GungHo Online Entertainment,Inc.

The revenue share of the Puzzle & Dragons (Puzzdora) series remained high, at 41.2% (¥42,677 million) in FY2024 (ended December 2024) and 27.4% (¥25,504 million) in FY2025 (ended December 2025), and dependence on it relative to total revenue (¥93,242 million in FY2025) continues. While the degree of dependence has been trending downward due to the growth of Ragnarok-related titles (Gravity Group), if the competitiveness of Puzzle & Dragons (Puzzdora) declines due to the emergence of competitors' games or other factors, this could have a material impact on business results and financial condition. Although the Company has adopted the creation of new value as a management strategy and is working to diversify revenue, establishing alternative revenue sources will take time.

The number of internet-based entertainment providers and game titles continues to increase, raising concerns about rising advertising costs due to fierce competition for user acquisition and a decline in competitive advantage due to the rise of competitors. While the Group's strengths lie in its more than 23 years of experience operating PC online games and its planning and development capabilities, if it is slow to respond to changes in user preferences, this will directly affect revenue through a decline in MAU. Since user preferences change over time, the Group continues to conduct market research and data analysis, but there is an inherent risk that its response may not keep pace.

The Group's smartphone game revenue represents a high proportion of total revenue, and the Group's revenue and operations are highly dependent on the payment processing and platforms of Apple Inc. and Google LLC. If these platform companies change their business strategies, alter their fee rates, or if it becomes impossible to continue contracts with them, this could have a direct impact on business results and financial condition. Although the Group strives to build good relationships of trust, the countermeasures available to the Group against decisions made by the platform companies are limited.

Development of the Company's original games requires significant development funds over a long period until service launch, and the investment recovery period may also become extended. Advances in technology are expected to lead to further increases in the performance of smartphones and new game consoles, resulting in further increases in development costs and a growing burden on the financial base. In addition, if new games are not accepted by the market due to changes in user preferences, the Company may be forced to postpone or discontinue development, potentially resulting in an inability to recover invested capital.

The Group has overseas consolidated subsidiaries such as Gravity Co., Ltd. in South Korea and GungHo Online Entertainment America, Inc. in the United States, and is promoting global expansion of smartphone games, PC online games, and consumer games. Various country risks are inherent, including social conditions, political and economic circumstances, culture and religion, local laws, and regulations in each country, and if these risks materialize, they could affect business results and financial condition. The Group and its partners strive to gather information and address risks, but it is difficult to completely control changes in the external environment.

When translating the financial statements of overseas consolidated subsidiaries into yen, significant fluctuations in exchange rates could affect consolidated business results and financial condition. In addition, foreign currency-denominated transactions occur in connection with the collection of sales proceeds and payment of fees related to game provision, and foreign exchange risk extends across overall business activities. There is no mention of specific foreign exchange hedging measures, and there is a risk that exchange rate fluctuations will be directly reflected in business performance.

Online games are provided as services via internet servers, and if the system goes down due to natural disasters, computer viruses, communication failures, unauthorized external intrusion, or other causes, it becomes impossible to continue operations. If game data is altered or important data is lost or leaked, this results in direct damage as well as a decline in system reliability. Although the Company has implemented measures such as a 24-hour, 365-day monitoring system and a security-focused system configuration, it cannot completely eliminate the risk of large-scale trouble occurring.

The Group acquires and manages personal information in connection with member registration, billing, and other activities, and if leakage, tampering, or unauthorized use occurs, this could result in significant impacts such as response cost burdens, damage claims, and a decline in credibility. Although the Group implements its own measures, such as two-stage management of GungHo IDs and game accounts and restrictions on access to personal information, an increase in compliance-related costs is also expected amid the tightening of personal information protection laws. Although the Group conducts thorough internal training and develops management regulations, it is difficult to guarantee the complete prevention of leaks.

Billing troubles involving minors using smartphone games have become a social problem, and moves to strengthen regulation of the industry continue, such as the Consumer Affairs Agency's 2012 determination that complete gacha violated the Act against Unjustifiable Premiums and Misleading Representations. While the Group supports industry association guidelines and conducts awareness activities, if future changes in social conditions lead to changes in the interpretation of existing laws or the enactment of new laws, business operations could be significantly restricted. Various tax laws, including the Payment Services Act and the Consumption Tax Act, also apply, and there is a risk that changes in the regulatory environment will directly affect the revenue model.

Kazuki Morishita, Chairman of the Board of Directors, has served as Chief Development Officer, discovering Ragnarok Online and serving as executive producer of the Puzzle & Dragons (Puzzdora) series, and currently continues to serve as the person ultimately responsible for all processes of planning, development, and supervision of new game development, resulting in a high degree of dependence on him. If, for any reason, he becomes unable to continue leading business operations, this could have a material impact on business results and financial condition through a decline in the ability to create hit titles. Although the Group is strengthening organizational responses through delegation of authority, personnel expansion, and talent development, the current level of dependence remains high.