Business and Other Risks

MegaChips has identified the following risks pertaining to its operations and other matters that may have a material impact on investors’ judgment.
Forward-looking statements in this section represent the judgment of MegaChips as of June 22, 2018.

Dependence on specific customers

Purchasers

MegaChips principally sells LSIs for storing game software (custom memory) for use in game consoles; LSIs for game consoles and peripheral devices; LSIs for digital cameras and other image processing; timing controller LSIs for liquid crystal panels; and digital video monitoring systems for security and monitoring applications. The percentage of net sales involving LSIs for storing game software (custom memory) to Nintendo Co., Ltd. (“Nintendo”) is increasing.
Accordingly, our operating results may be impacted by sales trends for game software and the game consoles using these LSI products, and may also be influenced by, among other factors, the extent to which Nintendo adopts our products.

Contract manufacturers (suppliers)

Since its foundation, MegaChips has adopted a business model in which it operates as an R&D-oriented fabless enterprise, concentrating its management resources on research and development and contracting out the manufacture of its products to third parties. Consequently, we have been able to develop products that best meet customers’ needs based on our proprietary technological capabilities and to expand our business without needing to invest in plant and equipment that require substantial investments. We work with a number of different foundries and manufacturers in Japan and overseas, although a slight percentage of purchases are made from Macronix International Co., Ltd. (“Macronix”), which manufactures LSIs for storing game software (custom memory) supplied to our major customer, Nintendo, and LSIs for game consoles and peripheral devices.
Therefore, if Macronix become unable to manufacture, for whatever reason, MegaChips’ operating results may be impacted.
Further, we have entered into manufacturing consignment contracts with Nintendo and Macronix, respectively. We intend to build solid and close ties with these companies to ensure a stable supply of products.

Operations

Risks associated with LSI products

MegaChips has adopted a fabless business model, where we do not have manufacturing capacity, but instead outsource manufacturing to third parties. We outsource the manufacturing of LSI products to major foundries both in Japan and overseas.
Therefore, the demand and supply balance in the semiconductor market may affect the quantities and prices of products that we procure, and we may not be able to procure products in the quantities and at the prices that we desire.
Although our LSIs are used in state-of-the-art digital devices, since the pace of technological innovation is rapid, there is no guarantee that these products will continue to be used. Moreover, demand may fluctuate due to the effect of fierce competition to which our end products using our LSIs are subject.

Risks in strategic investment

In the event that MegaChips engages in strategic tie-ups, including equity participation, to accelerate the growth of its businesses, the benefits that we anticipated, such as the creation of business synergies or increased earnings, may not materialize.

Research and development

Based on the management philosophy of building MegaChips’ business through "Innovation", coexisting with customers over the long term through "Trust", and making an ongoing contribution to society through "Creativity", we have expanded our operations with our technological development capabilities as a base. Our competitiveness derives from “Specialization” in products for specific customers and for specific areas of application in the growing image, audio, and communication-related markets, a “Concentration” of our resources on research and development activities to provide the cutting-edge technologies and products to our customers, and demonstrating our “Uniqueness”.
MegaChips believes that it can continue to develop and launch innovative and appealing products in the market. However, in our industry, advances in technology occur at remarkable speed and the market may change rapidly, with technologies that were considered new suddenly becoming obsolete and new technologies and services surging in popularity. There is no assurance that we can always respond quickly to these changes and we may be required to invest a large sum in research and development. This will, in turn, likely affect our operating results.
MegaChips makes every effort to develop cutting-edge technologies and to maintain a competitive edge in its technologies and products. However, if other companies become dominant in the technology development competition, it will have an impact on MegaChips’ operating results.

Ensuring skilled personnel

MegaChips is expanding its operations based on its technological development capabilities in the areas of images, audio, and communications, and this business growth depends heavily on skilled personnel. It is, therefore, an extremely important business challenge to secure and retain excellent skilled personnel, as well as to determine how to treat and train these skilled personnel.
MegaChips made several corporate acquisitions and research and development investments in the growing equipment market, including mobile and wearable devices and the IoT field. As a result of the accelerated pace of global development, it is vital for MegaChips to ensure and develop an executive class and front-line managers across all divisions in overseas subsidiaries.
MegaChips will re-establish an HR system necessary for the global human resources policy, and will formulate and implement a training plan. However, if the number of skilled personnel in Japan or overseas leaving MegaChips increases in the future, or if the training of newly hired personnel or globalization efforts do not progress as planned, these factors might have a significant impact on MegaChips' corporate value and competitiveness.

Exchange rate fluctuations

A portion of our business transactions are denominated in currencies other than Japanese yen, notably US dollars. Consequently, exchange rate fluctuations, especially fluctuations in the yen/dollar rate, may affect our operating results.
MegaChips uses forward currency contracts where necessary to hedge the foreign exchange risk.

Management

Anti-takeover measures

Although MegaChips does not have a basic policy for corporate control, it believes that anti-takeover measures and the protection of shareholder interests against hostile acquirers are important management issues. For this reason, we have been collecting information on recent acquisitions.

Accounting auditors

The Board of Statutory Auditors will submit a proposal to dismiss or not reappoint the account auditor to the General Meeting of Shareholders if MegaChips has a reason to do so or if the accounting auditor violates laws or ordinances, or if MegaChips believes that the accounting auditor offended public order or morals.

Risk concerning the establishment of internal control systems

MegaChips takes legal compliance very seriously and considers the establishment of a corporate governance system as important managerial issue. We have consequently taken steps to strengthen such corporate governance system and enhance risk management.
Further, MegaChips also approved basic policies at the meeting of the Board of Directors for internal control pursuant to the provisions of the Companies Act. Based on these policies, we have been improving our internal control systems, including those associated with financial statements, pursuant to the Financial Instruments and Exchange Act, conducting our operations in accordance with the rules, and evaluating the results. In this way, we ensure that we manage our businesses properly and lawfully.
However, if any extraordinary event not anticipated under the internal control systems that we have established were to occur, the credibility and comprehensiveness of financial reporting and information disclosure by us may not be assured. In this case, we may lose the trust of our stakeholders and there may be a material adverse effect on our financial position and operating results.
Note, however, that no such events have occurred thus far.

Intellectual property rights

As an R&D-oriented fabless enterprise, MegaChips recognizes that the protection of its intellectual property rights is material to its business development.
Consequently, we have strengthened our internal system for the protection of intellectual property rights and our ties with patent law offices to actively file applications and register patents and trademarks and protect the products and services we offer. We simultaneously investigate the rights of other companies thoroughly to prevent any infringements.
However, there exists no assurance that all patents or trademarks for which we file applications will be registered. Additionally, it is impossible to fully investigate the technologies and rights of other companies prior to publication thereof. If lawsuits are filed against us alleging infringements of the intellectual property rights of other companies, our operating results may be affected.
MegaChips’ independently developed proprietary technologies may not be fully protected under intellectual property legislation in specific countries and regions. Under such conditions, we may be unable to effectively prevent other companies from using our intellectual property without our permission and from introducing similar products into the market.
As of the date of submission of the securities report (June 22, 2018), no litigation had been filed against us in respect to any intellectual property right.

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