Business and Other Risks

The group has formulated risk management rules and has established, in accordance with these rules, a Risk Management Committee to centralize and improve risk management.
The Committee serves as the point of contact for risk management at each company and is responsible for maintaining risk management for the group in normal times, which includes conducting risk assessments and formulating a business continuity plan. The Committee is regularly held and chaired by the President and Representative Director and the General Affairs Department serves as the secretariat.
The Committee identifies and evaluates risks associated with the execution of the imaging business at each group company for each fiscal year, and prepares and updates a risk map. The following, which are based on the risk map, are the main matters that could have a material impact on investors' decisions. This is not a comprehensive list of all risks identified in the risk map, and risks other than those listed exist.
The group works to control risks by setting the priority of control activities for identified risks each fiscal year and holding regular group-wide meetings of responsible personnel. However, if a risk is actualized, despite control activities being implemented, it may affect the group's operating results and financial position.

(1) Risks common to all segments

1 Business environment–related risks

1) Risks related to the growth potential of the imaging business

The group operates a variety of businesses within the imaging business domain.
The global increase in the number of internet users and the evolution of mobile communication systems have led to an increase in the frequency that video is used in a wide range of media. Video-related needs are therefore expected to diversify even further. To meet such diverse needs, the group has established a system to provide dedicated service, addressing the issue in several ways, such as creating new opportunities to experience imaging, which has included strengthening the live entertainment business and game-related business.
However, this diversification of video-related needs may lead to a decline in the market value of video and slow the growth of the imaging business as a result of excessive competition, economic trends, and other factors, and this could affect the group's operating results and financial position.

2) Risk of technological change in the imaging business

In the imaging business field, where the group conducts business, there has been remarkable progress and change in the field of imaging systems and other technologies related to video production and distribution. We are continuing to respond, in terms of the introduction of editing systems that use cloud storage and the promotion of remote production workflows, and in order to realize such systems, we are opening new offices in optimal locations and strengthening integration of imaging technology development–related departments so as to enable us to propose new technical services. Because it is necessary to continue to respond to these types of technical changes, we have optimized the group businesses by restructuring the businesses to meet the challenge of video production reforms accompanying changes in the business environment.
However, by responding quickly to imaging-related technological changes, the cost of developing new video production methods and imaging systems and solutions may increase. In addition, as our competitors respond to technological change, there is the possibility that our group will fall behind in technological change. If this occurs, it could affect the group's operating results and financial position.

3) Risks related to the creation of new business models

In the imaging business, there has been a shift away from traditional video distribution channels such as TV broadcasting, movie theaters, and DVDs, and with the growth of the internet, and particularly the use of smartphones, it is now possible for anyone to easily access video content and to inexpensively produce video content, which has dramatically changed the imaging distribution structure. Thus, it is necessary to ascertain these dramatic changes in imaging needs and flexibly develop the imaging business.
In this environment, we are expanding both business with internet video streaming service providers, including those overseas, and our global E2E services (handling a wide range of imaging distribution channels) and developing the business in new ways that go beyond traditional business models, including creating a live entertainment business and original IP. However, if we are unable to accurately read the rapidly changing video consumer trends and immediately respond to changes in the business model appropriate for consumption trends, this could affect the group's operating results and financial position.

2 Risks related to mergers & acquisitions, etc.

The group is developing business alliances, mergers & acquisitions (M&A), etc. to expand its share of the video production and technical services market, develop new services, expand existing businesses, and acquire imaging-related technologies, and has positioned those actions as important elements of its management strategy.
When undertaking a merger & acquisition, etc., we conduct a detailed examination of the business value, financial and legal aspects, etc. of the target company to avoid risks associated with the merger & acquisition, etc.
However, if the business value of the target company declines, or the synergistic effect with the group is not fully realized after the merger & acquisition etc., we may need to write down goodwill and other assets, which could affect the group's operating results and financial position. It is also possible that contingent liabilities or unrecognized compliance violations of the target company may come to light.
We already acquire new business models for the imaging business through such activities as investing in start-up companies, but if we do not realize the expected investment return on account of changes in the business environment or operational problems at the company invested in, this could affect the group's operating results and financial position.

