1 Management Policies, Operating Environment and Challenges

(1) Corporate Management Policies

Based upon the Group’s mission “Money Forward. Move your life forward,” the Group embraces its vision of “Becoming the financial platform for all” and deploys a Platform Service Business in four domains.

(2) Business Environment and Strategy

The Group’s business is mainly SaaS model or subscription model, which takes longer to generate profit compared to the model which records revenue upfront. On the other hand, the churn rate is low and the profitability is high in medium- to long-term.
As for the market environment, the needs for the services provided by the Group are increasing due to the recent effects of the new coronavirus infection, including the introduction of cloud services and cashless payment, and the increasing financial anxiety among individuals and companies. In addition, the Japanese government’s “Action Plan of the Growth Strategy,” which was approved by the Cabinet in July 2020, includes a review of settlement legislation, the introduction of financial service intermediary legislation, the promotion of a cashless payment, and stronger support for the introduction of communication devices for telework by small and medium-sized enterprises. In addition, the deregulation of the Electronic Bookkeeping Act, the decision to introduce an invoice system, and the publication of guidelines on seal stamping (a move toward a paperless operation) have all provided a tailwind for the Group’s business operations.
In light of this business model and market environment, the Group has been aggressively investing upfront since its foundation, focusing on acquiring new users and developing innovative services that meet new market needs.

(3) Performance Indicator to Judge the Status of Achievement of Management Goals

As stated in above, the Company makes management decisions by placing the highest priority on maximizing the present value of cash flows over the medium to long term. As management indicators, the Group places importance on net sales and EBITDA.

(4) Business and Financial Challenges to be Addressed on a Priority Basis

Please refer to the sustainability page for the priority themes for the Group.

2 Business and Other Risks

This section describes major factors that can potentially lead to risks in the Group’s operations. From the perspective of information disclosure to investors, the Group also actively discloses matters that are not necessarily business risks but are considered to be important in investors’ decisions.
It should be noted that while the Group acknowledges the possibility of such risks occurring, and makes every effort to avoid such risks and respond to such risks in the event that they do occur, investment decisions regarding the Company’s stocks should be made by considering the matters described below and in other sections.
Also, please be advised that the description below does not cover all risks associated to investments in the Company’s stocks. It should be noted that any forward-looking statements herein are based on the Group’s judgement as of the date the Japanese language annual securities report was submitted, and contain uncertainties; therefore, actual results may differ from those described in any such forward-looking statements.

(1) Matters Concerning the Business Environment

① Securing Competitive Advantage

While the Group’s mainstay business is its Platform Service Business, the Group believes that in order for the Group’s business to evolve, it is necessary for the Internet user base and peripheral markets to expand. However, in the event that the Group is unable to adequately respond to changes in the business environment, or in the event that growth of the Internet services market slows down as a result of unexpected events such as the enforcement of new legal regulations, the Group’s operating results may be adversely affected.

② Developments in the Cloud Market

The cloud service market continues to grow rapidly—its market size increased by 21.4% YoY to 2,357.2 billion JPY in fiscal year 2016, and is expected to exceed 5.3 trillion JPY in fiscal year 2024 (according to materials published in June 2020 by MM Research Institute, Ltd.) The Group expects this trend of growth to continue, and therefore plans to deploy diversified cloud-related services. However, in the event that growth in the cloud market slows down as a result of such factors as economic conditions or economic trends within or outside Japan, the Group’s businesses and operating results may be adversely affected.

③ Technological Innovation

The Internet services industry in which the Group operates continues to change at significantly rapid pace while technological innovation occurs and customer preferences evolve. Such environment requires Internet service providers to respond to these changes in a flexible manner. The Group has been undertaking various initiatives to respond swiftly to technological innovation and shifts in customer preferences, including establishing an internal structure that enables staying current with the latest technological trends and changes in the operating environment, as well as recruiting and providing training to talented personnel. However, in the event that the Group is unable to respond to technological innovation or shifts in customer preferences in a timely manner, or that significant expenses are required to respond to such changes, including investments in systems or personnel expenses, the Group’s operating results may be adversely affected.

④ Competition with Other Companies

The Group positions its Platform Service Business centered on Money Forward Cloud as its mainstay business; however, many other companies also operate in this business realm. The Group is committed to bolstering its competitive edge through such initiatives as developing services that pursue optimal usability, providing unique services and contents aimed at increasing frequency of visits by registered members, and ensuring security and enhancing customer support in media that the customers use. However, in the event that competition intensifies with, for example, companies that provide services similar to those of the Group, or in the event that the Group is unable to sufficiently differentiate its services, the Group’s businesses and operating results may be adversely affected.

