Business Risks

Disclaimer: The following is an extracted translation of the Japanese language annual securities report (yuka shoken hokokusho) for the year ended April 30, 2022 submitted on July 29, 2022.

Business and Other Risks

Of the matters regarding our business, financial conditions and the like, the following matters could have a material effect on investors’ decision.
Our policy is to fully understand the probability of occurrence of these risks and seek to prevent them from occurring and, if they occur, take necessary measures. However, we believe that investment decision with respect to our securities should be made after cautiously considering the matters discussed in this section and others. Forward-looking statements in this section represent our judgment about possible future events and are not exhaustive of all possible risks in the future.

<Particularly Important Risks>

  • Dependence on Video Distribution Platforms Operated by Other Companies
    In the live streaming domain, we provide services on video distribution platforms operated by other companies such as YouTube. However, if our contractual relationship with a video distribution platform operator is terminated due to our violation of their terms of use and our services can no longer be offered on their video distribution platform, or if the value of the platform as a video distribution media declines due to a decrease in the number of users, our business will be affected. While we recognize this as a particularly important risk that could have an impact on our business development, business performance, and financial position, we recognize the risk of materialization is not high.
    In addition to the live streaming domain, we also accumulate fans and generate revenue through commerce and events without relying solely on video distribution platforms, and we do not consider the live streaming domain to account for an excessively high percentage of our total revenue. In addition, we do not depend solely on a single platform, but rather accumulate fans in various locations such as social networking services so that we can shift video distribution platforms.
  • Dependence on Popular VTubers
    The VTuber group “NIJISANJI” we operate made its debut as a group and has strengthened relationships with users through livestreaming communication with VTubers. Therefore, we recognize that we have low dependency on certain VTubers and a wide range of VTubers are supported by a large number of fans. Meanwhile, in the course of providing content IP services, we always recognize risks such as our dependency on popular VTubers and a possible failure in creating new popular VTubers. Therefore we aim to steadily increase the number of VTubers by utilizing our strengths and expand fan communities while maintaining enthusiasm from them.
    In the event that a streamer of popular VTuber suspends or ceases its activities, or if VTuber activities are affected by scandals, etc. or if we curtails VTuber activities for management strategy reasons, the outstanding contract with streamer is limited in its duration and there is no guarantee that it can be renewed each time. If the outstanding contract with a popular VTuber is not renewed, or if we are unable to create a new popular VTuber, it may affect the reputation of ANYCOLOR or “NIJISANJI,” our business development, business performance, and financial position, and we recognize this as a particularly important risk. However, we recognize the risk of materialization is not high.
    We provide a wide range of support for VTuber activities to build an organization that allows streamers to operate with peace of mind. In addition, it is difficult for streamers to conduct their activities as VTubers affiliated with “NIJISANJI” independently, and only a small number of NIJISANJI VTubers retired in the fiscal year ended April 30, 2022.
  • Reputation Risk Due to Inappropriate Content in Video Content
    We instruct streamers not to distribute videos or engage in other activities that may violate public order and morals or infringe on intellectual property rights. In the event that we become aware of inappropriate activities, we will take prompt action. However, we recognize that there is a particularly important risk that inadequate action could lead to a decline in the reputation of ANYCOLOR or its VTubers, litigation or disputes, which could affect our business development, business performance, and financial position. However, we recognize that the risk of materialization is not high.
    We believe that delivering appropriate content will contribute to the acquisition and accumulation of fans and client companies in the medium to long term, and is focusing on compliance training and content management for streamers. We will continue to strengthen its system to protect ANYCOLOR and its streamers from reputational damage caused by the distribution of videos with inappropriate content.

