NIHON FALCOM CORPORATION

Game software production requires a development period ranging from six months to two or three years, and there is a possibility that discrepancies may arise between planned and actual development periods. If the functionality required of products becomes more sophisticated due to recent technological innovation, there is a risk that further prolongation of development periods could adversely affect business performance. The Company addresses this through thorough schedule management, construction of proprietary development engines, and establishment of an efficient development structure.

Game software has the characteristic that a large portion of sales tend to concentrate at the time of release, and sales in the Product Division tend to be recorded heavily in the quarter in which a new product is launched. Depending on the timing of new product releases, performance may fluctuate significantly on a quarterly basis, which is a factor that makes it difficult for investors to forecast performance. Measures to level out fluctuations, such as spreading out release schedules, are not explicitly disclosed in the Annual Securities Report.

The Company's business performance tends to be highly dependent on specific game software titles, such as the Ys Series and the Kiseki Series. If changes in the market environment lead to user attrition or if game content (IP) becomes outdated, this could affect overall business performance, including licensing royalty income. The Company seeks to reduce this dependence by continuing to release existing titles while also creating and developing new IP.

The Company aims to obtain patents, trademarks, and other rights for newly developed products, but the acquisition of such rights is not necessarily guaranteed, and if a competitor gains an advantage in technology, know-how, or titles, this could impede product development and sales. In addition, while the Company believes it does not infringe on third parties' intellectual property rights, the possibility of future litigation or claims cannot be ruled out, raising concerns about adverse effects on business performance. The Company works to acquire and manage intellectual property rights as necessary.

Expanding the business requires securing and developing personnel with sufficient knowledge and skills, particularly in the development field, and failure to secure sufficiently qualified personnel could constrain business expansion and result in lost opportunities. The Company positions human resource strategy as one of its most important issues, and strives to secure and retain talent by maintaining appropriate base compensation levels, implementing performance-linked compensation programs, and utilizing recruitment agency services.

The Company does not currently handle businesses or products subject to regulations such as "R18," but if regulations targeting computer or digital content-related businesses are strengthened in the future, this could affect business activities. The specific content and timing of any regulatory tightening are uncertain, creating a risk of increased compliance costs or restrictions on the scope of business.

The proliferation of unauthorized illegal copies and pirated versions of game software may undermine the Company's sales opportunities and adversely affect business performance. As there is currently no definitive countermeasure available, it is difficult to completely prevent such damage. The Company shares information with ACCS (Association of Copyright for Computer Software) and licensees, and takes action as necessary.

The Company holds customers' personal information through mail-order sales, and the volume of information held is expected to increase as mail-order sales via its website grow. If personal information is leaked due to unforeseen circumstances such as external hacking, this could lead to a loss of trust resulting in decreased sales and the incurrence of damages compensation costs. The Company works to prevent information leaks through the establishment of internal management systems, raising awareness of information management, and restricting access rights.

If a serious infectious disease such as a new strain of influenza or COVID-19 becomes widespread, employee infections could force the Company to suspend various business activities, including development and sales. Such business suspension would directly lead to delays in product releases and lost sales opportunities, posing a risk of material impact on business performance. The Company strives to minimize the impact through thorough infectious disease countermeasures, ensuring spacing between seats, and partial use of remote work.

Recent technological innovation has led to increasingly sophisticated functionality being demanded of products, and a delayed response could lead to prolonged development periods and reduced competitiveness. A delayed response to new technology could cause a relative decline in product quality, risking user attrition and erosion of IP value. The Company works to strengthen its ability to respond to technological innovation through the gathering of information on new technologies and the construction of proprietary development engines.