⑤ Developments in the Businesses of Apple Inc. and Google LLC

The Group provides smartphone apps to users, and at present, the provision of such apps through platforms operated by Apple Inc. and Google LLC is an important prerequisite of the Company’s businesses. Depending on changes or developments in the business strategies of these platform providers, the Group’s businesses and operating results may be adversely affected.

⑥ Effects of the New Coronavirus Infection

In the event that the spread of the new coronavirus infection delays the decision making by our client companies due to the stagnation of consumer activity and uncertainty caused by the slowdown of the global economy, or if the infection spreads to the Group’s employees or business partners and the Group has to curtail its business activities, the Group’s operating results and financial conditions may be adversely affected. In order to prevent employees from becoming infected, the Group has implemented measures such as telecommuting, staggered commuting, adjusting the ratio of employees who come to work, and ensuring that there is enough space between seats, etc. The Group is taking measures to prevent the spread of infectious diseases by prioritizing the safety and health of employees as well as minimizing disruption to their work as much as possible.

(2) Matters Concerning Fluctuation in Operating Results, etc.

① Fluctuations in Business Performance

While the business realm in which the Group operates continues to advance and grow rapidly, it is still a nascent and developing market which is subject to uncertainties, in particular, concerning the competitive environment, pricing trends and regulations on business models. In this environment, the Group seeks to expand and diversify its business and revenue sources by actively investing in creating businesses that are highly profitable and that leverage the Group’s know-how. However, in the event that such businesses, regardless of thorough planning, do not achieve the anticipated success or do not meet initial business plans due to unforeseen risks, the Group’s operating results and financial conditions may be adversely affected.

② Fluctuations in Quarterly Operating Results

The Group organizes several large-scale promotional events on a regular basis including Money Expo, and the timing of these events may vary from year to year. In addition, when the Group releases new services for financial institutions, it may experience a temporary surge in its revenue. In May 2019, the Company released a new plan for Money Forward Cloud, and sales in Business domain increased significantly from the second quarter to the third quarter of the fiscal year ending November 30, 2019. In the event of new plan releases or plan changes, results may fluctuate.
As a result, the Group’s revenues may not be consistent throughout the fiscal year and could fluctuate significantly from quarter to quarter.

③ Uncertainties in Achieving Operating Result Targets

(A) Upfront Investment in the Platform Service Business
The Group’s Platform Service Business requires upfront investments including for recruitment of development and sales personnel and for advertising activities, as a result of which the Group has continued to record operating losses since its commencement of operations. Based on the Group’s vision of “Becoming the financial platform for all” and with a view toward securing more customers, the Group is committed to recruiting and fostering talented personnel in sales and development among other areas based on constructive planning, while also effectively implementing promotional activities to raise market recognition and customer confidence, and investing in marketing to acquire customers, thereby raising net sales and profits. However, in the event that, for example, recruiting and fostering of personnel do not progress as anticipated, or activities including for marketing and promotion do not achieve significant effects, the Group’s businesses and operating results may be materially and adversely affected.

(B) The Group’s Short Operating History
The Company was established in May 2012 and has a relatively short operating history. Therefore, the Group’s historical business performance may be inadequate as a benchmark for annual comparative analysis of operating results, and its historical operating results may be insufficient as a guidance for estimating future results.

(C) Risk That Promotional Activities Do Not Drive Increase in Users as Anticipated
Increasing the number of users is an essential part of the Group’s business, and the Group has therefore actively pursued various promotional activities aimed at increasing the number of users, including through placement of television commercials and Internet advertisements. While such advertising campaigns have been implemented as optimal measures upon consideration of cost effectiveness for attracting new users for services including Money Forward Cloud and Money Forward ME, there is no assurance that user numbers will grow at the pace that the Group has anticipated.
In addition, while the Group has placed television commercials several times with an aim to increase the number of users and raise service recognition of both Money Forward Cloud and Money Forward ME, the Company may modify its advertising strategy and discontinue placement of television commercials. If the Group is unable to acquire new users as anticipated for Money Forward Cloud and Money Forward ME due to the aforementioned reasons, its businesses and operating results may be adversely affected.

