Business Risks

The key items that could become factors for risk in the development of the Group’s business are listed below. Also, from the perspective of disclosing information to investors, items that are not necessarily risk factors, but could be viewed as important in investment decisions and in enhancing the understanding of the Group’s business activities, are listed. Please note that the forward-looking statements in this section are determined based on the information available at the end of the fiscal year under review.(Last updated June 24, 2016)

Risks Related to Internal Management and Organizational Systems

Compliance

In order to comply with laws, ordinances and other various regulations, as well as social norms, the Group established “SMS Business Guidelines” and works to have these guidelines be well-known and thoroughly understood by all officers and employees. These guidelines require strict observance of laws and ordinances deeply related to the Group’s business, including the Act on the Protection of Personal Information, the Antimonopoly (Antitrust) Act, the Act against Unjustifiable Premiums and Misleading Representations, the Financial Instruments and Exchange Act, and the Employment Security Act, in addition to shutting out relationships with antisocial forces and preventing inappropriate conduct. Also, through training sessions in which all officers and employees are required to participate, which are held at the time of joining and regularly thereafter, the Group is striving to continually strengthen its compliance systems. However, in the event that the pace for establishing adequate compliance systems has not kept up with the Group’s rapid business expansion and violations of laws or regulations occur, this could invite the loss of credibility with users and clients, or bring about a lawsuit, thereby affecting the Group’s business activities and financial results.

Recruitment and Development of Human Resources and the Occurrence of Vacant Positions

IThe market related to the aging society, which is a major business domain of the Group, is expected to grow going forward, and the Group recognizes that this will bring about a large number of business opportunities. In order for the Group to fulfill its mission of providing an information infrastructure for an aging society, there is a need to promptly capitalize on these business opportunities by continuously creating a wide variety of services. It is also extremely important for the Group to recruit and develop human resources who can sincerely accept the demands of society and independently respond to changes. To this end, the Group actively engages in recruiting activities and endeavors to develop optimal human resource management structures and training systems. However, in the event that the recruitment and development of human resources do not progress according to plan, or in the event that a large number of vacant positions occur due to employees quitting or taking childcare or nursing care leave, the Group’s business activities and financial results could be impacted.

Risks Related to Legal Matters

Information Security

In the course of operating each of the various services it offers, the Group handles client information, including personal information, and other sensitive information. In order to prevent unauthorized access and fraudulent leakage or disclosure of such information, the Group is making efforts to continually strengthen its internal management controls, including employee training related to handling information, improving security systems, and managing access to information. However, there is potential for information to be leaked or lost as the result of third-party attacks with deliberate, negligent, or malicious intent by persons related to the Group or its subcontractors, or through the occurrence of other unexpected events. In such an event, loss of social trust in the Group, decline in competitiveness, and damage compensation or large expenses for improving security protocols could occur, which would affect the Group’s business activities and financial results.

Intellectual Property

In the provision of various services, the Group pays careful attention to avoid infringing on intellectual property rights, such as copyrights or trademark rights, while obtaining the advice of legal counsel. However, in the unlikely event that the Group infringes on the intellectual property rights of others, damage compensation claims and other factors could affect the Group’s financial results and condition.

Legal Regulations Related to Recruiting Agent Services

As a fee-charging employment placement business provider, the Group operates with the permission of the Minister of Health, Labour and Welfare. Accordingly, the Group requires permission to continue to engage in its principal business activities as such a provider. If for some reason the Group’s permits are revoked, it could potentially affect the Group’s business activities and financial results. Grounds for revoking permits are stipulated in Article 32-9 of the Employment Security Act. It is worth noting that as of March 31, 2016, based on information currently available to the Group, there are no facts concerning the Group that would fall within the grounds of revoking these permits. Permit numbers and acquisition dates for the main fee-charging employment placement business permits held by the Group are shown below.