<Important Risks>

  • Risks Related to Business Environment
    • Internet Environment, etc.
      Our business provides services mainly via the internet. Due to the widespread use of smartphones and tablet PCs in recent years and other reasons, general users’ internet environment has been continuously improved and services provided on the internet and their use have been expanding.
      However, in the future, if there are tightened regulations as to the use of the internet, changes in telecommunications carriers’ moves including a revision of service charges, rapid technological development, major changes in general users’ usage of the internet or in the state of the internet, or if we have difficulties in responding to such changes in our external environment, our business development, business performance, and financial position could be affected.
    • Growth Potential of VTuber Industry
      Our core VTuber business forms a part of the content market, and, especially due to the similarity of the characteristics of business and fans, we consider it closely connected with the anime market. Therefore we recognize that our VTuber business may be affected by trends in these markets.
      With the widespread use of the internet, there is no longer a barrier between creators who produce content and users who experience it, and the interactive communication culture between creators and users, and among users, through social networking services and the like has been fostered. Because of such facts, we believe that the VTuber market has significant growth potential.
      Meanwhile, our business domain is considered relatively new and growing as a market. For such reasons, we see that the definition of the market has not be established yet at this moment and the market will further evolve itself while changing its definition and form. In recent years, there is a serious social issue that minors running up large bills through using online services. To address this issue, we have posted a warning statement targeting minors in the overview of each distributed video as well as on our website and are cooperating with the National Consumer Affairs Center of Japan.
      We will further develop business in response to changes in the market, but if the growth of the market is hindered in the future due to the introduction or tightening of regulations, damage to reliability due to troubles in the industry, or other reasons, our business may be suffered, which could have impact on our business development, business performance, and financial position.
      Consumers’ trend in the fields of products and services may be strongly affected by economical environment and social conditions, etc. If any event that has significant impact on consumers’ spending, companies’ advertising budgets and the like occurs due to economic trends, employment situations, taxation systems, disasters and other reasons, it could affect our business.
    • Competitors’ Moves
      In the VTuber market in which we run business, a number of players have participated to date, including not only dedicated VTuber companies, but also entertainment companies such as game companies, video distribution platformers, and management agencies for entertainers, and its competitive environment is intensifying.
      We provide support for streamers’ activities we have fostered, and have continuously expanded the NIJISANJI brand in the VTuber market. We have expanded our business not by using existing characters or celebrities but by producing streamers, and offer not only video distribution services but also a variety of services, including content sales, organizing events, and acquiring company-sponsored projects. We believe these advantages help us differentiate ourselves from potential competitors, including entertainment companies such as game companies, video distribution platformers, management agencies for entertainers, and our products and services from other video content such as anime.
      However, if our initiatives like these fail to produce expected outcomes, or if the emergence of a competitor offering service with more attractive and groundbreaking characteristics makes our users stop using our services, it could affect our business development, business performance, and financial position.
    • COVID-19 Pandemic
      The global COVID-19 pandemic has impacted nearly every company engaged in business activities, and we are no exception. Impacts on our business include suspension of holding offline events and associated sales of goods, and extension of business negotiation period of some company-sponsored projects. However, the impacts are limited as a result of moving as many events as possible online and other various countermeasures. We also see positive effects, including an increase in viewing time of our video content, since more people are working from home now.
      However, there are still uncertainties as to when the COVID-19 pandemic will end, and the spread of infection and other changes in circumstances in the future could affect our business development, business performance, and financial position.
  • Business-related Risks
    • Contract with Google LLC
      Under our contract with Google LLC, we grant a license of our video content to the company, manage the content on YouTube using the tool provided by the company, and receive a portion of revenue generated from the content.
      The contract is effective for a period of one year and will be automatically renewed for successive term of one year unless either party gives a notice of termination 30 days or more before the end of the current term. No event subject to termination of this contract exists at this moment. The contract may be terminated due to such reasons as our insolvency including bankruptcy, business transfer, a violation of the confidentiality or representation and warranty provisions or any other important provisions of the contract. Also, either party may terminate it by giving a 30-day notice to the other party.
