Risk information | From the president to investors
As of June 26, 2020
With respect to matters related to the status of our business, accounting, etc. as described in the Annual Securities Report, our management recognizes that the following major risks may seriously affect the status of finance, business performance and cash flow of our consolidated companies. The Group will fully recognize the possibility of risks and avoid them whenever possible, and take accurate measures to minimize damage if any risk materializes. The future issues mentioned in the text are judged by the Group as of the end of the consolidated fiscal year (end of March 2020).
（1）Business environment
Diversification and procurement of Internet devices
The Company's principle products are Internet devices such as PCs, smartphones, and tablets, but the Company also provides a wide variety of other products. The Company engages in the proactive sales of these product groups and provides technical services & support to customers when they replace or add Internet devices. If the range of our products is narrowed down, such as when a manufacturer limits the products that they can sell to us due to our business relationship with them or if the delivery of products is delayed due to a manufacturer's stagnant supply chain, it will lead to a decrease in product sales and the loss of sales opportunities for new memberships and technical support and services associated with the products. Consequently, there is a possibility that it will affect the Group's financial performance. Furthermore, if the product lineup is changed substantially in stores, if inventories and costs increase, or if there is inventory loss due to product obsolescence and others as a result of the aggressive sales of new Internet devices, it may also affect the Group's financial performance.
Dependence on specific business partners and products
At times, some manufacturers or products suddenly become popular in the Internet device market, which may in turn increase our dependence on specific products or business partners. In such a case, changes in our manufacturers' policies that allow us to sell the products or provide us with stable supply will have an impact on our purchase of popular products, and there is a possibility that we will not be able to meet customer demand and the Group's financial performance will be affected.
Competition
In the operations of PC DEPOT Smart Life Stores and PC DEPOT, we provide products related to Internet devices such as PCs, smartphones and, tablets, as well as service products such as technical services and support. If consumer electronics superstores give large discounts on PCs and their peripherals, the profitability of PC sales may decline due to the reduced gross profit, which may affect the Group's financial performance. In addition, while digital technologies are becoming more common in our daily lives, partial competition with different industries may arise in the membership service business where mainly support is provided. In such a case, if a price competition occurs, it may affect the Group's financial performance.
・PC DEPOT Smart Life Store（Movie）
・PC DEPOT（Movie）
Similar businesses
Self-developed service products account for over 50% of sales in the Company's business. For example, we provide our original products such as technical support and services, Premium Membership, and solution services in which products and services are combined with networks—Mobile Virtual Network Operator (MVNO) business and Fixed Virtual Network Operator (FVNO) business. We are considering making these service products stronger by protecting them in all aspects, including legal protection such as the acquisition of patents for systems and trademark rights. However, if our competitors infringe our intellectual property rights and compete with similar products, or even if there is no infringement but the competition intensifies due to similar marketing, there is a possibility that the Group's financial performance will be affected. In addition, if other companies market in a similar and malicious manner, the image of our services may deteriorate.
（2）Business characteristics
Premium Membership
Our Premium Membership and solution services, which account for over 50% of sales, are services and support that continue for a long period of time, and we strive to maintain and improve the quality of these service products. If the loss of members surges as a result of a delay in the development or provision of service products, the discontinuation or termination of related contents after the provision of service products, or difficulties in providing services due to a failure in the system used for the membership service, there is a possibility that it will affect the Group's business and financial performance.
MVNO and FVNO Businesses
We receive network services from a telecommunication carrier and resell them through MVNO and FVNO. If the telecommunication carrier's services are interrupted or discontinued, sales generated through those services and other related service revenues will decrease, and it may affect the Group's financial performance.
・MVNO（o'zzio LTE）
・FVNO（o'zzio Hikari）
Internet provider business
The Company and one of its subsidiaries provide Internet services. If the number of subscribers of the subsidiary who withdraw from the service increases drastically or the Internet service is discontinued for a certain period of time, there is a possibility that it will affect the Group's business and financial performance.
