Business and Other Risks

MegaChips Group has identified the following risks pertaining to its operations and other matters that may have a significant impact on the financial position, business performance, and cash flow of the consolidated Group.

Business

Risks in Supply-Demand Balance for LSI Products

MegaChips Group provides comprehensive solutions, from design and development to production of LSIs, and without owing its own production facilities. Instead, we operate under a fabless business model, outsourcing all production to external partners. We have established a network primarily with major overseas foundries, particularly in Taiwan, and entrust the manufacturing of products based on customer needs.
As a result, the supply and pricing of our products may be affected by the supply-demand balance in the semiconductor market, potentially making it difficult to procure products in the desired quantities, timelines, or at favorable prices for our Group.

To address this, we are working to strengthen our collaboration with existing foundries more than ever, aiming to create an environment where we can secure priority access to product procurement. Additionally, we are exploring new foundry partners and diversifying our procurement sources to minimize risks.

Risks in Purchasers

MegaChips Group principally sells LSI for game software storage (custom memory) for the amusement field; LSI for game consoles and peripheral devices; LSI for digital cameras and other image processing; and LSI for OA equipment. The percentage of net sales derived from LSI for storing game software (custom memory) supplied to Nintendo Co., Ltd. (“Nintendo”) constitutes a significant portion.
Therefore, the performance of our Group may fluctuate depending on the sales trends of the game consoles and software that use our LSI products, and the market for LSI.
While this risk cannot be completely eliminated, we maintain a strong and close relationship with Nintendo and strive to achieve customer satisfaction by providing optimal solutions and ensuring a stable supply of products, thereby minimizing potential risks. Additionally, we are focusing on developing new businesses in fields such as industrial equipment and telecommunications, while working to optimize our business portfolio over the medium to long term.

Risks in Contract Manufacturers (Outsourced Process)

MegaChips has adopted a fabless business model, outsourcing its product manufacturing to outside partners. We have been able to develop products that best meet our customers’ needs leveraging our outstanding technology. We work with a number of different manufacturers. The percentage of outsourced process to Macronix International Co., Ltd. (“Macronix”), which manufactures LSI for storing game software (custom memory) supplied to our major customer, Nintendo, as well as LSI for game consoles and peripheral devices, is increasing.
Therefore, if Macronix becomes unable to manufacture for any reason, it could potentially impact the performance of our Group. At present, however, there are no indications that such a risk will materialize. Additionally, we have entered into manufacturing consignment agreements with both Nintendo and Macronix, and we are working to maintain strong and close relationships with both companies to ensure a stable supply of products.
Furthermore, we recognize the geopolitical and other risks associated with the fact that the foundries to which we outsource production are primarily located in Taiwan. To address these risks, we are actively seeking foundries both domestically and internationally, building trust-based relationships, and preparing for unforeseen circumstances.

Risks in Ensuring Skilled Personnel

MegaChips is expanding operations based on its technological development capabilities leveraging unique analog and digital technology and its business growth depends heavily on skilled personnel. Therefore, it is an extremely major matter of our personnel policy to secure and retain excellent skilled personnel, as well as to determine how to treat and train these skilled personnel.
Therefore, if, in the future, we are unable to maintain talented engineers domestically and internationally, or if we fail to achieve our plans for recruiting, developing, and globalizing human resources, our group’s competitiveness may weaken, potentially impacting our corporate value itself.
To address these challenges, our group has established a structured human resource management system and implements human resource policies based on development plans to invest in talent for fostering new businesses over the medium to long term. Additionally, we are actively committed to human resource development, aiming to cultivate individuals who can demonstrate their abilities in diverse environments and maximize organizational performance.

Management

Risks in Strategic Investment

To drive business expansion and achieve future growth, MegaChips Group engages in strategic investments aimed at creating synergies through partnerships with investee companies and startups that possess cutting-edge technologies and innovative ideas. However, with such strategic investments for future business growth, there is a possibility that the anticipated benefits, such as synergy creation, the establishment of complementary business relationships, and performance growth, may not be realized as expected. Additionally, our Group’s performance could be impacted by valuation losses resulting from a decline in the market value of investment securities or a significant decrease in their intrinsic value.
Regarding these strategic investments, the board of directors comprehensively evaluate factors such as synergy creation with our company, the progress and future potential of the business, and other relevant considerations. Based on a thorough assessment of the investment’s effectiveness and associated risks, they determine the appropriateness of retaining each investment on a case-by-case basis.

Exchange Rate Fluctuations

A portion of our business transactions with customers and manufacturing subcontractors are denominated in currencies other than Japanese yen, notably US dollars and Taiwan dollars. The figures in the financial statement of the overseas subsidiaries are converted into Japanese yen for the consolidated financial statement, consequently, exchange rate varies, especially fluctuations in the yen/dollar rate, may affect our operating results.
If the foreign exchange rate moves in the direction of the yen's appreciation, it has negative effect on the performance, and the greater the fluctuation range, the greater the possibility of the risk becoming apparent.
MegaChips uses forward currency contracts as needed to reduce foreign exchange risk.

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.
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.
MegaChips Group enhances an intellectual property-related internal system and a collaboration with a patent firm and actively files and registers patents and trademark to secure our products and services, while thoroughly investigates right of other companies to minimize risks of the possibility of infringement of a third party’s intellectual property rights.

Information Security

MegaChips Group holds confidential information related not only to product development and intellectual properties but also to our customers and suppliers, and employees through our business activities. Therefore, amid the rising security risks in recent years, implementing appropriate information management and information security measures has become a critical issue for expanding our business.
To handle this information, we manage it appropriately and establish robust security measures with the Company. However, if this information were to be leaked due to cyber-attacks, unauthorized access, falsification, or computer virus invasions, or if crucial data were to be destroyed, altered and systems were to be crushed, significant costs could arise, potentially affecting the performance of our Group.
Furthermore, we are working on information security measures in both systems and operations, such as strengthening the security of internal information systems and raising awareness through IT education for employees. To ensure information security, we strive to minimize risks by cooperating with the government and other companies for early information sharing and taking all possible measures.

Risk Factors Associated with an Accident or Natural Disaster

In the regions, both domestic and international, where MegaChips Group operates, there is a possibility of enormous damage to our business bases, the foundries and manufacturers, or customers to which we outsource our production, or to our customers, in the event of large-scale natural disasters such as earthquakes, fires, outbreaks of unknown infectious diseases, act of terrorism, social unrest, or other accidents and incidents. Furthermore, if such events force MegaChips Group to scale down its business activities, it could have a significant impact on our Group's business performance and financial condition.

While it is extremely difficult to completely avoid all risks associated with such unforeseen disasters, the Company has established a crisis management manual with the aim of preventing and mitigating risks, ensuring the safety of human lives during emergencies, minimizing and reducing damage, preventing secondary disasters, and facilitating the early resumption of operations. This manual outlines the necessary measures and response methods for crisis management, and we are implementing risk mitigation measures to the extent possible.