      If the contract is terminated, it may affect our business, which could affect our business development, business performance, and financial position.
    • Overseas Business Development
      We are currently developing the overseas VTuber business as well, especially in English-speaking countries and China. In these regions, the VTuber business is still at the developing stage and we are actively expanding the business and promoting VTubers overseas. We have also continued examining the feasibility of the VTuber business in countries and regions into which our business has not yet expanded.
      However, the promotion of VTubers in such countries and regions entails uncertainties, and we see potential risk factors such as language barrier, geographical conditions, various regulations including legal and taxation systems, economical and political insecurities, differences in cultural and individual preferences and in business practices, and fluctuation of exchange rate. We may also have difficulties in securing personnel and streamers necessary for business development, and competitive risk with local competitors which have competitive advantage in their respective countries or regions. Our failure to address such risks could affect our business development, business performance, and financial position.
    • New Businesses Development
      As a new entertainment business following the VTuber business, we are working on delivering “a new magical experience” to our customers through VTubers and other content. With the belief in new potential of entertainment, we strive to actively create entertainment services we have not seen yet in the world and grow such services into our core business.
      However, we recognize that the launch and expansion of a new business entail higher risk in nature compared to an existing business. If, despite careful market analysis and business planning, any unforeseeable event prevents us from making progress as planned, we may be unable to receive return on investment, which could affect our business development, business performance, and financial position.
    • Technological Innovation
      Technological development facilitates new expression of entertainment, and helps us evolve experience we offer to users. Based on such belief, we consider that it is imperative to adopt new technologies in a timely manner. Therefore, we will take measures and make investment necessary to adopt latest technologies that have been emerging one after another in recent years, including VR and AR.
      However, if technologies in our business domains undergo revolutionary change and we fail to respond to such trend, or if it requires more cost to adopt such technologies than we expect, it could affect our business development, business performance, and financial position.
    • System Failures
      Our business is operated mainly via the internet and its service infrastructures depend on the communication network designed to connect to the internet. We have reinforced server facilities and other devices and established the internal structure in order to operate services in a stable manner.
      However, if the computer system goes down due to unpredictable factors on our side, such as temporary overload of the system, power outage, software malfunction, computer virus or unauthorized external access breaking into a computer, natural disasters, accidents, or if an event outside our system that adversely affects users’ access environment occurs, our business development, business performance, and financial position could be affected.
  • Risks Regarding Laws, Regulations, etc.
    • Personal Information Management
      We retain personal information of affiliated streamers and customers and understand the importance of enhancing the management of such information. We will work to strictly adhere to internal rules, provide internal education to directors and employees on a regular basis and improve our information security system, and thus ensure further reinforcement and thorough implementation of our information management system across the board.
      However, in the unlikely event of leakage of personal information we hold, we may incur monetary damages, lose social credibility, or have other adverse impact, which could affect our business development, business performance, and financial position.
    • Infringement of Intellectual Property Rights, Violation of Public Order and Morals
      We will ensure that we acquire intellectual property rights related to our business, and protect trademarks, content we hold and the like, and at the same time provide affiliated streamers with compliance trainings and monitor videos distributed by them to prevent them from engaging in any video distribution or other activity that could violate public order and morals or infringe on any third party’s intellectual property right.
      However, if any of our intellectual property rights is not protected from third parties, or if an infringement claim is filed by a third party against us, costs and losses may incur to defend us or resolve disputes, which could affect our business development, business performance, and financial position.
    • Risks Related to Interpretation and Application of Laws and Regulations for the Internet, Applications, etc.
      Since our main business domain, video distribution on the internet, and our various businesses using streamers are new types of business, there is a possibility that an issue may arise in the interpretation and application of current laws and rights in connection with our business execution with regard to the Copyright Act, portrait rights and privacy rights, the Act on Specified Commercial Transactions, the Act against Unjustifiable Premiums and Misleading Representations, the Act on the Protection of Personal Information, tax laws concerning video distribution and other laws and regulations. This could have impact on our business development, business performance, and financial position as a result.
