business environment or status of competition, etc., the Group may be required to report an impairment loss on this goodwill, and the business development, financial position, and operating results of the Group may be affected.
(8) Competition: The Group recognizes that @cosme, which it operates, is supported mainly by female users. In addition to strengthening the @cosme earnings structure, the Group's policy is to develop its business in beauty-related areas that utilize the Internet, but if, for example, a major firm enters these business areas and competition intensifies, the business development, financial position, and operating results of the Group may be affected.

3. Compliance

(1) Legal regulations: If new laws, regulations, etc., are established or there are changes to the interpretation of existing laws, and regulations, etc., affecting services related to use of the Internet and Internet-related business operators in the various service fields where the Group operates, including various laws and regulations in Japan, such as the Act on the Limitation of Liability for Damages of Specified Telecommunications Service Providers and the Right to Demand Disclosure of Identification Information of the Senders; the Act on Prohibition of Unauthorized Computer Access; the Act on Regulation of Transmission of Specified Electronic Mail; the Act on Specified Commercial Transactions; the Act against Unjustifiable Premiums and Misleading Representations; the Law on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices; and the Act on the Protection of Personal Information, as well as the legal systems, laws, and regulations in the various foreign countries where the Group's overseas offices are located, then there is a possibility that the business development, financial position, and operating results of the Group may be affected.
(2) Protection of personal information: When providing services, the Group acquires the personal information of registered members (including name, email address, gender, address, occupation, date of birth, skin type, hair type, review history, and purchase history) and, therefore, has the duty of a personal information handling business operator as provided for in the “Act on the Protection of Personal Information.” In order to thoroughly protect personal information, the Group has established a policy regarding the protection of personal information and endeavors to ensure thorough compliance with this policy in addition to carrying out management and operation with care, including internal training on the handling of personal information. However, the possibility of a leak, falsification, unauthorized use, unauthorized external access, or other unexpected event occurring in regard to personal information held by the Group, etc., exists. If such an event occurs, the business development, financial position, and operating results of the Group may be affected, due to the cost of an appropriate response, claims for damages against the Group, a decline in the Group's credit, etc.
(3) Intellectual property rights: In addition to investigating the registration and usage status of patents, trademark rights, and other intellectual property rights held by third parties through external patent attorneys, etc., the Group also takes steps as necessary to properly safe guard its intellectual property, by applying to register the Group's intellectual property rights, etc., in Japan and overseas.
However, if an infringement of intellectual property rights held by a third party occurs, due to, for example, the registration and usage status of patents, trademark rights, and other intellectual property rights held by third parties not plainly discovered even after an investigation, then there is a possibility that there may be a claim for damages against the Group by the third party and the business development, financial position, and operating results of the Group may be affected.
In addition, the Group also provides reviews that users have posted for use in advertisements, promotional materials, etc., in return for compensation. In such cases, the Group has taken into consideration the opinions of attorneys and other experts regarding these reviews and received users' consent for the terms of use at registration, which set forth the fact that the Company may use reviews posted, but if a reputational issue occurs owing to a complaint from the user that posted the review regarding the handling of rights related to use of the review, etc., the business development, financial position, and operating results of the Group may be affected.
(4) Internal management structure: Based on the recognition that effectively functioning corporate governance is essential for the sustainable enhancement of corporate value, the Group recognizes that it must ensure the propriety of business activities and reliability of financial reporting in addition to thoroughly complying with laws and regulations based on sound ethical standards. The Group has established Compliance Regulations to ensure that misconduct by officers, employees, and other internal parties does not occur, and has also set forth the laws, regulations, and rules that should be complied with by officers, and employees, etc., of the Group, and confirms the status of compliance through internal audits, etc. However, if a violation of laws, and regulations, etc., or misconduct by internal parties occurs, or if circumstances occur whereby the creation of an internal management structure is unable to keep pace with rapid business expansion, the business development, financial position, and operating results of the Group may be affected.
(5) Occurrence of lawsuits: The Group endeavors to reduce the risk of violation of laws, and regulations, etc., by establishing Compliance Regulations and ensuring officers and employees comply with these regulations. However, regardless of whether there has been a violation of laws, and regulations, etc., by the Group or its officers and employees, there is a possibility of unforeseen issues arising with users, business partners, and third parties that could lead to a lawsuit. Depending on the content and results of the lawsuit filed, the business development, financial position, and operating results of the Group may be affected owing to large expenses required to respond to the lawsuit, deterioration in corporate brand image, etc.