(D) Factors in Business Domain Operations That May Affect Operating Results
With regards to the Money Forward Cloud, the Group’s sales personnel conduct direct sales to accounting firms and business corporations; however, there is a possibility that contract revenue per sales personnel or number of sales personnel secured does not expand as planned. In sales via the Internet, while the Group expects unit price per user to increase by a certain degree as a result of conversions to plans with higher unit prices, unit price may not transition as planned. In the event that operations in Business domain do not transition as planned due to the aforementioned factors, the Group’s businesses and operating results may be adversely affected.

(E) Factors in Home Domain Operations That May Affect Operating Results
Net sales from premium charges may not increase as planned in the event that the number of users does not increase as planned, or that the premium charge rate of premium services does not increase as anticipated. As for net sales from media/advertising, the Internet advertising market size is on an upward trend, and the Group is working to raise its media value; however, advertising activities tend to be affected by economic conditions, and it is also believed that Internet advertising will continue to be in competition with other advertising media. Therefore, in the event that such conditions change, net sales from media/advertising may not increase as planned. In the event that operations of Home domain do not transition as planned due to the aforementioned factors, the Group’s businesses and operating results may be adversely affected.

(F) Rate of Continued Service Usage
The rate of continued service usage by existing users is of high importance in the Group’s businesses, and therefore, the Group aims to maintain and raise the rate of continued usage through initiatives including enriching the information and services it provides. However, in the event that the number of users who continue to use the Group’s services decreases due to such reasons as misjudgment of initiatives or troubles of any sort, the Group’s businesses and operating results may be adversely affected.

④ Risks Accompanying the Expansion of Business Realms

Since the Group’s profits are significantly affected by net sales from Money Forward Cloud and Money Forward ME, the Group is constantly searching for new sources of revenues from a diversified perspective and working to expand and stabilize its businesses. For example, in June 2020, Money Forward Venture Partners, Inc. began operating HIRAC FUND, an entrepreneurial fund that invests in and supports seed and early-stage startups, and entered the fund management business.

⑤ Investments and Loans

As part of its expansion strategy, the Group may make investments or extend loans in such forms as equity capital injection, establishment of a new subsidiary, joint venture, business alliance or merger and acquisition, both within and outside Japan. While the Group will carefully evaluate the potential risks and return of any such investments or loans in advance, there is no assurance that the Group can accurately predict the impact of such investments or loans on the Group. In the event that any such investments or loans do not yield the expected return, or in the event that impairment loss is recorded for a certain business, the Group’s operating results and financial conditions may be adversely affected.

(3) Matters Concerning Legal Regulations, etc.

① Electronic Payment Services Business

The Company is registered as an electronic settlement agent under the Banking Act and is subject to the Banking Act, etc. in order to engage in electronic settlement agency business. However, in the event that the Company violates the Banking Law, etc., and an administrative action is taken to revoke the registration or the Company is ordered to take necessary measures for improvement, etc., the operation of Money Forward Cloud and Money Forward ME may become difficult, and the Group’s businesses and operating results may be adversely affected. In addition, the Banking Act, etc. stipulates that electronic settlement agents are obligated to conclude contracts with banks, etc., regarding electronic settlement agent business, and the Company has concluded contracts with each financial institution. However, in the event that the Company is unable to maintain contracts with banks, etc., the operation of Money Forward Cloud and Money Forward ME may become difficult and the Group’s businesses and operating results may be adversely affected.

② Account Aggregation

The Group relies extensively on account aggregation technology in Money Forward Cloud and Money Forward ME to automatically connect with customers’ online accounts provided by financial institutions or other parties (“financial intuitions.”) For financial institutions that are not subject to the Banking Law, etc., the Company are granted the right to access account information of financial intuitions directly from the customers. Hence, in the event that financial institutions refuse to grant access to account information via the Group’s services, the Group may not be able to obtain necessary information.
The Group has entered into agreements with several financial institutions for access to account information applying the regulation for financial services intermediary business. The Group seeks to maintain excellent relationships with financial institutions by designing systems that minimize the burden on systems of such financial institutions, being granted special access including disclosing the source IP addresses of the Group’s servers to selected financial institutions, and responding promptly to queries from them. However, if for any reason they refuse to grant access to account information via the Group’s services, the Group will not be able to obtain information, and consequently, the Group may experience difficulty in providing particular functions in Money Forward Cloud and Money Forward ME. As a result, the Group’s businesses and operating results may be adversely affected.

