RISK FACTORS

Below, we have outlined the potential risks associated with our group’s businesses. Some of the points we mention are not risks as such. We decided to include them anyway because we believe that being open and transparent about these matters will further assist investors in making investment decisions. The information below includes projections and other forward-looking assumptions, which are based on information available to us as of the end of the end of the current consolidated fiscal year. Please note that these statements are not exhaustive of all possible factors that may arise in the future.

(1)Risks related to the business climate

① Online advertising: market trends and competition

Our group operates in online advertising, the market for which has grown dramatically during the past 10 years. Online advertising and advertising in general is vulnerable to general economic trends. In the future, our group’s financial position and performance might be adversely affected if economic conditions deteriorate, advertising budgets shrink, or if the market grows less than expected.
We do everything we can to gain an edge in this ever-competitive climate. However, even our very best efforts might prove unsuccessful. Failure to gain the competitive advantage we seek would adversely impact the financial position and performance of our group.

② Technological innovation risk

The services our group delivers are grounded in internet technology. E-commerce is a volatile business arena due to a constant succession of new technological innovations as well as the services they underlie. Smartphones, tablets, and similar devices have rapidly gained traction as ad-displaying devices, and this trend is prompting a series of new services that target these devices.
To manage innovation risk, we hire and train talented engineers, provide an innovation-friendly workplace, and acquire cutting-edge technology and knowhow—particularly in relation to smartphones.
However, if we struggle to acquire the necessary knowhow or if we fall behind in the technology race, our competitiveness might decline as a result. On the other hand, keeping up with new technology might entail increased spending on systems and human resources. If our technological prowess declines, so too will the quality of our services and our competiveness. Such an eventuality would adversely impact the financial position and performance of our group.

③ Overseas business risks

In our online advertising business, we have developed an Asian network consisting of subsidiaries in Singapore, Vietnam, Indonesia, and Thailand. We intend to keep advancing overseas because we regard overseas business as a future growth driver for the group. However, business might stall if we struggle to comply with the local business customs or regulatory environment. In such case, we might fail to recoup our investment, which would adversely impact the financial position and performance of our group.

④ Natural disasters

Since we rely on servers for our business activities, we must consider the risk of system failure in a natural or human-made disasters. We use a remotely located data center, back up our data regularly, monitor the backup status, and do everything else we can to preempt or avert this risk. However, if a major disaster (natural or human-made) strikes Tokyo (where we are headquartered), and if this disaster damages our facilities, limits our power supply, or causes us other trouble, we might have to suspend our services. The disaster might also force us to spend vast sums on repairing damaged facilities or compensating injured personnel. Such an eventuality would adversely impact the financial position and performance of our group.

(2)Risks related to our businesses

① Seasonal fluctuations

The advertising budgets of our customers determine our ad tech sales. Sales will rise or fall depending the advertisers’ monthly budgets, which tend to be most generous in December and the final month of the fiscal year (typically March).
Accordingly, unlike businesses with stable monthly recurring revenue, our source of revenue and profit is much more volatile. On the other hand, we must retain a large workforce at all times so that we can accommodate rushes during busy seasons. Therefore, our group’s financial position and performance would be adversely affected if our revenue source enters a significant downward trend of volatility.

Quarterly earnings for our 8th consolidated accounting period are as follows.

(Thousand yen)

8th consolidated accounting period
(April 1, 2017, To March 31, 2017)
1Q Consolidated
accounting period
2Q Consolidated
accounting period
3Q Consolidated
accounting period
4Q Consolidated
accounting period
Net sales 3,069,625 3,418,757 3,584,631 4,307,924
Operating income
(loss)
61,764 183,950 123,650 158,245

Notes:

1. Net sales excludes consumption tax.
2. The above figures have not yet been audited pursuant to Article 193-2(1) of the Financial Instruments and Exchange Act.

② Dependence on a specific business

Our supply-side platform (“Geniee SSP”) has absorbed a large portion of our resources ever since we began, and we remain heavily dependent on this business. However, we aim to diversify (and thus strengthen) our revenue base by expanding from ad tech to marketing tech. To this end, we are leveraging Geniee SSP’s vast ad distribution database, customer base, and ad management knowhow in an effort to develop a demand-side platform (“Geniee DSP”), data management platform (“Geniee DMP”), and marketing automation platform (“Majin”). We will expand the market share of these new businesses while developing new features and services.
However, changes in the business climate might thwart these efforts. We might also see a decline in transaction volume if clients revise their distribution policies or if our systems break down. Such eventualities would adversely impact the financial position and performance of our group.

