Fibergate Inc.

There is a risk that networks and facilities may become unavailable due to computer viruses, hacker attacks, natural disasters, and other causes. Servers are managed redundantly across two or more domestic sites, and measures such as earthquake-resistant structures and backup power supplies have been implemented; however, system failures caused by unforeseeable events such as cyberattacks or natural disasters exceeding expectations cannot be ruled out. In the event of a failure, the company may face significant difficulty in providing communication services broadly, which could affect its business results and financial position.

As of the end of the consolidated fiscal year under review, communication equipment (net) of ¥6,956 million was recorded, accounting for approximately 57% of consolidated total assets, making it a material asset. The number of installed units reached 736,522. If retirement processing at service termination is not carried out in a timely manner, assets may be overstated, potentially overstating profit attributable to owners of parent. Physical verification is conducted through semiannual connectivity checks, but given the large quantity involved, there are limits to comprehensive management.

Of the initial installation services in the Home Use Business, revenue recognized at a point in time amounted to ¥1,796 million (14% of consolidated net sales) in the consolidated fiscal year under review. Since it is difficult to have the property owner present, confirmation of construction completion is substituted with connectivity checks. If the connectivity check does not function effectively, or if the results are improperly adjusted, there is a risk that revenue may not be recorded in the appropriate accounting period. This risk directly relates to the accuracy of financial reporting.

Given the business characteristic that communication equipment investment is required in advance of revenue generation, the company relies on borrowings from financial institutions to fund capital expenditures and the purchase of real estate for sale in the Real Estate Business. In a scenario of rising market interest rates or an increase in the company's own risk premium, interest expenses would increase, potentially affecting business results and financial position. Additionally, if fundraising is constrained for any reason, there is a risk that business expansion plans could be hindered.

As a telecommunications carrier, the company holds a large volume of communication records and personal information of service users, making it subject to regulation under the Act on the Protection of Personal Information. If information leakage or unauthorized use occurs, the company could face business improvement orders from regulatory authorities, damages claims, and loss of credibility, which could affect business results and business development. While measures such as obtaining Privacy Mark certification (acquired in February 2016), conducting internal training, and entering confidentiality agreements with outsourcing partners have been implemented, the risk of leakage cannot be completely eliminated.

The Home Use Business has both recurring revenue from long-term contracts and one-time revenue; however, since communication equipment for new contracts is depreciated using the declining-balance method, profit margins on recurring revenue tend to be low initially after service commencement. In the Business Use Business, sales scale and profit margins vary by project, causing overall profit margin to fluctuate depending on the number of projects. During phases of business expansion, an increase in the proportion of recurring revenue in total sales may lead to a decline in segment profit margin.

There are numerous competitors in the industry centered on the Home Use Business, including new entrants from other industries, and some competitors hold advantages in product strength, price competitiveness, and customer base. While the group seeks to differentiate itself through brand strength enhancement and integrated services such as a multilingual call center, if competitors' advantages prove superior, this could lead to a decline in profitability or slower progress in customer acquisition, affecting business results.

The group provides services using lines supplied by multiple domestic telecommunications carriers; however, the rapid increase in data usage per user has led to bandwidth shortages across the internet industry as a whole. If equipment supply shortages worsen, this could lead to increased procurement costs, deteriorating profitability, and constraints on business expansion. Additionally, if data center owners refuse to renew contracts or demand changes in terms, there is no guarantee that renewals will occur under the same conditions as before.

The company outsources manufacturing of communication equipment to a partner factory in Taiwan, resulting in transactions denominated in US dollars. In a yen depreciation phase, the yen-equivalent purchase price increases, and if this cannot be passed on to sales prices, profit margins decline. Conversely, in a yen appreciation phase, the narrowing price gap between the cost of previously purchased inventory and the selling price could also reduce profit margins. Although risk mitigation measures such as forward exchange contracts are implemented, complete hedging is difficult.

Representative Director Masaaki Inomata has played a critical role since the company's founding, from determining management policy and business strategy to developing new businesses and building business models. While efforts are underway to reduce this dependence through delegation of authority, development of candidates for executive management positions, and information sharing at board of directors and executive officer meetings, if he becomes unable to perform his duties, this could affect business results and financial position.