4. Other

(1) System investment, etc.: If there is a rapid change in Internet technology, services, etc., or a rapid increase in members or site views that exceeds the targets of the Group, there is a possibility that the Group may be forced to change the timing, content, or scale of system investment. If such events occur, system investment, depreciation, and amortization may increase, leading to the reporting of an impairment loss, and there is a possibility that the business development, financial position, and operating results of the Group may be affected.
(2) System failures and security measures: The Group engages mainly in businesses that pertain to services offered in an online environment. The Group utilizes various devices, such as servers, and telecommunication lines, etc. In order to offer services in a stable manner, the Group uses data centers with earthquake-resistant structures and, takes measurements against unauthorized access and virus by blocking external unauthorized access to the Company's servers with firewall, in addition to implementing double protection measures with security at the level of the operating system in use on servers, etc., and conducting regular inspections for weaknesses. However, if power supply is suspended; telecommunication lines are blocked; there is a software or hardware error, natural disaster, or other system failure that is unexpected by the Group; or if there is a criminal external unauthorized access, i.e., unauthorized entry into the Company's servers, etc., and this leads to users being unable to use the Company's services, the business development, financial position, and operating results of the Group may be affected.
(3) Reliance on specific persons: Tetsuro Yoshimatsu, Chairperson and Chief Executive Officer of the Company, is the Company's founder and, as Chief Executive Officer, has served as Representative Director since the establishment of the Company. Through his experience in building the current business foundations of the Company with his personal network centered on the Internet industry, Mr. Yoshimatsu is familiar with the Internet-related industry and plays an important role in determining and executing the management policies and business strategies of the Group. The Group strives to share information among officers and managers in the Company's Board of Directors and management meeting, etc., and strengthen its management organization, as well as create a management structure that is not excessively reliant on Mr. Yoshimatsu, but if for some reason, it becomes difficult for Mr. Yoshimatsu to continue the business operations of the Group, the business development, financial position, and operating results of the Group may be affected.
(4) Securing and developing personnel: The Group believes that it is necessary to secure human resources on an ongoing basis, in line with expected future business expansion and new business development. In particular, the Group's policy is to endeavor to secure human resources with advanced management capabilities and skills in the area of system technology, for the expansion and growth of business foundations, in addition to creating a training system to retain human resources. However, if the Group is unable to sufficiently secure or develop the human resources it seeks or there is loss of human resources, the normal implementation of business activities and the expansion of new businesses, etc., may be hindered, and if such circumstances occur, the business development, financial position, and operating results of the Group may be affected.
(5) Investment: The Group invests in companies operating in beauty- and Internet-related areas in Japan and overseas. As the Group mainly invests in non-listed companies, there are many uncertain factors in regard to future prospects, and depending on the future operating results of companies that the Group invests in, including deteriorating operating results owing to internal factors such as business management structures in addition to external factors such as the market environment, the Group may be required to report an impairment loss, etc., on investment securities held by it, etc., and the business development, financial position, and operating results of the Group may be affected.
(6) Dilution of value of shares due to exercise of stock options: The Group has adopted a stock option program as an incentive for Directors and employees. In addition, the Group is considering continuing the utilization of a stock option program in future, and if stock acquisition rights, etc., granted in future are exercised in addition to stock acquisition rights, etc., granted at present, the value of shares held may be diluted.
(7) Disasters, emergencies, etc.: If there is a large-scale natural disaster, international conflict, etc., in or around Tokyo in Japan or China, etc., where the Group's main offices are located, there is a possibility that the Group's services may be suspended, etc., and in addition to harming the reliability of the Company and its brand image, there is a possibility that the operating results and financial position of the Group may be affected. To prepare for cases of natural disaster, and international conflict, etc., the Group has established countermeasures in the event of emergency, such as formulating business continuity plans, but if there is great harm to physical assets or personnel, continuation of the Group's business activities itself may become difficult or impossible.