Operational Risks

Risks that could affect the performance or operations of SEGA SAMMY Group are given below.

The Group’s management results could still be affected by the emergency of risks beyond those that the Group has envisaged other than the risks stated below. In addition, forward-looking statements in this securities report represent the judgement of the Group as of June 25,2020.

1.Significant risk: Statutory regulations and reliance on the Pachislot and Pachinko Machines Business

 As the overall financial performance of the Group is highly reliant on the Pachislot and Pachinko Machines Business, the fortunes of the Group tend to be swayed by the trend of this business. Accordingly, securing stable revenues from this segment is an important management task going forward.
 The products the Group sells must conform to technical specifications pursuant to the Public Safety Commission’s “Regulations for the Verification of Licenses, Formats, and Other Aspects of Pachislot and Pachinko Machines,” which are based on the Act on Control and Improvement of Amusement Business, etc. of Japan and related laws and statutory regulations.

 Also, the “Rules for Partial Revision of Ordinance for Act on Control and Improvement of Amusement Business, etc., and Regulations for the Verification of Licenses, Formats, and Other Aspects of Pachislot and Pachinko Machines” which focuses mainly on curbing gambling elements, was enforced on February 1, 2018. As a result of a revision to regulations, a deadline for the machines not compliant with the new regulations are allowed to remain installed is set, which means the demand to replace to new pachislot and pachinko machines will be concentrated over that transitional period. Accordingly, an important management task is to establish a development and sales schedule that meets the demand for replacement of machines. In addition, in the Group, the Ethics Committee regulates expressions that could encourage excessive gambling or invite misunderstanding. Furthermore, the Group has established an office tasked with preventing improper manipulation of machines for profit, which continually collects market information with a view to developing machines that are resistant to improper manipulation.

 However, major changes in statutory regulations or the establishment of a voluntary self-censorship period for sales in conjunction with the holding of various international events, could significantly affect the Group’s operating results.

2.Overall management risk

 The Group Compliance Risk Liaison Committee is established as a place where measures and information regarding risk management, etc., are principally discussed, inspected and shared. The Group Compliance Risk Liaison Committee is held in principle once every six months. The committee carries out cross-mapping by investigating the level of impact and the possibility of occurrence for latent risks in the Group. The committee then performs risk evaluation and reports its results, which includes examining appropriate countermeasures for those risks, to the Board of Directors, where those risks are discussed. The risks that have been determined by the Group Compliance Risk Liaison Committee as being particularly significant are described below.

Risk items Summaries Main measures
Compliance and legal violation ・Risks related to obstructions in acquiring IR operating licenses due to compliance and legal violations, and license cancellation by Nevada State Gaming Commission
・Violation of rights of third parties by way of the products or services provided by the Group
・Malfunctions of products manufactured by the Group
・Risk of fall in brand image due to litigation arising from unexpected complaints from users
・Implement Group compliance measures through the establishment of a dedicated office
・Spread knowledge of the “Corporate Ethics Hot Line”
・ Registered as registered operator of “Whistleblowing System Certification (System for self-declaration of conformity)” ( WCMS Certification)
・Activities to prevent involvement with anti-social forces
 - We establish rules at each Group company as measures against anti-social forces promoted across the entire Sega Sammy Group and implement background checks as part of entering into transactions
 - Implement background checks when necessary for other existing transactions
Disasters ・Risk of greater than anticipated physical damage or casualties among personnel at the headquarters, operating bases, or manufacturing bases of Group companies or those of the Group’s business partners due to large-scale natural disasters - such as earthquakes, fires, or floods - or terrorist attacks ・Establish the crisis management rules, identify the business activities’ inherent risks, take measures to mitigate risks and prevent crises as a matter of normal practice, as well as establish and maintain systems to respond immediately to major crises
Management of personal information, etc. ・Risk of financial liability or damage to brand image because of external leaking of personal information ・Respond to GDPR (General Data Protection Rules) of the EU
・ Implement audits of Group companies that have acquired the P mark
Information security ・External attacks such as hacking
・ Malfunction and other failure of information system due to computer virus, etc.
・Implement strengthening activities, educational activities and monitoring activities for security governance at each Group company
・Implement precautionary measures (surveillance and monitoring) and follow-up measures (incident reporting), and implement vulnerability diagnosis, etc.
・Strengthen security surveillance tools

3.Risk by business

Each business in the Group varies in content and each has different risks. The business-specific risks are as follows:

Segments Summary of main risks Main measures
Pachislot and Pachinko Machines ・Issue of gambling addiction
・Changes in user preferences
・Risk of insufficient procurement of material due to steep demand in initial period
・Surplus parts
・Initiatives to tackle addiction across the entire industry
・Establish a system for developing a product lineup that features new types of gameplay and meets the market needs
・Standardization of parts
・Shortening of procurement lead time
・Strengthening of inventory control
・Effective utilization for other products
Entertainment Contents ・Intensification of competitive environment in the digital games area due to appearance of high quality titles with strong IP
・Loss of investment appetite for facility operators due to changes in personal consumption trends and user needs in the Amusement Machines Sales area
・Changes of the regulation in the Amusement Center Operations area by the Act on Control and Improvement of Amusement Business, etc. and other related statutory laws and regulations, including cabinet orders and ministerial ordinances
・Surplus inventory in home video game software and toys when those items cannot be launched during peak trading seasons
・Optimize the number of titles in operation and the number of new titles to be launched
・Offer a revenue model that enhances investment efficiency for amusement center operators as well as providing the Group with long-term stable revenues
・Comply with the Act on Control and Improvement of Amusement Business, etc. and other related statutory laws and regulations, including cabinet orders and ministerial ordinances
・Strengthen product development management
Resort ・Delay of the promotion of the establishment of specified integrated resort areas in Japan ・Accumulation of know-how to develop and operate the integrated resort facilities in foreign countries

4.Individual risk

The following non-business risks could have an impact on the Group’s management results.

Risk items Summary of main risks
Business expansion through M&As, etc. ・Risk that the initially anticipated synergies are not obtained
・Risk of fall in business performance due to poor performance after an M&A
Asset-impairment accounting ・Occurring of impairment risks on capital investment amounts and goodwill amounts due to a drop in future cash flows
Loss on investment securities in possession ・Risk of fall in business performance due to a drop in fair values
・Risk of impairment loss due to decline in actual prices
Loss on abandonment of deferred tax assets ・Risk of recording tax expenses due to decrease in expected recoverability of tax loss carried forward and deductible temporary differences
Loss due to foreign exchange fluctuation ・Risk of changes in foreign exchange rate in sales activities and materials procurement in overseas markets
・Risk of loss on net assets through foreign currency translation adjustments due to changes in foreign exchange rate for foreign subsidiaries and associates

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