           
Relevant Ministry Name of Acquirer Permit Number Date Acquired Expiration Date
Ministry of Health, Labour and Welfare SMS Co., Ltd. 13-yu-190019 July 1, 2003 June 30, 2021
Ministry of Health, Labour and Welfare SMS Career Co., Ltd. 13-yu-306922 January 5, 2015 January 4, 2018

Also, as the Group provides services targeting qualified healthcare professionals, including care managers and nurses, in the event the Long-Term Care Insurance Act and the Act on Public Health Nurses, Midwives and Nurses, which determine these various qualifications, are amended in the future, it could potentially affect the Group’s business activities and financial results. It is worth noting that as of March 31, 2016, based on information currently available to the Group, there are no facts pertaining to the revision of laws and ordinances that would affect the Group’s financial results.

Legal Restrictions Overseas

Starting with the MIMS Group, which was acquired in October 2015, the Group is developing various businesses overseas, primarily in Asia. Overseas subsidiaries are subject to local laws and regulations. In the future, there may be cases where such laws and regulations become stricter, or new laws or regulations are established unexpectedly. The Group makes concerted efforts to operate its business in accordance with the relevant provisions of these legal systems through seeking the advice of local legal counsels and other means. However, in the event a subsidiary is unable to adhere to the relevant laws and regulations, that subsidiary may be ordered by law to improve its business practices or discontinue its business, which could potentially limit the scope of the Group’s business activities.

Litigation

Thus far, there has not been any litigation brought against the Group that significantly affected its financial results. In addition, the Group does not forecast any such litigation being brought against it for the time being. However, if litigation is brought against the Group that would significantly affect financial results or influence social opinion and the Group receives an unfavorable ruling, it could potentially affect the Group’s financial results and condition.

Financial Risks

Dilution of Share Value

The Group has adopted a stock option system and, as of March 31, 2016, the number of potential shares from stock options was 382,400 shares, which is equivalent to 0.90% of total shares, including dilution. These stock options were implemented as one way to expand the Group’s financial results and business scale, and the Company believes these stock options do not necessarily conflict with the interests of existing shareholders. However, when these stock options are exercised, the value per share of the Company’s shares is diluted.

Impact of Exchange Rates

Consolidated financial statements for the financial results, assets, and liabilities of the Group’s overseas subsidiaries are created after converting financial amounts to yen. Accordingly, there is an impact when exchange rates fluctuate at the time of conversion. In the event that rapid exchange rate fluctuations occur that exceed expectations, the Group’s financial results and position could potentially be affected.

Goodwill Impairment

Following the acquisition of the MIMS Group, which provides services related to drug information in Asia and Oceania, in October 2015, the Group acquired 60% of shares in Medica Asia (Holdco) Limited, the holding company of the MIMS Group. In accordance with this acquisition, the Group recorded a large amount of goodwill. In the event that the MIMS Group profitability declines remarkably and an impairment loss is recorded in the future, it could potentially affect the Group’s financial results and position.

Risks Related to Business Operation

Soundness of Online Community Service

The Group’s online community services allow a large number of individual members to communicate with other members on their own through bulletin boards and other means. To foster a sound and healthy online community, the Group has established Terms of Use in order to encourage members to use the service in an appropriate manner. Also, in the event inappropriate use is confirmed, measures such as the removal of user posts are in place. However, as a result of a rapid increase in the number of members going forward, it may become difficult to completely ascertain the behavior of members within the site. In the event of trouble arising due to inappropriate behavior by members, the Group could potentially be held legally liable. Also, even in the event the Group is not held legally liable, damage to the Group’s brand image could potentially affect business activities and financial results.

Overseas Development

The Group recognizes overseas as an overwhelmingly large market and believes that in order to capture the opportunity this market presents, the prompt introduction of services is required. As part of that effort, the Group acquired the MIMS Group, which develops businesses in 13 countries in Asia and Oceania, in October 2015. In this kind of overseas development, political factors (e.g., legal systems, regulations for the fields of nursing care and medical care, and political unrest), economic factors (e.g., foreign exchange rates and economic conditions), cultural factors (e.g., local culture and business practices), and unforeseeable factors from the social environment present latent risks. Such risks are associated with doing business in a completely different environment than in Japan. The Group has placed Singapore as the administration base for overseas business development, which, while cooperating with the head office in Japan, promotes business development that bears in mind the country risk in each country. However, in the event the Group is unable to handle these various risks, the business activities and financial results of the Group could be impacted.