③ Invoicing and Factoring Businesses by Subsidiaries

Through subsidiary Money Forward Kessai, Inc., the Group operates an invoicing and cash collection business (i.e., a settlement service providing clients with BPO for invoicing to and collection from their counterparts and guaranteeing collection of accounts receivable) and accounts receivable financing business (i.e., accounts receivable early liquidation service.) However, businesses selling their accounts receivable as part of the service’s settlement transaction and their counterparts tend to be relatively small companies or proprietors with high levels of credit risk. As such, the management of credit risk is crucial. To collect credit from businesses selling their accounts receivables and their counterparts, the Group receives a guarantee from subsidiary Money Forward Hosho, Inc., thereby ensuring collection, and also transfers credit risk to a third-party insurer by way of an insurance policy. The Group is in effect assuming a residual part of the credit risk of businesses selling their accounts receivables and their counterparts. While the Group believes it has sufficient know-how to manage the credit risks relating to SME settlement, in the event that performance of guarantee exceeds its expectations, the Group’s operating results may be adversely affected. At the moment, the aforementioned business does not fall within the scope of “the intermediation of comprehensive credit purchases” of the Installment Sales Act, “money lending business” under the Money Lending Business Act, or “funds transfer transactions” under the Banking Act, and is not subject to regulation under any laws as a licensed business.
However, the business may in the future become subject to regulation if new laws are enacted or the interpretation of current laws change, in which case Money Forward Kessai, Inc. may not be able to continue its business, and as a result, the Group’s operating results may be adversely affected.

④ Protection of Personal Information

The Group obtains personal information, including log-in details for websites of financial institutions or other parties, and is therefore regulated as a “Personal Information Handling Business” under the Act on the Protection of Personal Information. (Personal information obtained by the Group is limited to user’s password for logging into websites of financial institutions or other parties, and Money Forward ME do not obtain other details; namely, user’s birth date, address or phone number.) The Group stipulates a Personal Information Protection Policy, specifies the purpose of use when collecting personal information, and restricts use of such information to such purposes. In addition, with regards to managing personal information, the Group provides in-house training to the Group’s executives and employees on the handling of personal information, sets internal access privileges, saves access logs, appropriately manages information in its data centers, and establishes and upgrades rules regarding personal information management. The Group is committed to protecting its information assets including personal information, and accordingly, has obtained certification for ISO/IEC 27001 and under the Privacy Mark System, is a member of the Nippon CSIRT Association, and collects information including those related to incidents, system vulnerabilities, and prediction of cyberattacks.
However, in the event of unauthorized access from a third party, flaws in the internal management structure, or other unexpected incidents resulting in the exposure of personal information, the Group may be subject to such issues as claims for compensatory damages or damage of its reputation, which could adversely affect its businesses and operating results.

⑤ Litigation, etc.

As of February 26, 2021, there is no pending litigation against the Company or other members of the Group. However, it is difficult to completely eliminate possibilities of the Company or other members of the Group becoming subject to claims for compensatory damages including through litigations due to any incidents that may occur in the future, and in the event that such incidents occur, the Group’s businesses and operating results may be adversely affected.

⑥ Intellectual Property Rights

While the Group collaborates with outside specialists to survey where possible for potential risks of infringement of intellectual property rights belonging to third parties, it is difficult to thoroughly identify all third-party intellectual property rights in the business areas in which the Group operates, and the Group is unable to deny the possibility that it may unwittingly infringe on the intellectual property rights of other companies. In such cases, the Group’s businesses and operating results may be adversely affected due to such reasons as claims for compensatory damages or requests for injunction of use.

(4) Matters Concerning Organizational Structure and Internal Control Structure, etc.

① Dependency on Specific Persons

The Company’s representative director, president and CEO, Mr. Yosuke Tsuji, has been involved extensively in the Group’s businesses since the Company’s founding, has extensive knowledge of and experience with Fintech, and plays an important role in formulating and executing the Group’s business strategies. While the Group has been seeking to fortify its organizational structure so as not to be reliant on any particular individuals, and enhancing its management structure so as not to excessively rely on Mr. Tsuji, in the event that it becomes difficult for Mr. Tsuji to execute his duties in the Group for any reason, the Group’s businesses and operating results may be adversely affected.