③ Transactions with the SoftBank

We affiliate with SoftBank Group Corp. and list the corporation as under “other affiliates.” The basis of this affiliation is that one of SoftBank’s group companies, SoftBank Group International GK, holds a 32.12% stake in our company. The corporation operates several business segments, including a domestic telecommunications business, a segment related to Sprint Corporation, a segment related to Yahoo! Japan, a distribution business, a segment related to Arm Holdings, and a segment related to SoftBank’s Vision Fund and Delta Fund. SoftBank Group Corp. lists our group as an equity-method affiliate under “other.” However, our Board of Directors remains independent from the corporation because we have signed no contracts that would grant it special privileges over the board’s business. Of our five directors who also serve on the Audit & Supervisory Committee, two are from SoftBank Group: Katsumasa Niki and Daisuke Fujihira. We nominated them because of their extensive experience, which we believed they would use to strengthen our corporate governance. Their details are shown below.

Position within Geniee Name Position within the SoftBank Group
Director
(part-time)
Katsumasa Niki SoftBank Corp. Advisor
Deepcore Inc. President & CEO
Director
(part-time)
Daisuke Fujihira SoftBank Corp. Digital Marketing Business Management
Department Manager of Corporate
Business Management, Corporate Business
Strategic Headquarters
SB Gift Corp. Representative Director
SB Ad Corp. Director
Generate, Inc. Representative Director & CEO

During the fiscal year ended March 31, 2018, we conducted the following transactions with SoftBank Group Corp.—specifically, with the corporation’s holding company and with Yahoo! Japan (which Softbank partially owns):

Total transactions: ¥1,963,879 (13.7% of our consolidated sales)
Transaction costs: ¥365,669 (2.6% of our consolidated sales costs and SG&A expenses)

If SoftBank Group Corp. decides to change the terms of our transactions, it might adversely impact the financial position and performance of our group.

④ Business tie-ups

Our business plan commits us to expanding our businesses and forging new fields. To this end, we explore possible business tie-ups, equity investments, and M&A transactions. We vet each prospective investment, focusing on whether it will produce synergistic effects, whether it offers a reasonable risk-return tradeoff, and whether the investee’s financial position and the contractual terms are viable. Even with such due diligence, however, we cannot completely guarantee the success of an investment. The financial position and performance of our group might be adversely affected if: (1) the investment fails to produce the synergy we expected due to inadequate control or supervision of the investee’s management, (2) circumstances force us to alter the contract terms or cancel the contract altogether, (3) fluctuating performance forces us to record goodwill impairment, or if (4) we record contingent liabilities or identify unrecognized liabilities.

⑤ Stepping up efforts against problematic advertising

We understand that to guarantee the value that we deliver to customers, we must thoroughly manage the quality of the ads we distribute. To this end, we monitor any inappropriate or false/misleading ads, or any ads that appear on illegal sites. Moreover, we have set out rules for dealing with ads that are adult in nature, and we are trying to deal less in such ads. Despite these precautions, unexpected circumstances might catch us off guard, and as a result, we might end up having to pay damages to customers. This eventuality would adversely affect the financial position and performance of our group.

(3)Risks related to the management

① Building a workforce

The cornerstone of our growth strategy is people. We place top priority on recruiting and training talented men and women. While we devote maximum energy to building an effective workforce, we might find that our workforce falls short in certain circumstances. For example, if we radically alter our business operations, our workforce might struggle to accommodate the increased workload. Another possibility is that our demand for labor will far surpass the supply. Even with a sufficient workforce, we face the risk of our key personnel getting headhunted or an unexpected surge in resignations. If our workforce does fall short for these or other reasons, it would adversely affect the financial position and performance of our group.

② System risks

The services we deliver to customers are online services that exist on servers and other computer systems. We always look for ways to help us deliver these services stably. For example, we augment our systems and strengthen our backup procedures. Nonetheless, we would be forced to suspend our services in certain circumstances. For example, our systems and networks might malfunction, sustain damage in a natural disaster, fail to accommodate a traffic spike, or suffer a virus infection. The same would apply if the programs or data were improperly accessed and modified. Depending on the situation, we might end up losing customer trust or even facing damages claims. Such eventualities would adversely affect the financial position and performance of our group.

