With respect to the statements of business and financial conditions in our securities report, we recognize that there are risk factors that could have a material impact on our consolidated financial position, operating performance, and cash flows as follows.
Please note that the statements about future events in this section are made based on our management's judgment as of the date of the latest securities report (September 29, 2020).
(1) Risks associated with changes in demand in the semiconductor market
A major portion of our business comes from the customers engaged in semiconductor-related businesses, and our performance relies heavily on semiconductor market demand. The market is expected to achieve growth in the mid- to long-term with the progress of innovations, but it might be subject to large fluctuations in the short term due to supply-demand imbalance. If there is an unexpected sudden decline in market demand and the customers decide to freeze or postpone capital investments, it could have a material impact on our performance. On the other hand, if there is an unexpected sudden increase in market demand and the customers decide to accelerate the pace of capital investments, we might be unable to produce products in a timely manner and miss the business opportunity.
To mitigate the impact of these changes in market demand, we regularly review the status of progress in the customers' investment plans and the orders we receive. We are also striving to construct a flexible production infrastructure under the fab-lite strategy.
(2) Risks associated with R&D
We are actively and continuously conducting R&D on leading-edge technologies, chiefly in the areas of optics, precision mechanics, and electronics, and striving to rapidly launch new products that incorporate the acquired technologies to attain high market shares and high profit margins in the markets we have entered. We pay close attention to market trends and customer plans, but if we are unable to meet the customers' requirements about technology level and delivery schedule, or if our competitors launch competitive new products before we could do so, we might lose a competitive edge and profit margins. This could have a material impact on our financial results.
We are striving to capture the current and future customer needs early on by asking the customers pursuing the leading-edge technologies to share their roadmaps with us and by winning their confidence and establishing a solid relationship through strong sales promotion and engineering support. We have also set up the Advanced Technology Office whose members provide inter-departmental assistance to product development teams for the timely rollout of new products.
(3) Risks associated with talent retention
Being a R&D-oriented company, we find it crucial to retain and nurture good talent who can engage in R&D to achieve growth. If we are unable to keep hiring and nurturing necessary talent, or if we lose important talent, it might impair our product development capability and/or technical support capability. This could have a material impact on our financial results.
We are striving to put in place a highly attractive compensation scheme linked to the company's performance and a performance evaluation system that rewards employees based on their contributions. We are also actively hiring and nurturing talent who fit in well with our corporate culture.
(4) Risks associated with quality
Our products are designed to offer solutions to customers based on a combination of various leading-edge technologies in the area of optics, precision mechanics, electronics, and software. We seek and develop state-of-the-art technologies and even adopt new technologies that are yet to be widely used in the market for our new products. However, if unexpected quality issues arise from such new technologies, we might lose revenues and customer confidence. This could have a material impact on our financial results.
We have established a quality assurance system receiving ISO9001 certification. We work closely with our subcontractors and suppliers to ensure that we provide high-quality products and services. In the event of quality failure, we will act promptly to take corrective measures and prevent its recurrence. We are continuously improving the quality of products and services in this manner.
(5) Risks associated with intellectual property rights
We use various state-of-the-art technologies in our products, and there is a risk of inadvertently infringing on the intellectual property rights of third parties. If we fail to take action appropriately in such case, we might face injunctions against product sales or orders to pay damages. This could have a material impact on our financial results. Intellectual property rights in the leading-edge technology areas are intricately intertwined with each other. If we are involved in disputes concerning those rights, it could have a material impact on our financial results as well.
We pursue an intellectual property strategy from the initial stage of R&D so as not to infringe on the intellectual property rights of third parties. At the same time, we secure our rights to the proprietary technologies we develop in order to differentiate our products from others and enhance competitive advantage. In this manner, we are striving to maintain high market shares and high profit margins for each of the products we offer.
(6) Risks associated with shifts in the timing of product acceptance by the customer
The mainstay of our business is semiconductor-related products and some of these products are sold at very high unit prices. If the timing of delivery and acceptance for these products shifts from one year to another even for a small number of units at the customer's request, it could have a material impact on our financial results.
We are striving to register sales as scheduled, but if we expect a significant change to our forecast of financial results, we will disclose it in an appropriate manner.
(7) Risks associated with procurement of special parts and components
Our products use various special parts and components and some of them, especially light sources and optical components, are not easily replaceable. If we have difficulty procuring these parts and components from suppliers, it could have a material impact on our R&D and production.
We are striving to establish a solid relationship with suppliers, monitor procurement risks at all times, and keep the right inventories. We also gather information about alternative parts and second sources available for risk hedge.
(8) Risks associated with overseas business
We are actively promoting business overseas and have a high overseas sales ratio. There are risks associated with overseas business, such as unexpected changes in laws and regulations, the presence or emergence of economically adverse factors, and political, social or economic unrest. If these risks materialize, it might disrupt our overseas sales. This could have a material impact on our financial results.
We have established subsidiaries and offices in countries where our major customers are located to collect the information there and monitor the risk factors that might affect our business with the customers. We have also put a system in place to report materialized risks to our representative directors and board members so that we can take necessary actions promptly.
(9) Risks associated with foreign exchange rate fluctuations
We develop and manufacture products in Japan and ship them to customers around the world. Many of our transactions are conducted in foreign currencies. If there is a sudden and rapid fluctuation of foreign exchange rate, it could have a material impact on our financial results.
Our norm is to conduct foreign trade transactions in the Japanese yen to avoid foreign exchange risks. However, if we have to conduct a transaction in a foreign currency (e.g., US dollar) at the customer's request, we will monitor our foreign exchange sensitivity and the impact on our financial results. If there is a sign of materialized risks, we will act promptly.
(10) Risks associated with disasters
Our R&D facilities and headquarters are located in Kohoku-ku, Yokohama City, Kanagawa Prefecture in Japan. If a major disaster or epidemic strikes this region or a surrounding area, it could have a material impact on our headquarters' operation and/or production activities. Even if it does not strike us directly, if it affects our business partners or if it causes the restrictions of movement of people and goods, it could have a material impact on our production and sales promotion activities.
To ensure quick recovery from disasters and business continuation, we have set up a business continuation plan (BCP) focused mainly on the safety of employees and our responsibility to deliver products to customers.
(11) Risks associated with information security
We possess a great deal of technical information and customer information for business execution. If an unexpected data breach or communication failure occurs due to cyberattacks or any other reason, we might lose customer confidence. This could have a material impact on our financial results.
We have set up an information security committee to enhance the security of our information system in accordance with our information security policy.
(12) Other risks
In addition to the risks described above, there are other risks that could have a material impact on our financial results, including those associated with global and regional economic environments, war, terrorism, financial and stock markets, and aggravated product development/standardization competitions.