3 Risks related to securing and developing talent

The group's imaging business requires talent with expertise in the fields of video production and imaging systems and solutions development, and the group works together to acquire such talent. In addition, we are also focusing on talent development through such activities as providing education and training that takes into consideration the latest technological trends and introducing a talent management system for the visualization of skills.
However, if dramatic changes in video production methods and technologies cause the group's brand strength in the imaging business to decline, the group may not be able to secure and train enough highly specialized talent, and its competitive organizational strength may decline.
If this occurs, it could affect the group's operating results and financial position.

4 Risks related to large-scale disasters, infectious diseases, etc.

In addition to operating a number of imaging-related facilities, the group is involved in video production, creative talent dispatch, and other businesses.
In the event that business activities are disrupted due to direct human loss or damage to physical assets caused by a natural disaster, demands of society resulting from a disaster, or similar reasons, we have introduced an employee safety confirmation system, established a business continuity plan, and implemented measures to minimize damage by purchasing fire insurance, etc. However, the insurance does not cover all damages, which could affect the group's operating results and financial position.
In addition, the spread of new infectious diseases such as influenza or COVID-19 could cause changes in the environment, such as paralysis of the business due to restrictions on business activities and video production activities, requests for voluntary restraint or postponement of various events, or cancellation of advertising activities due to an economic downturn, which could affect the group's operating results and financial position.
As COVID-19 is still spreading, the group continues to operate its business while implementing measures to prevent the spread of infections by establishing infection prevention guidelines and utilizing staggered work hours and telecommuting.

5 Risks related to information security

The group's major companies have acquired Privacy Mark and ISMS/ISO-IEC27001:2013 (Information Security Management System) certification. In addition to providing all employees with compliance training, which also covers information security, to raise their awareness of information management, the group has reinforced its response, including conducting information security risk assessments and offering consulting services to unify security standards among group companies.
However, in the event of a leak of customer information or some other type of confidential information for such reasons as insufficient awareness of the risk of or vulnerabilities to information asset leaks, inadequate business continuity measures in the event of a system outage that exceeds countermeasure assumptions, unforeseen events that fall outside current management standards, or unauthorized access by a third party, this could lead to a loss of public trust, costs due to claims for compensation for damage. If this occurs, it could affect the Group's operating results and financial position.

6 Risks related to intellectual property rights

The group protects its rights in the various countries that it conducts its imaging business, including both Japan and overseas, by acquiring intellectual property rights, such as copyrights related to content creation, patents and trademarks related to imaging technology, and licenses to intellectual property rights. The group also manages its intellectual property rights so as not to infringe on the intellectual property rights of third parties.
However, there is frequent fraudulent use and copying of the group's video content and imaging technology, and the group may not be able to prevent all infringement of intellectual property rights internationally. There is also the possibility of claims regarding infringement of such rights as intellectual property rights to video content used by the group. If this occurs, it could affect the group's operating results and financial position.

7 Risks related to compliance

When conducting its imaging business, the group is subject to various legal regulations. In addition, in each country that it conducts business, the group is subject to the legal regulations of that country.
The group strives to promote compliance and foster awareness of social norms by conducting not only compliance training for all employees but also compliance training at each group company that is tailored to the needs of that company.
However, the group could lose the trust of its business partners and customers due to disciplinary measures, lawsuits, or loss of reputation resulting from violations of laws and regulations or actions by employees that are contrary to social expectations. If this occurs, it could affect the group's operating results and financial position.

