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.

Business

Risks in Supply-Demand Balance for LSI Products

MegaChips provides comprehensive solutions, from design and development to production of LSIs, and without owing its own production facilities. The Company have established a network with major foundries both domestically and internationally, primarily based in Taiwan, and outsource the manufacturing of products to them tailored to customers’ needs.
Therefore, the supply and demand balance in semiconductor market may affect the delivery, 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. To address these risks, the Company is strengthening its relationships with existing foundries more than ever before and is working on environmental improvements to enable proprietary product procurement. In addition to this, the Company is making efforts to minimize risks by considering and adding new third-party partners.

Risks in Purchasers

MegaChips principally sells LSI for a 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 involving LSI for storing game software (custom memory) to Nintendo Co., Ltd. (“Nintendo”) is increasing.
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 industrial equipment, telecommunications and energy control as well as optimizing the business portfolio in the mid- to long-term.

Risks in Contract Manufacturers (Outsourced Process)

MegaChips has adopted a business model in which it operates as an fabless manufacturer, outsourcing its product manufacturing. We have been able to develop products that best meet our customers’ needs based on 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 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.
In addition, we recognize the geopolitical and other risks associated with our third parties being primarily located in Taiwan. To deal with this issue, we will seek new foundries both domestically and internationally, and build trust relationships with them to prepare for unexpected conditions.

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, 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 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 effort into human resources development to develop individuals who can demonstrate their abilities in various environments and maximize company’s outcomes.

Management

Risks in Strategic Investment

MegaChips Group may make investments in alliance partners and startups with cutting-edge technologies and ideas, when we determine that it will contribute to the enhancement of our corporate value through business collaboration with other companies and strategic alliances that aim for purposes such as information gathering. 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 structure consisting of directors and outside experts decides these strategic investments, comprehensively considering the status of business collaboration and other matters to enhance our corporate value and a future revenue, verifying effects and risks and implement it with the approval of the BOD meeting.

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 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

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 fiscal situation 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.