② Recruitment and Fostering of Talented Personnel

In order for the Group to continue to expand its corporate scale, it is essential to secure highly motivated and talented human resources who share the Group’s mission, vision, and values and who fit into the Group’s culture. However, in the event that the Group is unable to acquire sufficient talented human resources due to intensifying competition or changes in market needs, or in the event of an outflow of human resources, the Group’s businesses and operating results may be adversely affected.
The Group has set “Talent Forward” as one of the priority themes. The company will create diverse growth opportunities to draw out potential of employees with management’s commitment to member development by creating an environment that accepts diverse viewpoints regardless of gender, nationality, age, and educational background.

③ Internal Control Structure

The Group acknowledges that it needs to reinforce its internal control structure in order to cope with future business operations and expansion. While the Group plans to enhance and fortify its internal control structure in line with its business expansion, any delays in establishing an internal control structure befitting the Group’s business size may have an adverse effect on the Group’s businesses and operating results.

④ Stability of Systems

The services that the Group operates place extensive burdens on systems, and therefore, stable operation of such systems is crucial in executing the Group’s businesses. As such, the Group has been taking various measures aimed at preventing system failures, including by continually investing in systems, constantly monitoring server equipment and networks used to implement services, and automatically sending alert mails to the responsible system officers in the case of early signs of malfunction.
However, system disruptions can still occur for any number of unforeseen incidents, including a sudden surge in access, software bugs, computer viruses, intentional sabotage, unintentional errors by the Group’s executives or employees, or natural disasters, resulting in losses of opportunity to gain profits. The occurrence of any such incidents may cause such issues as damage to the Group’s reputation, which may in turn have an adverse effect on the Group’s businesses and operating results.

⑤ Unauthorized Access

The Group’s mainstay Platform Service Business involves the handling of personal information and may therefore be subject to such risks as unauthorized access to its systems by third parties with malicious intentions aiming to unlawfully obtain data. In order to prevent unauthorized access by third parties, the Group has implemented measures which include detailed review at the system development stage, installation of firewalls, and evaluation by third-party security diagnostics firms for its systems including those for service provision and for internal information management. In addition, the Group is strengthening its monitoring structure by implementing adequate securities measures including encryption of important personal data such as deposit/withdrawal logs, and encrypted data transmission. Furthermore, since cyberattacks by third parties can be made not only via the Internet, but also through multiple other routes including through the Group’s internal terminals by a malicious bot, the Group takes various measures to reduce such risks, including the installation of anti-virus software on employee terminals and network isolation of environments dedicated to maintenance operations that handle personal information.
However, there is no assurance that systems will not be breached by unauthorized access, and that personal information and account information of users will not be deleted or illegally obtained by third parties. The occurrence of such incidents may cause such issues as claims for compensatory damages or damage to the Group’s reputation, which may in turn have an adverse effect on the Group’s operating results. It should be noted that personal information obtained by the Group is limited to user’s password for logging into websites of financial institutions or other parties, and that Money Forward ME does not obtain other details; namely, user’s birth date, address or phone number.

(5) Others

① Tax Loss Carryforward

The Group currently records tax loss carryforward and is not imposed corporate, inhabitant and enterprise tax based on the normal tax rate. However, if the business performance continues to be favorable and the tax loss carryforward is used up, the Company will be imposed corporate, inhabitant and enterprise taxes based on the normal corporate tax rate, which may have an adverse effect on the Group’s businesses and operating results.

② Impairment of Non-current Assets

The Group records non-current assets including goodwill and software. In the event that the non-current assets held by the Group need to be impaired in accordance with the “Accounting Standard for Impairment of Fixed Assets” and the “Guidance on Accounting Standard for Impairment of Fixed Assets” due to deterioration in profitability or other reasons, the Group may have an adverse effect on its businesses and operating results.

③ Policy for the Distribution of Dividend

The Group considers the generation of shareholder return to be an important management priority. However, the Group believes that it is currently in its growth phase, and that aiming for further expansion of the business by retaining its earnings for the purpose of diversifying its revenue-generating opportunities and strengthening its ability to generate profit will eventually lead to better shareholder return.
While the Company plans to take measures to return profits to shareholders in the future, taking into account business performance and financial conditions of each fiscal year, it is unclear if, or when it will be able to commence the distribution of dividends.

④ Dilution in the Value of Shares

The Group has adopted a stock option plan and a restricted stock compensation plan for management, employees, external collaborators, etc. for the purpose of providing medium- to long-term incentives to maximize shareholder value and to further share value with shareholders, and may continue to utilize such plans in the future.
In the event that outstanding stock options are exercised, or new stocks are issued by restricted stock compensation plan, value of shares held by existing shareholders may be diluted.