FAN Communications, Inc.

The market environment of the internet advertising industry is undergoing significant change, driven by the shift to online lifestyles and changes to privacy specifications and market oligopolization by major platform operators. The Group is responding by expanding its business domain into prosumer support businesses centered on the internet advertising business; however, if adaptation to these changes lags, it could lead to a decline in competitiveness and materially affect the Group's business and results of operations.

With the rapid proliferation of AI technologies including generative AI, risks are emerging such as declining traffic to partner sites due to the spread of AI search, the rise of AI-driven marketing methods by competitors, and intellectual property infringement or violations of the Act against Unjustifiable Premiums and Misleading Representations arising from AI-generated content. The Group is advancing the formulation of AI ethics guidelines and the development of new services, but a delayed response could lead to a decline in revenue from its core business and a loss of social credibility.

The Group's revenue is almost entirely dependent on the internet advertising business, resulting in a structure where fluctuations in that business's performance have a direct and significant impact on overall Group results. While the Group intends to diversify through the development of new prosumer support businesses and adjacent areas, business diversification has not yet progressed sufficiently at this time. If the core business experiences declining revenue due to changes in the market environment or intensified competition, there is a risk that the Group's overall performance could deteriorate significantly.

Laws and regulations targeting internet users and businesses are continually being enacted and amended, and there is a possibility that data acquired and utilized by the Group could be classified as personal information, etc., and become subject to usage restrictions. In addition, if technologies used for ad delivery, performance tracking, or fraud prevention become subject to regulation or restriction, substantial investment would be required to develop alternative measures. The Group implements responses appropriate to regulatory content as needed, but the impact of stricter regulation could materially affect the Group's business and results of operations.

The Group manages personal information such as member information and bank account details, as well as transaction data of advertisers and partner sites, on its servers, and bears obligations under the Act on the Protection of Personal Information. Although the Group has implemented measures such as access control and hardware and network management, if information were to be leaked due to unauthorized external access or other causes, it could result in claims for damages and a loss of social credibility, materially affecting the Group's business and results of operations.

Nearly all of the Group's services are provided via the web, and the aggregation and management of performance-based compensation also depends on its systems, making stable operation 24 hours a day, 365 days a year essential. If systems were to stop due to disasters such as earthquakes or fires, computer viruses or hackers, hardware or software malfunctions, or sudden surges in traffic, it could result in a decline in credibility, customer cancellations, and adverse effects on the acquisition of new customers due to service outages. The Group has implemented failure prevention measures such as redundancy and regular backups, but complete elimination of such risk is difficult.

There are multiple competitors in the internet advertising business, and their number may increase further in the future. Although the Group possesses advantages in the number of partner sites acquired through early market entry and first-mover benefits, there is no guarantee that it will be able to maintain its competitive advantage going forward, and revenue and profitability could decline as a result of competition.

There is a risk that advertisers or partner sites may post advertisements that violate laws or public order and morals, or make fraudulent claims for performance-based compensation. The Group has established a management system including screening at the time of participation, regular monitoring, warnings, and contract termination; however, if monitoring is insufficient or unknown fraud occurs, it could lead to a loss of credibility and claims for damages, affecting the Group's business and results of operations.

As business expands, securing and developing excellent personnel has become an important challenge, and the Group continuously implements recruitment and training measures. However, if it becomes difficult to secure sufficient personnel, or if important officers or employees resign or retire and it becomes difficult to recruit successors, this could affect the execution of business strategy and results of operations. The Group is strengthening its management organization and technical staff to avoid excessive dependence on specific individuals, but the risk remains.

The Group makes investments in internet-related companies, invests in venture companies through investment business partnerships, and invests in financial instruments such as bonds. If investee companies experience deteriorating performance leading to uncollectible amounts or impairment losses, or if sudden changes in the bond or stock markets result in valuation losses on held financial assets, this could affect the Group's results of operations and financial position.