  • Risks Related to Company Organization
    • Dependence on Riku Tazumi, Representative Director and CEO
      Riku Tazumi, Representative Director and CEO, is the founder of ANYCOLOR Inc. and has been its representative since its foundation. He has a wealth of experience and knowledge of the operation of the VTuber business and plays an extremely significant role in deciding and executing our operational policy and business strategy. We have established the management structure that does not excessively depend on him by strengthening the organization and sharing information with officers and executives at the Board of Directors meetings and on other occasions. However, if he becomes unable to continue to operate the Company for some reason, it could affect its business development, business performance, and financial position.
    • Risks Related to Human Resources
      We believe that in order for us to grow continuously, it is important to hire talent and develop an organizational structure in proportion to the size of business. In order to hire talent who can relate to our corporate mission and are highly motivated, we are actively engaging in recruiting activities, while creating an employee-friendly working environment and human resources system. In addition, to help them exercise their full potential in the Company after employment, we have improved a training system, including on-the-job trainings.
      However, if, particularly due to an intensified competition for talent, changes in market needs or other reasons, our recruitment did not progress as expected and it becomes difficult for us to acquire talent, or if current employees leave the Company one after another, our business development, business performance, and financial position could be affected.
    • Strengthening of Business Structure and Internal Management Structure
      For us to further grow, we understand that it is imperative to improve the efficiency of operations and strengthen an internal management system in proportion to the scale of business and risk types. We will appropriately identify and analyze risks to our business, and work to develop an appropriate internal management system by developing rules and various manuals, improving internal education and other means. In addition, we have established and have been operating the internal control system to ensure the appropriateness of financial reporting pursuant to laws and regulations.
      However, if we have difficulties in establishing a sufficient internal management system due to such reasons as a rapid expansion of the scale of business in the future, it could affect our business development, business performance, and financial position. In addition, if our internal control system concerning financial reporting fails to function effectively, or if there occurs any significant deficiency in the internal control system concerning financial reporting, the reliability of our financial reports could be affected.
  • Operating Results, Financial Standing, etc.
    • Being a Startup
      Since we are a young company founded in May 2017 and in the process of a rapid growth, it may be impossible to obtain sufficient comparable financial information for a period under review, and it may be insufficient to judge future performance based on performance in past years only. In addition, our overseas VTuber business is still at the investment stage, and therefore numerical information is limited especially in such domains.
    • Dividend Policy
      We position strengthening our balance sheet and ensuring competitiveness, in addition to return of profits to shareholders, as our important management challenges. We think that we are still in the growing process at this moment and can maximize return of profits to shareholders by increasing internal reserve and investing in business expansion and improvement of business efficiency. For this reason, we have not paid dividend since our foundation and intend to increase internal reserve for the time being. We have an intention of considering return of profits to shareholders in light of operating results for each fiscal year, but the possibility and timing of dividend payment are yet to be determined at this moment.
  • Other Risk Factors
    • Dilution of Stock Value by Exercising Share Options
      We grant share options to those who make contribution to the growth of the Company, including directors and employees, as an incentive to increase long-term corporate value, and may issue share options and other equity incentive plans to secure and retain talent in the future. If our new shares are additionally issued or delivered due to the exercise of share options or other reasons, the value of shares and proportion of voting right held by existing shareholders may be diluted. In addition, if such shares flow into the market at once, it could affect the appropriate formation of stock price.
    • Use of Proceeds
      We will use funds raised through a public offering when going public to further expand our business, recruit people for growing business and pay labor costs for increased employees. However, business environment of the market in which we operate may rapidly change, and even if we use the proceeds according to our initial plan, we may not produce return on investment as expected. In addition, due to the change in market conditions, we may be forced to change our plan and use the proceeds for other purpose than the above. In such case we will disclose the change in use of proceeds in a timely manner.