8 Financial risks

1) Risks related to the timing of revenue accrual and recording

As part of the operation of the imaging business within the group, there are cases when the scale or content of an ordered project deviates significantly from what was expected, or the delivery date is changed and total net sales and earnings are delayed to the next month, next quarter, or next fiscal year. In particular, for the commercial and TV content production and production technology services businesses, net sales and earnings tend to be concentrated around the end of the quarter, in September and March, because they are linked to the advertiser's advertising budget and TV stations' TV programming reshuffle. Therefore, if net sales and earnings are posted in different periods/fiscal years, this could affect the group's operating results and financial position for the period depending on the amount.

2) Risks related to investment securities

Sometimes, the group acquires shares (securities) of business partners in order to more effectively develop its business. When acquiring such shares, the group conducts a preliminary examination of the target company's state of management and future business plan, and acquires the shares comprehensively taking into consideration such factors as business synergies with the group, profitability, risk factors, etc. However, it is difficult to completely predict these factors. If the target company's corporate value declines in the future for any of various reasons, including the target company's business expansion falling short of initial plans, the group may be forced to record an impairment loss on the securities it acquired, which could affect the group's operating results and financial position.

(2) Risks in each segment

1) Content Creation business

Changes that occur in the content creation production process, such as extension of the production period due to delays in the production schedule or increase in subcontracting costs due to overcapacity, could cause the production budget to exceed the original estimate. The group addresses this issue by strengthening its management system, but if the production budget exceeds the original estimate, this could affect the group's operating results and financial position.
In addition, the group makes joint investments in the production of feature films and other content for various media and earns revenue from related profit sharing and secondary use rights. Although the group makes decisions on these investments after considering profitability and risk factors, it is extremely difficult to completely foresee the market response, and it may not be possible to earn the anticipated return. The group addresses this issue by conducting thorough research and creating a system to identify risks for each work, but if it is not possible to earn the anticipated return, this could affect the group's operating results and financial position.

2) Production Technology Services business

Within the Domestic E2E services and post-production services for TV programs and TV commercials, commercial-related operations and TV program operations, which are paid for through corporate advertising expenditures, are easily impacted by changes in the economy, and the number and value of orders tends to decline during economic downturns, which could affect the operating results and financial position of the group.
In addition, some of our location shooting and live broadcasting services are highly dependent on specific suppliers, and if a sudden or unexpected event occurs with those business partners, making it difficult to conduct business with them, this could affect the group's operating results and financial position.
The overseas E2E services business is comprised of multiple overseas subsidiaries, primarily Pixelogic Media Partners LLC, and changes in various systems, customs and culture, political and economic conditions, and foreign exchange rates in the countries and regions in which we operate could affect the group's operating results and financial position.
Human talent services are subject to various legal regulations, including the Act on Securing the Proper Operation of Worker Dispatching Businesses and Protecting Dispatched Workers. Although we strictly comply with laws and regulations and are constantly implementing related measures, the strengthening of these legal regulations and changes in their interpretation could increase costs and create new business restrictions, which could affect the group's operating results and financial position.

3) Imaging Systems & Solutions business

The Imaging Systems & Solutions business develops and manufactures various types of imaging equipment. However, if the sales of new products do not generate the expected revenue, or if there are defects, failures, or complaints about the products, the increase in impairment loss and such costs as those to respond to the problem could affect the group's operating results and financial position. In addition, some operations are highly dependent on specific business partners, and there is the possibility that a sudden or unexpected event could occur with those business partners, making it difficult to conduct business with them. We address the issue by increasing the number of staff in and consolidating R&D departments through the acquisition of talent throughout the group and shares in companies engaged in system solutions and other activities, strengthening education and training, and starting to develop new businesses. If it becomes difficult to conduct business with specific business partners, it could affect the operating results and financial position of the group.
As we export our imaging equipment overseas and develop and manufacture medical-related imaging equipment and similar products, we are required to comply with the Foreign Exchange and Foreign Trade Act and Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices, etc., and conduct business after obtaining the necessary licenses and approvals. The Quality Assurance Department monitors the latest information to ensure compliance with these laws. However, if new costs are incurred due to unexpected changes or tightening of these regulations, this could affect the group's operating results and financial position.