Bad debts of accounts receivable
With respect to premium membership and certain solution services, etc., the Company collects a part of the price of information terminals as monthly service fees after the sale thereof during the sale of products that combine services and Internet devices, or the MVNO business, etc. With the increasing amount of accounts receivable for such service products, we are enhancing our credit management to prepare for the risk of bad debts. However, if the number of bad debts increases more than the Company expects, rendering the collection of accounts receivable impossible, it may affect the business results of the Group.
Franchise-related receivables and defaults by building sub-lessees
Based on the franchise agreement, the Company records the accounts payables of franchise stores as accounts receivables (credits) and credit card payments made at the franchise stores as deposits (debts). While we hedge some irrecoverable debt risks by offsetting these credits and debts, all or part of the difference may not be collected if the company managing the franchise stores goes bankrupt. Furthermore, we earn rent revenues under a sublease agreement on some stores, and if a sub-lessee experiences difficulty in continuing their business operations, there is a possibility that we will not be able to collect rent from them.
The Company's brand product
The Company's private band "OZZIO" is our original brand. We adopt an exclusive branding method where products that are developed and manufactured by a manufacturer are changed to our brand. The manufacturer is responsible for manufacturing the product and providing after-sales support, but if an accident occurs, there is a possibility that we will be liable to compensate for more damages than what a seller is responsible for.
Original brand「O'ZZIO」
Mistakes made when returning devices or mistakes in the procedure
When the Company provides technical services and support such as check-up, repair or data transfer/recovery, each store keeps the customers' Internet devices such as PCs, smartphones, and tablets. When doing so, there is a possibility that the staff may make a mistake such as returning the wrong device. Although the store auditor takes preventive measures and other countermeasures to avoid this, we may be asked to compensate for damages if a mistake occurs. In such a case, there is a possibility that it will affect the Group's business and financial performance.
（3）Store openings
Opening of new stores
If a plan to open new stores by the Group and franchise companies is changed or postponed, it may have an impact on the Group's financial performance.
Closure of stores
If a store cannot secure earnings or its earnings deteriorate, we strive to minimize the impact on the whole financial performance as much as possible by closing the store. However, the Group's financial performance may be affected by losses accompanied by the closure of a store and a delay in opening an alternative store.
Leases of stores
The Company leases many of its stores under a building lease agreement. While we strive to establish good relationships with the lessors by having periodic dialogues with them, if a lessor goes bankrupt or becomes insolvent and we are unable to collect all or part of the security money and lease deposit, there is a possibility that it may affect the Group's financial performance.
Changes in the shop-in-shop of PC DEPOT PC Clinic
PC DEPOT PC Clinic uses in-store retail space, and as of the fiscal year end, 58 stores that are directly managed by the Group and 5 stores that are managed by a subsidiary are operating in the stores of K'S HOLDINGS CORPORATION. If we face difficulties in continuing the operations of many of our shop-in-shop stores due to the closure of the stores or the withdrawal/move of the shop-in-shop stores for some reason, there is a possibility that it will affect the Group's management.
・PC DEPOT PC Clinic in stores owned by K'S HOLDINGS CORPORATION（Movie）
（4）Management structure
Dependence on the President
Takahisa Nojima, President, is the founder of the Group and has been the Chief Executive Officer since its establishment. He has abundant experience and knowledge of IT and service and retail industries, and plays an extremely important role in making decisions on the management policy and business strategies and executing them. The Group strives to strengthen the management organization and the sharing of information among directors and officers at the board of directors' meetings and management meetings, and prepares a management structure that is not too dependent on him. If he has difficulties in continuing the Group's operations for some reason, there is a possibility that it may have an impact on the Group's business and financial performance.