M&A and Business Alliances

In addition to organic business development, the Group has been promoting new business development through M&A and business alliances with other companies. Target companies are selected giving consideration to consistency with the Group’s strategy and synergies and after performing due diligence on the financial position of the concerned company, contractual matters, business conditions, and other matters. The decision on whether to move forward with an M&A or business alliance is made with the utmost care at the Executive Committee and the Board of Directors. However, in the event that the anticipated effects from M&A and alliances are not realized and strategic objectives are not achieved, or in the event unrecognized debt is discovered after the investment, it can potentially affect financial results of the Group and its financial position.

Expansion of the Service Domain

In order to shape the information infrastructure for an aging society into an industry, the Group is promptly capitalizing on business opportunities to create new services and making strides with the establishment of a business model in line with trends in political policies and market needs. When launching a new business, there are instances where a reasonable upfront investment is necessary and instances where business-specific risk factors occur. Accordingly, there is a possibility that the Group is unable to realize the initially anticipated results due to such factors as changes in the external environment and rapid market expansion. In addition, when withdrawing from a business, losses could occur from the disposal and impairment of that business’s assets and the Group’s financial results and condition could be affected.

System Failure

The Group uses Internet telecommunications networks and websites as the main vehicles for providing services in operations systems, including a management support service for nursing care operators, a recruiting advertisement website, and an online community website for nurses. From the perspective of service reliability and transaction security, the Group’s business-use IT infrastructure is designed with high availability and high stability against failure. Also, in order to strengthen infrastructure management, the Group proactively recruits personnel with a wealth of experience in information systems development and operation. In addition, regarding the long-term care insurance claims system on the management support service for nursing care operators, over 10,000 nursing care facilities are registered users. Due to the fact that the system handles critical data related to monthly insurance claims, data centers were established in two locations that are capable of addressing immediate switchover in case of emergency. However, despite management under this type of rigorous system, in the event natural disasters or accidents occur, the event of human error on the part of Group officers and employees, or the event an act of data destruction or falsification through unauthorized access occurs, it could lead to the diminished functionality of the Group’s computer systems and potentially invite a serious situation such as malfunction or failure. If this type of situation arises, Group service provision and business transactions would be seriously impacted, and the Group may be required to provide compensation for nursing care insurance claims deficiencies, thereby affecting the business activities of the Group and its financial results.

Competition

In the market for recruiting agent services for nurses in which the Group operates, competitors from major staffing-related service providers have been entering the market for the past several years. In order to achieve ongoing growth of its business, the Group recognized that it is important to build barriers to entry through comprehensive management of multiple services where synergistic effects could be realized in each field, and therefore is making efforts toward securing both professionals and operators. However, going forward, if new entrant competitors succeed in securing workers and operators ahead of the Group, or in the event a large capital competitor enters the market through a major investment, it could potentially affect business activities of the Group and its financial results.

Labor Markets for the Nursing Care and Medical Care Industries

For the labor market in the nursing care field, a certain number of qualified care managers are required to be involved in services provided by nursing care operators under the Long-Term Care Insurance Act. Also, a chronic labor shortage has continued and, for operators to continue their business, securing qualified personnel has become an important management issue. For the labor market in the medical care field as well, a chronic labor shortage situation for nurses has continued for quite some time. Under such circumstances, the Group believes that there will be continued demand for recruiting healthcare professionals from operators in the fields of nursing care and medical care going forward. However, in the event that demand from operators to recruit healthcare professionals actually declines due to deregulation in the fields of nursing and medical care, it could potentially affect business activities of the Group and its financial results. It is worth noting that as of March 31, 2016, based on information currently available to the Group, there are no facts pertaining to revisions of laws and ordinances that would affect the Group’s financial results.