Business and Other Risks

MegaChips has identified the following risks pertaining to its operations and other matters that may have a material impact on the financial position and the cash flow of the Group.
Forward-looking statements in this section represent the judgment of MegaChips as of March 31, 2021.

Dependence on specific customers

Purchasers

MegaChips principally sells LSIs for a game software storage (custom memory) for the amusement field; LSIs for game consoles and peripheral devices; LSIs for digital cameras and other image processing; LSIs for OA equipment. The percentage of net sales involving LSIs for storing game software (custom memory) to Nintendo Co., Ltd. (“Nintendo”) is increasing and accounts for 78.0% of the sales for the current fiscal year.
Therefore, the performance of the Company could fluctuate depending on the sales trend of the game consoles and software that use our LSI products, and the market of LSI.
The risk is not something that can be completely eliminated, we have the good and close relationship with Nintendo and aim to meet customer satisfaction with our products by providing ideal solution and stable supply and minimize the possible risks. Besides, we focus on the development of the new business in the fields including automotive, industrial equipment, telecommunications infrastructure, energy control and robotics as well as improve the business portfolio in the mid-and-long term.

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 manufacturers, percentage of purchases 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 is becoming higher, and accounts for 62.6% in the current fiscal year.
Therefore, if Macronix becomes unable to manufacture, for whatever reason, MegaChips’ operating results may be impacted.
Currently, there is no sign that the said risk would become apparent. 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 established the network with major foundries in Japan and overseas such as Taiwan, and outsource the manufacturing of LSI products depending on the customer demand.
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 LSI products are used in state-of-the-art digital devices, since the pace of technological innovation is rapid, there is no guarantee that our Group’s products will continue to be used. Moreover, demand fluctuates due to the effect of fierce competition as well as the spread of CSR Procurement Policy to which our end products using our LSIs are subject. To deal with the risks, our Group aim to minimize risks by flexibly providing optimal production technology along with working on optimization of purchase cost, production quantity and production schedule while assuming the competitive price that differentiate with the products of other companies.

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 lies in our uniqueness leveraging analog and digital technology.
Currently MegaChips Group focuses its management resources in the growth areas such as automotive, industrial equipment, telecom infrastructure, energy control and robotics and working on the research and development to provide state-of-the-art technology and products to the customers. The R&D expenditures totaled ¥3,058 billion and accounted for 3.6% of consolidated sales.
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. Also, when other companies have an advantage in the competition of the technology development, the share of our Group would drop and causes an impact on the performance.
MegaChips makes every effort to develop cutting-edge technologies based on our unique analog and digital technology and continuously provide attractive products in the market, and to maintain a competitive edge in its technologies and products.

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, we recognize that it is an extremely major challenge of our personnel policy to secure and retain excellent skilled personnel, as well as to determine how to treat and train these skilled personnel.
If we cannot maintain, hire, develop and globalize skilled personnel in Japan or overseas s in the future, it might have an impact on MegaChips' corporate value and competitiveness.
To cope with these issues, MegaChips Group will streamline a personnel treatment system and implement a personnel policy based on the development plan according to investment in human resources for mid-to-long term new business development. We put an effort in measures including language education, new employee training, and diversity promotion to develop human resources that can display personnel abilities in various environment and maximize company’s outcome.

Management

Valuation of Goodwill, etc. included in stocks of subsidiaries and affiliates

The MegaChips owns shares of SiTime Corporation (listed on the NASDAQ Global Market) (SiTime), which was acquired in November 2014, and currently is an equity-method affiliate of the Company. These investments, including intangible assets, primarily goodwill (Goodwill, etc.) are posted in the consolidated balance sheet as “shares of subsidiaries and affiliates”. As of the end of the current consolidated fiscal year, the balance of the shares of subsidiaries and affiliates was ¥11,958 million, accounting for 16.0% of consolidated total assets.
Although, as a listed company, SiTime operates based on its own policies and strategies, the deterioration of its business performance and financial position may affect the MegaChips’ business performance.
Goodwill, etc. included in the aforementioned shares of subsidiaries and affiliates are evaluated based on the net realizable value using the market value of the shares. However, if the net realizable value falls below the carrying amount due to a decline in the share price of SiTime, the MegaChips’ business performance may be affected by an impairment loss.
At present, the Company has determined that it is not necessary to recognize impairment in the evaluation of Goodwill, etc.

Risks in strategic investment

MegaChips Group may make strategic alliances, including investments, when we determine that it will contribute to the enhancement of our corporate value through business collaboration with other companies and information gathering. The balance of investment securities for the current fiscal year is ¥3,590 billion and accounts for 8.0% of consolidated total assets, including shares of Macronix that is our major supplier.
In the strategic collaboration including investment to accelerate business growth, it may not be possible to achieve the results expected by the Company in building complementary relationships and expanding business results. It also might have an impact on the Group’s performance due to the appraisal loss from the drop in the book value of the investment shares or a sharp decline of the net asset value.
The meeting strcuture consisting of directors and outside experts decides these strategic investments, comprehensively considering business collaboration, information gathering status and a future revenue, verifying effects and risks and implement it with the approval of the BOD meeting.

Exchange rate fluctuations

MegaChips owns overseas subsidiaries as the business bases and a portion of our business transactions 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 materiality in 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.

Risk factors associated with an accident or natural disaster

A natural hazard such as a large-scale earthquake, the widespread outbreak of serious infectious disease, acts of terrorism have the potential to become risks for the Group’s businesses and could affect the Group’s business bases, the foundries and manufacturers, or customers. Also, such an event can cause suspension of business activities of the Group and might have substantial impact on the financial position of the Group.
The Group has formulated a Business Continuation Plan (BCP) and prepared a Crisis Management Manual to prevent a secondary disaster and minimize damage and losses of the disaster.

In Response to the COVID-19

Our response to the COVID-19 is to ensure the physical and life safety of executives and employees and temporary employees who work at our Group's offices, as well as the safety of related parties of our business partners with the highest priority. We take various measures to prevent the infection, though will continue to take necessary measures promptly according to the information from the government and future infection circumstances and strive to reduce the risk.

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