Human resources
In the Group, many experts, including engineers and digital life planners, work closely together at each store and the headquarters, and provide total support in an integrated manner mainly through the membership service. In order to ensure the continuance and growth of the service, we need to improve our human resources, keep the required number of staff, and employ staff who can handle the diversifying society in the future. If these are not implemented as planned and it becomes difficult to acquire suitable staff, it may reduce our competitiveness and be a factor in limiting our business expansions.
Internal control system
The Group has prepared an internal control system to deal with compliance-related issues and set up a Compliance Office in order to establish a more comprehensive internal control system. In addition to staff education, we confirm that our employees are ready to become a member of the Company using pledges and confirmations so that our directors, executive officers, and employees engage in corporate activities based on high ethical standards. However, if any illegal action occurs intentionally or negligently and lowers our social credibility and brand image as a result, there is a possibility that the Group's business and financial performance will be affected.
The Group's brand image
If the entire Group's image is impaired as a result of inappropriate actions taken by the Company, its directors, or employees, harmful rumors based on unreliable information, or scandals caused by the franchise corporations, there is a possibility that it will affect the Group's business and financial performance due to impaired credibility, staff resignation, and difficulties in securing human resources.
M&A
In addition to the sales of various Internet devices such as PCs, the Group also aims to create a unique business model in which we plan the future of our customers' smart lives together with member customersand carry them out systematically. We try to differentiate our business clearly from Internet mail order businesses and consumer electronics superstores, but if we are regarded to be in the same industry as those businesses, there is a risk that we will be taken over by a bigger company in the same industry because the size of those companies is much larger. Furthermore, the structure of the society has been changing with an emphasis on digitalization, which increases the risk of us being purchased by a company from another industry. In such a case, there is a possibility that it will affect the Group's business and financial performance.
（5）System failures
In the Group's business, we operate a number of systems and software such as the POS system, a comprehensive control system for Premium Membership, a system for cloud services, and Internet services. The Group's IT Strategic Promotion Department has taken measures for these systems, including ensuring system redundancy, improving availability, and enhancing data backup and security, in order to operate the systems stably. However, if system failures occur due to earthquakes and other natural disasters, power outage and other disruptions in infrastructures, hardware or software malfunctions, an increase in the system load resulting from access concentration, computer viruses, external attacks, and the loss of system data, there is a possibility that store operations and the provision of service products including the Premium Membership will be interrupted, which will stop billings and create uncollected charges. In such cases, we will prioritize the handling and resolution of these problems, but the Group's business and financial performance may be affected by the loss of marketing opportunities, loss of credibility, and an increase in temporary costs required to recover the systems.
（6）Legal regulations
The Group conducts its business operations after it has been inspected and acquired permits and licenses under store-related laws, which include the Building Standards Act, the Act against Unjustifiable Premiums and Misleading Representations, the Anti-Trust Act, the Subcontract Act, and the Telecommunications Business Act. If a legal regulation is unexpectedly enacted or amended, if the administration guidance policy is changed, or if voluntary restraints are asked, there is a possibility that the Group's business and financial performance will be affected by the adjustment or delay of store openings or operations, newly incurred response costs, and the restrictions of business activities.
（7）Protection of personal data
The Group takes full care in protecting personal data by strengthening its management system for personal data and restricting the access to the personal data that is obtained and owned by the Group. The Group's stores operate under the principle of "not asking, not having, and not bringing in" unnecessary personal data. In addition, data handling is strictly controlled at the call center of Premium Membership based on certain rules, such as limiting entry to the center and limiting the employees who can access personal data. However, there is a possibility that personal data may be leaked or misused as a result of unforeseen situations such as intentional data breach by our staff or due to their negligence, unauthorized access to our systems, or computer viruses. If such an incident occurs, there is a possibility that the Group will need to compensate for damages, which may affect the Group's business and financial performance. Furthermore, the Group's credibility may significantly decline, which will have a massive impact on our business activities.