③ Litigation risk and transactional problems

In aggressively pursuing business at home and overseas, we run the risk of violating the rights or interests of third parties (including our customers, trading partners, shareholders, and employees) and then facing any damages claims or other litigation that might ensue. We cannot entirely eliminate this possibility, although we do minimize it by constantly developing and refining risk management structures throughout our group. If such litigation arises, it might stall our efforts to develop our businesses, damage our reputation, or hurt us financially. Such eventualities would adversely affect the financial position and performance of our group.

④ Online privacy regulation

Our supply-side, demand-side, and data management platforms use cookies to track users’ interactions with our affiliated websites (such as the URLs they access and which parts of the website they view and in what order). In Japan, online privacy is primarily governed by the Act on the Protection of Personal Information.
The current legislation poses no impediment to our businesses. In the future, however, we might have to restrict our services if legislators pass a new law or an amendment concerning online advertising, or if we face public pressure to self-regulate. Such an eventuality might adversely affect the financial position and performance of our group.

⑤ Managing data security and personal information

Companies that use our marketing automation platform, Majin, entrust customer information to us. We have established a privacy policy to govern the way we manage this information, and we try our best to ensure that our group complies with the policy. Under this policy, we uphold a high standard of personal data protection. Indeed, in recognition of these efforts, the Japan Institute for Promotion of Digital Economy and Community has granted us the right to display the Privacy Mark. Still, we face the possibility that customer data will leak due to several possible factors, including system failure or cases where an unauthorized party somehow gains access or an employee mishandles personal data. We might then lose public trust or face damages claims from an injured company or individual. Such an eventuality would adversely affect the financial position and performance of our group.

⑥ Intellectual property rights

We do everything we can to weed out potential violations of third-party intellectual property rights. However, our investigations cannot cover all possible violations of intellectual property rights pertaining to our services. If another company violates our intellectual property rights or if we violate another company’s intellectual property rights, we might face a claim for injunctive relief or damages. Such an eventuality would adversely affect the financial position and performance of our group.

⑦ Internal controls

We regard effective corporate governance as essential to achieving corporate sustainability. Accordingly, we aim to put in place robust internal controls to inculcate a strong compliance culture. This includes fair and reasonable work processes, reliable financial reporting, and high standards of ethical conduct. However, we might struggle to maintain compliance management if our internal controls fail to keep up with the pace of rapid business expansion. Such an eventuality would adversely affect the financial position and performance of our group.
Additionally, to ensure that no affiliates of ours commit malpractice, we instruct the affiliates to fully comply with all applicable laws and rules, and we check whether they are doing so through our regular internal audits. However, these efforts cannot completely eliminate the potential for legal violations or malpractice among affiliates. If such occurs, it would adversely affect the financial position and performance of our group.

⑧ Dependence on a specific person

Our founder, Tomoaki Kudo, serves as representative director and CEO. Tomoaki is well-versed in the technologies underlying our online advertising services. Using this knowledge, he plays a critical role in shaping and realizing our big-picture corporate objectives and our specific business strategies.
To prevent us becoming overly dependent on Tomoaki’s personal leadership, we aim for an effective management team by encouraging our directors and top-level managers to communicate closely in the meetings of the Board of Directors and Management Council.
Nonetheless, if Tomoaki somehow becomes unable to go on leading the group, this would adversely affect the financial position and performance of our group.

⑨ The risks we face as a young company

We started in April 2010, making us a rather young company. So far, we have achieved continued revenue growth, but the online advertising arena is prone to sudden changes. Accordingly, we must allow for a large degree of uncertainty when formulating business plans for the group. Moreover, judging from our financial position and performance in past years, there is some room for improvement in our forecast accuracy.

(4) Other risks

① Dividend policy

Our basic policy on dividends is to sustain stable dividend payments while ensuring that we retain enough internal reserves to support future development plans and to strengthen our management.

At the moment, however, we neither pay dividends nor do we have any particular plan or schedule for paying them in the future.

Our basic policy on distributing surplus to shareholders is to set a level commensurate with our performance and financial trends as well as with our future business and investment plans while also keeping an eye on our internal reserves.

② Share dilution when option holders exercise their options

We grant stock options to our directors and employees as an incentive to contribute to our long-term corporate value. In the future, we might also offer stock options as a means of attracting top talent.
If the option holders exercise their options, it will prompt us to issue additional shares. This issuance would dilute the value of existing shares. As of May 31, 2018, the shares underlying the stock options amount to 653,750, which represents 3.7% of the total outstanding shares (other than treasury shares).

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