（8）Lawsuits
There is a possibility that the Group may be sued for infringing the rights and interests of third parties including customers, business partners, and employees and asked to compensate for damages. As a result, there is a possibility that it may disrupt the Group's business development, hurt the corporate image, as well as affect its business and financial performance due to compensation payments.
（9）Administrative penalties
There is a possibility that the Group may receive administrative penalties or guidance from administrative agencies, which will not only disrupt the Group's business development and hurt the corporate image, but also affect our business and financial performance.
（10）Natural disasters
If store operations are disrupted by natural disasters such as an earthquake, typhoon, flood, tsunami, or contamination, fire or power outage, planned power outage caused by electricity shortage, and/or the disruption of infrastructures in the areas where the Group, the franchise stores, and the headquarters deploy their business activities, there is a possibility that sales will decrease and costs will be incurred to restore them back to the previous state and to hire personnel. In preparation for such an event, we have enhanced the crisis management system by reviewing the "Disaster Countermeasures Manual" and our reinforcements against earthquakes. However, if a disaster of a larger magnitude than expected occurs, it may affect business continuation. Furthermore, if a disaster occurs, we will place first priority on the safety and lives of our customers and employees and stop operations until the risks have been eliminated and safety can be ensured, which may affect business continuation or the Group's financial performance.
（11）Occurrence of infectious diseases in Japan
The Group states that we will contribute to regional communities through our business activities by "eliminating the digital divide in communities" and focusing on human interactions. If a serious infectious disease occurs and turns into a pandemic like the novel influenza, there is a possibility that we will stop part or all of our store and headquarters operations in order to prevent the spread of infection and secure the safety of our employees. Our subsidiaries may also face difficulties in continuing their businesses for a certain period of time, which may have a significant impact on the Group's business and financial performance. In addition, if a highly contagious disease becomes an epidemic and a larger number of employees and stakeholders are infected than anticipated, there is a possibility that it will affect business continuation.
Specific initiatives taken against the spread of the novel coronavirus this year as of the submission date of this document are as follows:
・In addition to our 43 stores located in the Greater Tokyo Area, all of our stores partially limited their operations from March 28, 2020. After the cancellation of the declaration of the state of emergency, our stores have opened while taking safety measures according to the situation in each area we operate.
・We prioritized our premium members and customers in local communities where there are issues that need to be tackled promptly, and provide services for preparing for or consultations about telecommuting, online education, remote communication, etc.
・To reduce the time that customers are in our stores, we request that customers reserve a date and time for visiting one of our store in advance for non-emergency matters or take other measures to avoid the so-called “Three Cs” (closed spaces with poor ventilation, crowded places with many people nearby, and a setting in which people are in close contact, such as conversations at close range).
・ We suspended ordinary advertising, shortened our business hours, and increased the number of our store holidays. After the cancellation of the declaration of the state of emergency, we resumed ordinary advertising.
・ For the health management of individuals, we ensure that our employees check their temperature upon arriving at work, wear masks, wash their hands, use sanitizer, etc. without fail, hold in principle all business meetings online, including commercial negotiations involving head office, and implement at head office and other workplaces a staggered working hours system and telecommuting, thereby putting priority on the ensuring of safety of our customers, employees, and business partners.
・Our priority issue is to secure funds for an extended period of time. We have secured a fixed amount of funds and will consider securing more to cope with future issues.
・ As for the status of our product inventory, we expect product inventories, inventory changes and future prospects to be within a certain range with regard to most products. Although the delivery of some products from suppliers was delayed, the current inventory status is returning to normal. If confusion arises in the global supply chain in future, it may affect inventories and the sale of products.
・With respect to future prospects, if economic conditions and employment environment continue to be uncertain for a long period of time due to the spread of the novel coronavirus infection or even after the situation returns to normal, our sales may be reduced due to customers withdrawing from premium membership caused by a decrease in consumption and other matters. However, society overall is in greater need for taking measures related to the digital environment and we will take all possible measures to have people recognize the necessity of the Company’s business.
